Completing and

Reporting the
Audit
Lecture 10
These slides are based on the resources provided with Arens, Elder, Shailer, Fiedler and Beasley,
(2010). "Essentials of Auditing, Assurance Services and Ethics in Australia", Pearson, Frenchs
Forest

Learning objectives
1 Design and perform audit tests related to
presentation and disclosure audit objectives.
2 Conduct a review for contingent liabilities and
commitments.
3 Obtain and evaluate letters from clients lawyers.
4 Conduct a post-balance date review for subsequent
events.

Learning objectives (Contd)
5 Design and perform the final steps in the
evidence-accumulation segment of the audit.
6 Integrate the audit evidence gathered, and
evaluate the overall audit results.
7 Communicate effectively with the audit
committee and management.
8 Identify the auditors responsibilities when facts
affecting the audit report are discovered after its
issuance.
Different audit opinions from
Chapter 2
An unmodified audit report contains an unqualified or
clean opinion.

All other reports are modified opinions.

A report can be an unqualified modified report when an
emphasis of matter is added.

An emphasis of matter is used so that the reader can pay
appropriate attention to the issue raised, but does not
change the auditors opinion

Different audit opinions (Contd)
Other modified reports are qualified (ASA 705). A
qualified opinion is given when there are reservations
about the truth and fairness of the financial
statements.

Can include a qualified or except for opinion. This is
when issue(s) are material but not pervasive.

Adverse opinion would arise when financial report is
misstated and is material and pervasive.

Disclaimer of opinion would arise when there is an
inability to obtain sufficient appropriate audit
evidence and is material and pervasive.

Summary of the audit: phase IV
Additional presentation and disclosure
tests
Examples of substantive procedures:
Review debt contracts to determine that accounts
receivable are pledged as collateral
Use a disclosure checklist to determine if the
financial statements include all required disclosures
Review financial statements to determine if assets
are properly classified between current and non-
current categories
Reconcile amounts included in the long-term debt
footnotes to information in the auditors working
papers
Reviewing for contingent liabilities
and commitments
Contingent liability:
A potential future obligation to an outside party for an
unknown amount resulting from activities that have
already taken place but are conditional on some future
event
Examples of considerable concern to the auditor:
Pending legal action
Income tax disputes
Product warranties
Notes receivable discounted
Guarantees of obligations of others
Unused balances in letters of credit
Reviewing for contingent liabilities and
commitments (Contd)
Commitments, e.g.:
To purchase raw materials; or
To lease facilities at a certain price
Agreements to sell merchandise at a fixed price
Procedures for finding contingencies, e.g.:
Inquire of management
Review ATO correspondence
Review minutes of meetings
Analyse legal expense
Inquiries regarding litigation and claims
Lawyers representation letter:
Initiated by auditor
Prepared and sent by management
Sent direct to auditor
Some solicitors may be reluctant:
Lack of knowledge about matters
Refusal to disclose due to confidentiality

Reviewing for subsequent events
Auditors responsibility for reviewing for
subsequent events is normally limited to the
period:
Beginning with the balance sheet date; and
Ending with the date of the auditors report

Types of subsequent events
Those events that have a direct effect on the financial
statements and require adjustment:
Provide additional information to management and
auditors to the valuation of account balances
Require an adjustment of account balances if
amounts are material, e.g.:
Bankruptcy of a major debtor
Settlement of litigation at a different amount
Disposal of equipment below current book value
Types of subsequent events (Contd)
Those events that have no direct effect on the financial
statements but for which disclosure is advisable:
Provide evidence of conditions that didnt exist at
the date of the financial report but are so significant
that they require disclosure
Ordinarily can be adequately disclosed in the notes
to the financial report, e.g.:
Decline in market value of securities
Issuance of bonds or shares
Decline in market value of inventory
Uninsured loss of inventory from fire
Merger or acquisition
Audit tests for subsequent events
Inquiring of management
Corresponding with lawyers
Reviewing internal statements prepared subsequent
to the balance sheet date:
Major changes in the business or environment
Reviewing records prepared subsequent to the
balance sheet date
Examining minutes issued subsequent to the
balance sheet date
Obtaining a letter of representation
Final evidence accumulation
Performing final analytical procedures:
Final review for material misstatements
Evaluating going-concern assumption:
Analytical procedures are important
Adverse opinion where highly improbable the
entity will continue as a going concern
Final evidence accumulation (Contd)
Obtaining a management representation letter:
To impress on management its responsibility
for the assertions in the financial report
To document the responses from management
to inquiries about various aspects of the audit

Reading other information accompanying the
financial reports:
To ensure correspondence with information in
the financial statements
Evaluating results
Sufficiency of evidence:
Reviewing the audit program
Evidence supports auditors opinion:
Summarising the misstatements uncovered
in the audit
Financial report disclosures:
Adequacy of financial statement disclosures

Evaluating results (Contd)
Working paper review:
To evaluate performance of inexperienced
personnel
To ensure the audit meets the public accounting
firms standard of performance
To counteract the bias that often enters into the
auditors judgement
Independent review:
By a staff member with no experience on the
engagement
Communicating with the audit
committee and management
Communicate any irregularities:
Including fraud and other illegal acts
Communicate reportable internal control
structure conditions
Communicate auditor independence
requirements

Communicating with the audit
committee and management
(Contd)
Other communication with the audit committee, e.g.:
General approach and overall scope of the audit
Selection of, and changes to, significant accounting
policies
Material audit adjustments
Management letter:
To inform client management of the auditors
recommendations for improving the clients
business
Subsequent discovery of facts
After the auditor issues the audit report and
completes all communication with
management and the audit committee:
The audit is finished
If the auditor becomes aware after the audited
financial statements have been issued that
some information included in the statements is
materially misleading:
The auditor is obliged to inform statement
users and may decide to re-issue the audit
opinion unless the report is changed