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Auditing- A Practical Approach

Chapter 13: COMPLETING AND REPORTING ON THE AUDIT

FMGT 4310

Auditing 2

Chapter 13 Learning Objectives

1. Explain the procedures performed as part of the

engagement wrap-up

2. Understand the considerations when assessing

the going concern assumption

3. Understand the purpose of and the procedures

performed in the review for contingent liabilities

and commitments

4. Compare the two types of (material) subsequent

events to determine what effect they have on the

financial statements (if any) 13-2

Chapter 13 Learning Objectives

5. Analyze misstatements and explain the difference between quantitative and qualitative considerations when evaluating misstatements

6. Evaluate conclusions obtained during the performance of the audit and explain how these conclusions link to the overall opinion

7. Describe the components of an audit report 8. Identify the types of modifications to an audit

report

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Chapter 13 Learning Objectives

9. Explain what reporting is required to management and those charged with governance

10. Understand the various types of other engagements that auditors may be asked to perform (Appendix 13)

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• The auditor must gather sufficient, appropriate, audit evidence (SAAE- GAAS) to support the opinion.

• Must consider problem areas that may have arisen during the course of the audit.

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OBJECTIVE OF FIELD WORK

Engagement Wrap-Up

• Has there been any change in the assessment of RMM?

• If there have been misstatements or control deviations – Explanation why?

– Does this change RMM assessment?

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Engagement Wrap-Up

• Do we need to revise materiality? Consider: – Changes in client circumstances

– New users (e.g. new lender)

– Posting of audit adjustments  NI

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Engagement Wrap-Up

• Administrative issues

Consider: – Clearing all outstanding review notes

– Obtaining and reviewing working papers from other auditors

– Finalizing working paper files

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Final Analytical Procedures

• Useful as a final review for material misstatements or financial problems not noted during other testing.

• Final objective look at the financial statements.

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Going Concern Assumption

• What is the going concern assumption?

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Evaluation of Going Concern Assumption

• Management must prepare an assessment of going concern.

• Auditor must consider the reasonableness of this assessment (CAS 570)

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Evaluation of Going Concern Assumption

• Results of analytical review and overall financial statement review will guide the auditor with respect to risks of business failure.

• Further queries and follow-up will be used where liquidity problems surface.

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Evaluation of Going Concern Assumption

• Conditions which could cast doubt on the entity’s ability to continue as a going concern: – Serious deficiencies in working capital; – Inability to obtain financing sufficient for continued

operations; – Inability to comply with the terms of existing loan

agreements; – The possibility of an adverse outcome of one or

more contingencies; – A plan to significantly curtail or liquidate

operations. 13-13

Evaluation of Going Concern Assumption

NOT a going concern?

Clean opinion?

Disclosure

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Contingent liabilities

• What are contingent liabilities?

“Existing conditions”

“Future liability”

Contingent liabilities

• What are the auditor’s responsibilities? (CAS 501)

• Primary assertion(s)?

Searching for contingent liabilities

• What audit procedures are commonly performed in the search for contingent liabilities?

• What evidence?

• … specific procedures?

 Inspect…?

Searching for contingent liabilities

– Inquire of management

– Review/inspect minutes of shareholders’ and directors’ meetings

– Read/inspect contracts, agreements, and related correspondence

What will auditors be looking for?

Importance of analyzing legal expense

• A close analysis of the legal expense account is an important part of the search for unrecorded contingent liabilities or commitments

Why?

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Confirmation from client’s lawyer(s)

• Important procedure

• Contact all lawyers that are known to be working for the client

Claims vs. Possible claims

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Legal Inquiry Letter- Format

• Formatted as an letter from the client

• Management assessment of outstanding AND possible claims

• Lawyer to reply to client, cc auditor

• The information that lawyers can provide is limited due to their requirement to hold client information as confidential

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Evaluating known contingent liabilities

• What is the likelihood of the potential liability?

• What is the amount of the potential liability?

The evaluation of these two factors will determine the necessary disclosure and/or adjustment. Likely/probable?

Measurable?

 DISCLOSURE?

Subsequent Events

• What are subsequent events?

• Why are auditors concerned with subsequent events?

Adjustment vs. Disclosure

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Subsequent Events Review Period

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----|----------------------------|----------------|------| Year Approved Audit Issued End by Mgmt Report

|----- / /---------------------------|----------------| Subsequent events period

• Where there is a subsequent event that has a direct effect on the financial statements

– Is an adjustment required?

IF it arises from conditions that existed at the balance sheet date.. YES

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Subsequent Events

Type 1

• Where there is a subsequent event that has no direct effect on the financial statements.

i.e. Conditions that did not exist as of the balance sheet date but, is an adjustment required?

NO- but if they are so significant they may require disclosure

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Subsequent Events

Type 2

Subsequent Events Evidence

• Subsequent events audit evidence includes…?

• May lead to the “dual dating” of the audit report.

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• Consider differences due to

• Wrong amount

• Classification, or

• Presentation/Disclosure

• Misstatement due to fraud vs. error

• Material?

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Misstatements

Adjustment required?

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• Explanation of the audit process

• Conclusions reached

• Formal communication

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Audit Report

1. Report Title

2. Addressee

3. Opinion Paragraph

4. Basis for Opinion

5. Key Audit Matters

6. Management Responsibility

7. Auditor Responsibility

8. Other Reporting responsibilities

9. Name of public accounting firm

10.Date of the auditor’s report

11.Auditor’s address 13-31

Audit Report “Clean”(CAS 700)

 Optional unless required by law/regulation (CAS 701)

Areas of high RMM

Significant auditor judgement

Effect of significant events

Responsibilities of management

going concern

Material uncertainty related to going concern

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Going Concern

Inserted before Key Audit Matters

Modifications?

• Consider:

• Emphasis of matter

• Scope limitation

• GAAP deviation

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Audit Report

Does not affect opinion

Future actions/events

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GAAP

Scope

Emphasis of Matter

Auditor Communications

The auditor must communicate with management and/or the audit committee with respect to:

• Illegal acts • Material misstatements • Reportable internal control conditions

(internal control deficiencies that could lead to material errors)

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“..those charged with governance” (CAS 260)

Auditor Communications

The auditor must communicate with the audit committee with respect to:

• Significant disagreements with management;

• Serious difficulties encountered while performing the audit; and

• Any matter that has a significant effect on the qualitative aspects of the accounting principles used in the financial statements.

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Auditor Communications

The auditor is also required to communicate at least annually with the audit committee:

• Confirmation of the auditor’s independence. • Disclosure of all direct and indirect

relationships between the auditor and the entity.

• If the entity is publicly accountable, disclosure of the total fees charged for audit and non-audit services provided by the auditor to the entity during the last year.

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