AUDIT COMPLETION

TIME DIAGRAM
Financial year end Audit report date Issue financial statements

April 2013 31/12/2012 Planning & field

work & completion

1/6/2013

1/7/2013

Topic Outline
Reviewing the clients accounting for and disclosure of loss

contingencies Reviewing the clients significant accounting estimates Reviewing the adequacy of disclosures Conducting a final analytical review of the financial statements Completing an engagement quality review Reviewing subsequent events that occur after the balance sheet date Going concern assessment

Reviewing Contingencies
Contingent losses that are probable, reasonably

estimated, and remote should be accrued and disclosed in notes to the account
Contingencies include: Threat of expropriation of assets in a foreign country Litigation, claims, and assessments Guarantees of debts of others Obligations of banks under standby letters of credit

Agreements to repurchase receivables that have been

sold Purchase and sale commitments

Contingencies
Responsibilities Management is responsible for identifying, evaluating, and accounting for contingencies Auditor is responsible for determining client has properly identified, accounted for, and disclosed material contingencies Sources of Evidence Primary sources include management and clients legal counsel Additional sources include corporate minutes, contracts, correspondence from government agencies, and bank confirmations

Letter of Audit Inquiry (Legal Letter)

Primary source of corroborative evidence concerning

litigation, claims, and assessments is the clients legal counsel To ensure the completeness of potential liabilities and factual information about the contingencies Letter of inquiry should include
Identification of the company, its subsidiaries, and the date of the

audit Managements list that describes and evaluates its contingencies

For each contingency Description of the matter, progress to date, and action client intends to take Evaluation of the likelihood of unfavorable outcome and estimate of potential loss, if possible

Review of Significant Estimates

Management estimates provide opportunities for

the entity to manage or even manipulate earnings (i.e. earnings management) Companies may underestimate liabilities or impairment of asset values to achieve reported earning goals The auditor provides reasonable assurance that
Management has information system to develop

estimates material to the financial statements Estimates are reasonable Estimates are in accordance to FRS

Review of Significant Estimates

In evaluating management estimates, the auditor

concentrates on key factors and assumptions that are

Significant to the accounting estimate Sensitive to variations Deviations from historical patterns Susceptible to misstatement and bias Inconsistent with current economic trends

Evaluating Adequacy of Disclosures

Third standard of reporting states When informative

disclosures are not reasonably adequate, the auditor must note that fact in the auditors report Disclosures can be made either on the face of the financial statements and/or in the notes to the statements Auditor must be sure that:
Disclosed events and transactions occurred and pertain to the

entity All disclosures that should be included are included Disclosures are understandable to users Disclosures are accurate

Performing Analytical Review

Analytical procedures are required in both planning phase

and the final review phase Audit team analyzes the data from an overall business perspective Analytical review for Revenues and Expenses
Ratio analysis, common-size analysis, and analysis of the dollar

and percentage changes is useful for confirming audit work Analytical procedures should include the relationship of income statement changes to pertinent balance sheet accounts

Assessing Subsequent Events

Subsequent events occur after the balance

sheet date. These events require special audit attention:

Review of events occurring after the clients balance

sheet date but prior to issuance of the audit report

Subsequent discovery of facts existing at the date of the

auditors report but not discovered during the audit

Consideration of omitted audit procedures that come to

attention after the auditors report has been issued

Types of Subsequent Events

Type 1: conditions that existed at the balance sheet

date The financial statement numbers should be adjusted to reflect this information; footnote disclosure may also be necessary Examples of type 1 subsequent events:
Major customer files for bankruptcy during subsequent

period, its deteriorating financial condition existed prior to the balance sheet date Lawsuit settled for different amount than accrual A sale of inventory below carrying value provides evidence that the net realizable value was less than cost at year end

Assessing Subsequent Events (continued)

Type 2: conditions that did not exist at the balance

sheet date The financial statement numbers should not be adjusted for these events, but they should be considered for disclosure Examples of type 2 subsequent events:
Uninsured casualty loss that occurs after the balance sheet date Significant lawsuit initiated for incident occurring after the balance

sheet date Significant loss due to natural disaster occurring after the balance sheet date Major decisions made during the subsequent period such as to merge, discontinue a line of business, or issue new securities Material change occurs in the value of investment securities

Assessing Subsequent Events (continued)

Audit procedures used to identify subsequent

events include:
Read minutes of meetings of the board of directors,

stockholders, and other authoritative groups held after year-end Read interim financial statements; investigate significant changes Inquire of management about

Significant changes in noted in interim statements Significant contingent liabilities Significant changes in working capital, debt, or owners equity Status of any tentative items Unusual accounting adjustments made after balance sheet date

Assessing Subsequent Events (continued)

If subsequent event occurs after end of fieldwork

but before audit report is issued, auditor must decide whether to single or dual date the audit report
Single date Use the date of this event as the date of the audit report Dual date using the dates of the original audit report and the date of the event, to disclose the work done only on that event after the original audit report date

Subsequent discovery of facts existing at the date of the auditors report

Auditor must determine
Reliability of new information
Whether the event had occurred by the audit report date Whether users are likely to still be relying on the

financial statements
Whether the audit report would have been affected had

the facts been known

Subsequent discovery of facts existing at the date of the auditors report (continued)
If the auditor decides further reliance on the

financial statements and audit report is not appropriate, client is advised to make appropriate and timely disclosure of these new facts Appropriate actions:
Revise financial statements and audit report Revision and explanation reflected in subsequent period

financial statements If revision will take extended period, notify users that statements and audit report should no longer be relied on

Subsequent discovery of facts existing at the date of the auditors report (continued)
If client will not cooperate, auditor should Notify client and regulatory agency that the audit report should no longer be associated with the financial statements Notify known users that the audit report should no longer be relied on

Going-Concern Assumption
Auditor is required to evaluate clients ability to

remain a going concern for a period not to exceed one year from the balance sheet date Indicators of potential going concern problems include
Negative trends in key financial areas like cash flow,

sales, profits Internal matters, such as loss of key personnel, and outdated facilities and/or products

Going-Concern Assumption (continued)

External matters, such as new legislation, loss of

significant customer or supplier, uninsured casualty loss Other matters, such as loan default, inability to pay dividends, attempted debt restructuring Significant changes in the competitive market and the competitiveness of the clients products
If there is substantial doubt about ability of client

to remain a going concern, auditor should

Discuss the situation with management
Assess managements plan to overcome problems

Going-Concern Assumption (continued)

Consider the effects on the financial statements Auditor should evaluate the adequacy of financial statement disclosure Disclosures might include conditions causing the going concern doubt and managements plan to overcome the problem Consider the effects on the audit report Add explanatory paragraph to the unqualified audit report Disclaim opinion Issue qualified opinion if disclosure is not adequate

Evaluating Management Representations

Management Representation Letter Reminds management of its responsibility for the financial statements Confirms significant oral responses made by management Reduces possibility of misunderstandings between management and auditor

Letter is prepared by auditor on client letterhead,

addressed to the auditor, and normally signed by CEO and CFO

Evaluating Management Representations

(continued)

Letter is dated as of the audit report date (end of

fieldwork) Because management representations are not strong evidence, the auditor should perform procedures to corroborate the information in the letter Managements failure to provide this letter is a scope limitation sufficient to preclude issuance of unqualified opinion

Communicating with the Audit Committee

Items the auditor should discuss with the audit committee

include
Auditors responsibility Management judgments and accounting estimates Audit adjustments

Uncorrected misstatements
Accounting policies and alternative treatments Major accounting and reporting disagreements with management Difficulties encountered in performing the audit

Copies of significant communications between auditor and

management Managements discussion with other CPA firms

Communicating with Management via the Management Letter

Auditors often notice things that might make the client

more profitable Many of these observations related to control deficiencies or operational matters The observations are included in a management comment letter typically delivered to the Board of Directors with the audit report Management letter is not required, but does add value to the audit