21 - 1 Copyright 2003 Pearson Education Canada Inc. CHAPTER 21 Completing the Audit.

21 - 1Copyright 2003 Pearson Education Canada Inc.

CHAPTER 21Completing the

Audit


Audit Completion ProceduresAudit Completion ProceduresSearch for unrecorded contingent liabilities.

What is acontingent liability and what are the relevant related

GAAPrecommendations?



What is acontingent

liability and what are the relevant

GAAPrecommenda-

tions?

a potential futureobligation to an outside party for an unknown amount resulting from activities that havealready taken place



likely and reasonably estimated - accrual

likely and not estimable - footnote disclosure

not determinable - footnote disclosure

unlikely - no financial statement or disclosure unless significant adverse effect

What is acontingent

liability and what are the relevant

GAAPrecommenda-

tions?



Footnote disclosureshould describe the contingency and theopinion of legalcounsel or manage-ment regarding theexpected outcome.

What is acontingent

liability and what are the related

GAAPrecommenda-

tions?


Audit Completion ProceduresAudit Completion ProceduresSearch for unrecorded contingent liabilities.- enquire of management


Audit Completion ProceduresAudit Completion Procedures

Search for unrecorded contingent liabilities.- enquire of management- review: ~ client copies of Revenue Canada correspondence ~ minutes of board and shareholder meetings ~ invoices from client lawyers ~ existing audit workpapers ~ contracts, agreements, etc.


Audit Completion ProceduresAudit Completion ProceduresSearch for unrecorded contingent liabilities.- enquire of management- review: ~ client copies of Revenue Canada correspondence ~ minutes of board and shareholder meetings ~ invoices from client lawyers ~ existing audit work papers ~ contracts, agreements, etc.- obtain letters of confirmation from all client lawyers

Jill Auditor, CA

Joe Lawyer Canada48


Lawyer EnquiryLawyer Enquiry

The auditor should ask the client to prepare a letter (on client letterhead, signed by client officer) asking the lawyer to respond directly to the auditor concerning:



The auditor should ask the client to prepare a letter (on client letterhead, signed by client officer) asking the lawyer to respond directly to the client with a copy to theauditor concerning:- client’s description of the nature & current status of all outstanding & possible claims with which the lawyer has been involved


The auditor should ask the client to prepare a letter (on client letterhead, signed by client officer) asking the lawyer to respond directly to the auditor concerning:- client’s description of the nature & current status of all outstanding & possible claims with which the lawyer has been involved- client’s evaluation of the amount & likelihood of loss or gain for each listed outstanding & possible claim



The auditor should ask the client to prepare a letter (on client letterhead, signed by client officer) asking the lawyer to respond directly to the auditor concerning:- client’s description of the nature & current status of all outstanding & possible claims with which the lawyer has been involved- client’s evaluation of the amount & likelihood of loss or gain for each listed outstanding & possible claim- any unlisted or potential items, or whether the status of each claim or assessment



If an lawyer refuses to respond or refuses to provide adequate information, the audit opinion

will be qualified or denied.



Review for Subsequent EventsReview for Subsequent Events

?



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balance sheet field work report date completion issue date

period under audit subsequent events period

Subsequent events are events or trans-actions having a material effect on

the financial statements thatoccur after the balance sheet

date but before fieldwork completion.


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Types of Subsequent EventsTypes of Subsequent Events1.events that provide additional evidence about conditions that existed at the balance sheet date (e.g., settlement of liabilities, realiza- tion of assets)


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1.events that provide additional evidence about conditions that existed at the balance sheet date (e.g., settlement of liabilities, realiza- tion of assets)

Types of Subsequent EventsTypes of Subsequent Events

Client financial statements for the periodunder audit must be adjusted to reflectthis subsequent event information.


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2. events that occur after the balance sheet date and do not relate to conditions that existed at year-end (e.g., bond/stock issue, acquisition, fire/flood loss, major customer/vendor bankruptcy)



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2. events that occur after the balance sheet date and do not relate to conditions that existed at year-end

disclose

These subsequent events must be disclosed in the footnotes of the period under audit. Theauditor may also consider:- pro forma financial statements




Whatauditing

procedureswill identifysubsequent

events?


Subsequent Events Auditing ProceduresSubsequent Events Auditing Procedures

Near field work completion, auditors should:- read post-balance sheet interim statements and records

Ace Company

Financial Statements

For the month ofJanuary 2005


Subsequent Events Auditing ProceduresSubsequent Events Auditing Procedures

Near field work completion, auditors should:- read post-balance sheet interim statements and records- obtain a management representation letter and discuss with management: ~ contingent liabilities ~ significant changes in owners’ equity ~ items accounted for on tentative data ~ unusual adjustments in subsequent period


Subsequent Events Auditing ProceduresSubsequent Events Auditing Procedures Near field work completion, auditors should:- read post-balance sheet interim statements and records- obtain a management representation letter- read minutes of board and shareholder meetings that have occurred since year-end


Joe Lawyer

Jill Auditor, CA

Subsequent Events Auditing ProceduresSubsequent Events Auditing Procedures Near field work completion, auditors should:- read post-balance sheet interim statements and records- obtain a management representation letter- read minutes of board and shareholder meetings that have occurred since year-end- obtain letter from client’s lawyer

Canada 48


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Whatresponsibility

does the auditorhave for

subsequentevents that

occur betweenfield work

completion andthe issue date?


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- the auditor is not responsible for dis- covering subsequent events during this period

Whatresponsibility




completion and

the issue date?


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- the auditor is not responsible for dis- covering subsequent events during this period

- if, however, auditors learn of a subsequent event during this period, they are responsible for ensuring correcting accounting for it

Whatresponsibility




completion andthe issue date?


If auditors learn of a subsequent event during this period, they are responsible for

its disclosure.

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The auditors then have two options:- expand all subsequent events tests to the date of the event and change the report date to the date of the event (e.g., 2/21)


If auditors learn of a subsequent event during this period, they are responsible for

its disclosure.12/31 2/14 2/28



The auditors then have two options:- expand all subsequent events tests to the date of the event and change the report date to the date of the event (e.g., 2/21)- restrict testing only to matters relating to the new event and dual-date the report:

Taylor & Tower, CAsFebruary 14, 2005, except for Note 3, as to which the date is February 21, 2005


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The auditors then have two options:- expand all subsequent events tests to the date of the event and change the report date to the date of the event (e.g., 2/21)- restrict testing only to matters relating to the new event and dual-date the report

What are the trade-offsbetween these options?


Whatresponsibility

does the auditor

have for subsequentevents that occur afterthe issue

date?

period subsequent events period under audit

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Whatresponsibility

does the auditor


date?


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Auditors have no obligation toperform additional proceduresafter the report date unlessthey become aware of factsthat existed at the report date.


Whatresponsibility

does the auditor


date?

With regard to this information,auditors should determine:- did the information exist at the report date?


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Whatresponsibility

does the auditor


date?

With regard to this information,auditors should determine:- did the information exist at the report date?- is the information reliable?


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Whatresponsibility

does the auditor


date?

With regard to this information,auditors should determine:- did the information exist at the report date?- is the information reliable?- would the audit report have been different if the information had been available prior to the report date?


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Whatresponsibility

does the auditor


date?

With regard to this information,auditors should determine:- did the information exist at the report date?- is this information reliable?- would the audit report have been different if the information had been available prior to the report date?- are persons still relying on the audit report?


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If theanswer to

any of these questions is

no, theauditors donot need to

take anyaction.



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If theanswer to

all of these questions is

yes, theauditors mustact to prevent

future reliance on the

audit report.



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How do auditors How do auditors prevent future prevent future reliancereliance on a on a previously-issuedpreviously-issued

audit report?audit report?

Auditors’ Report

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the client must reviseand reissue the

financial statements


audit report?audit report?If the financial statement effect of the subsequently-discovered information

can be determined promptly


the client must notify persons known to be (and those likely to be) relying

on the financial statements


audit report?audit report?If the financial statement effect of the subsequently-discovered information

cannot be determined promptly


What should the auditor do if the client What should the auditor do if the client refusesrefuses to reissue the statements or contact to reissue the statements or contact

those relying on the auditors’ report?those relying on the auditors’ report?

reviseand

reissue?NO!




-first, notify the audit committee, or other body, such as the board, of management’s refusal



those relying on the auditors’ report?those relying on the auditors’ report?- first, notify the audit committee, etc. of management’s refusal- then: ~ inform client management that the audit report may no longer be associated with the statements




- first, notify the audit committee, etc. of management’s refusal- then: ~ inform client management that the audit report may no longer be associated with the statements ~ consider obtaining legal advice



those relying on the auditors’ report?those relying on the auditors’ report?- first, notify the audit committee, etc. of management’s refusal- then: ~ inform client management that the audit report may no longer be associated with the statements ~ consider obtaining legal advice ~ consider the appropriateness of other actions such as withdrawing


Client Representation LetterClient Representation Letter

?



The auditor must obtain a letter from the client documenting the client’s represen-tations during the engagement.

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ClientRepresentation

Letter

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The auditor must obtain a letter from the client documenting the client’s represen-tations during the engagement.

The primary purposes are to:- confirm and document oral statements- reduce auditor-client misunderstanding- remind management of its responsibili- ty for the financial statements


Client Representation LetterClient Representation LetterThe auditor must obtain a letter from the client documenting the client’s represen-tations during the engagement.

The primary purposes are to:- confirm and document oral statements- reduce auditor-client misunderstanding- remind management of responsibilitiesThe letter should be signed by the clientCFO and CEO and dated with the fieldwork completion date.



If the client refuses toIf the client refuses togive the auditor a give the auditor a

representation letter, representation letter, the auditor must the auditor must qualifyqualify

or or denydeny the opinion. the opinion.

probable


Final Audit StepsFinal Audit Steps

1. Incorporating all audit evidence, materiality, and judgment, the auditor draws overall conclusions and prepares the audit report.


Final Audit StepsFinal Audit Steps1. Incorporating all audit evidence, materiality, and judgment, the auditor draws overall conclusions and prepares the audit report.2. The auditor prepares the management letter.

?


Final Audit StepsFinal Audit Steps1. Incorporating all audit evidence, materiality, and judgment, the auditor draws overall conclusions and prepares the audit report.2. The auditor prepares the management letter.

recommendations forimproving the client business


Final Audit StepsFinal Audit Steps1. Incorporating all audit evidence, materiality, and judgment, the auditor draws overall conclusions and prepares the audit report.2. The auditor prepares the management letter.3. The auditor communicates the results to the audit committee/management and gives them the audit report and management letter.


GAAS GAAS suggestssuggests that auditors to that auditors to communicate (oral or written) to audit communicate (oral or written) to audit

committees, etc.:committees, etc.:

- the auditor’s responsibilities under GAAS


GAAS suggests that auditors GAAS suggests that auditors communicate (oral or written) to audit communicate (oral or written) to audit

committees, etc.:committees, etc.:

- the auditor’s responsibilities under GAAS- significant accounting policies selected, & judgments used by management



committees, etc.:committees, etc.:- the auditor’s responsibilities under GAAS- significant accounting policies selected, & judgments used by management- audit planning



committees, etc.:committees, etc.:- the auditor’s responsibilities under GAAS- significant accounting policies selected, & judgments used by management- audit planning- disagreements with management



committees, etc.:committees, etc.:- the auditor’s responsibilities under GAAS- significant accounting policies selected, & judgments used by management- audit planning- disagreements with management- difficulties in performing the audit



committees, etc.:committees, etc.:- the auditor’s responsibilities under GAAS- significant accounting policies selected, & judgments used by management- audit planning- disagreements with management- difficulties in performing the audit- consultations with other accountants


What are the What are the requiredrequired communications with the communications with the

audit committee, etc.?audit committee, etc.?


What are other suggested What are other suggested communications with the communications with the

audit committee?audit committee?

- significant deficiencies in internal control- misstatements that are other than trivial- illegal or possible illegal acts

21 - 1 Copyright 2003 Pearson Education Canada Inc. CHAPTER 21 Completing the Audit.

Documents

pearson education canada

audit slide

client letterhead

client officer

contingent liability

management slide

client lawyers jill

place slide