fall 2015auditing chapter 24 Completing the Audit 1.

fall 2015auditing

chapter 24

Completing the Audit

1

fall 2015auditing 2

Jena

describe what is meant by Interim Testing.

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Contingent Liabilities / Attorney’s Letter

Subsequent Events

Management Representations

analytical procedures

Final assessment of audit risk - opinion

communications to audit comm or mgmt• AU-c 260 Communication with Those Charged

with Governance• AU-c 265 Communicating Internal Control

Related Matters Identified in an Audit

subsequent discovery of facts

fall 2015auditing

examining subsequent payments to suppliers and other creditors to ensure that they were correctly recorded.

almost $5 million of purchases applicable to Dec. 31 audit period that had not been included as liabilities.

unrecorded liabilities

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Contingent Liabilities / Losses

• A potential future payment to an outside party from an existing condition

• Uncertainty about the amount

• Outcome will be resolved by future events

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Contingent Liabilities / Losses

• Lawsuits are an example of a contingency

• Income tax disputes• Product warranties• Guarantees of the debts of others

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Katie

what does SFAS No. 5 (ASC 450) teach us about

contingent losses or

contingent liabilities

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SFAS 5 (ASC 450) contingencies

probable estimable record loss

probable not estimable disclose

reasonably possible estimable or “

reasonably possible not estimable “

remote ignore ignore


SFAS 5 (ASC 450) contingencies

estimablecan’t be

estimated

Probable accrue loss fn disclose

Possible fn disclose fn disclose

Remote do nothing do nothing


Contingencies – lawsuits audit procedures

• Inquire of management

• Review minutes of BoD meetings

• Analyze legal expense

• Obtain a letter from each major attorney


Nicole

Management is our primary source of information about

Litigation, Claims and Assessments

what is our most important source of evidence to corroborate managements’ representations regarding LCA ?


Inquiry of Client’s Attorney

A list including (provided by client’s Senior Management)

– Pending litigation– Asserted or unasserted claims

Information about each item on list – Likelihood of an unfavorable outcome– Amount or range of potential loss

A statement that the list is completePage 348


“Inquiry of a Client’s Attorney”

this is an auditing procedure

Who sends this letter to the attorney ?To whom does their attorney respond ?

Huyen


“Inquiry of a Client’s Attorney”

what kind of problem do we have if their attorney refuses to respond ?

what kind of report will we issue ?

Romy


Do we modify the first paragraph?

Do we modify the Management’s Responsibility paragraph?

Do we modify the Auditor’s Responsibility paragraph?

Do we modify the Opinion paragraph?

Is there a Basis for Opinion paragraph? Before or after?

Julissa




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Katina

describe the two types of subsequent events

how do we decide whether to make an adjusting entry to include the effects of the subsequent event in the financial statement balances

or

just disclose the event in the footnotes


subsequent events

Type I - adjusting journal entrya.Those (subsequent events) that provide evidence of conditions that existed at the date of the financial statements

Type II - discloseb. Those (subsequent events) that provide evidence of conditions that arose after the date of the financial statements


Type I - adjusting journal entry

• Declaration of bankruptcy by a customer with a large account receivable

• Settlement of litigation for an amount greater than recorded

• Sale of investments for less than recorded amount


Type II - disclosure

• Issue bonds or equity securities• Merger or acquisition• Loss due to fire or natural disaster


subsequent events – auditing procedures

inquire of management

read internal financial statements

read minutes of Bd of Directors’ meetings

obtain a letter of representationpage 353



AU-C Section 580*

Written RepresentationsSource: SAS No. 122.

Effective for audits of financial statements for periods ending on or after December 15, 2012.

Introduction

Scope of This Section

.01 This section addresses the auditor's responsibility to obtain written representations from management and, when appropriate, those charged with governance in an audit of financial statements.

.02 Exhibit D, "List ofAU-C Sections Containing Requirements for Written Representations," lists other AU-C sections containing subject matter-specific requirements for written representations. The specific requirements for written representations of other AU-C sections do not limit the application of this


Letter of representation

Management is responsible for the financial statements

Management believes the f/s conform to GAAP

All financial records have been made available

All minutes have been made available

Information concerning fraud or illegal acts

Information concerning related party transactions

Unasserted claims that are probable have been disclosed

Subsequent events

Page 355


Julia

Who prepares and signs the letter of client representations?


Christina

we must obtain certain representations from management in writing

what kind of problem do we have if the client refuses?

what kind of report will we issue ?


Do we modify the first paragraph?

Do we modify the Management’s Responsibility paragraph?

Do we modify the Auditor’s Responsibility paragraph?

Do we modify the Opinion paragraph?

Is there a Basis for Opinion paragraph? Before or after?

Gordon


Iris

what is a “waived” or “passed” adjustment?

on page 360

“unadjusted misstatement audit schedule”

“summary of possible misstatements”


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Materiality page 122

34

minimum maximumpercent dollar percent dollar

earnings from operations 7,370 0.03 221 0.06 442current assets 51,027 0.03 1,531 0.06 3,062total assets 61,367 0.01 614 0.03 1,841current liabilities 13,216 0.03 396 0.06 793


Xiaodan

at what three stages of the audit MAY we perform Analytical Procedures ?

at what stages of the audit are we required to perform Analytical Procedures?


req’d planning phase

substantive tests

req’d at conclusion as an overall review


AU-C Section 520*

Analytical ProceduresSource: SAS No. 122.

Effective for audits of financial statements for periods ending on or after December 15, 2012.

Introduction

Scope of This Section

.01 This section addresses the auditor's use of analytical procedures as substantive procedures (substantive analytical procedures). It also addresses the auditor's responsibility to perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion on the financial statements. Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, addresses the use of analytical procedures as risk assessment procedures (which may be referred to as analytical procedures used to plan the audit).1 Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained, addresses the nature, timing, and extent of audit procedures in response to assessed risks; these audit procedures may include substantive analytical procedures


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Subsequent Events





with Governance• AU-c 265 Communicating Internal Control




Jake M

what is the definition of audit risk?



.05

known

misstatement

from samples

projected

uncorrected

misstatements

0

material


final review of workpapers

• all accounting and auditing questions have been resolved

• support the auditor’s opinion• provide evidence the audit complied with GAAS• means of coordinating and supervising the audit


Dillon

who is an “independent reviewer?”


dual dating

events that occur between the end of field work (the report date) and the date the report is issued

extend field work or

dual date

page 353


dual dating p. 353

Hewlett-Packard has an October 31 year end

Ernst & Young completed field work on November 13th

On Dec. 6, 2001, Hewlett-Packard made a $1 billion dollar debt offering, which it disclosed in Note 19 in its financial statements.

This is how Ernst & Young dated its auditor’s report

November 13, 2001, except for Note 19, as to which the date is December 6, 2001.


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communication with audit committees

• The auditor’s responsibilities• An overview of the scope of the audit

– Approach to address significant risks• Corrected misstatements• Accounting practices & estimates• Difficulties & disagreements with management

page 362


management letter




Deficiency in internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A deficiency in design exists when •a control necessary to meet the control objective is missing, or

• an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or competence to perform the control effectively.

Material weakness. A deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis.

Significant deficiency. A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged

with governance.


Aleksandr

what is the definition of control risk?


control risk

the risk that a misstatement in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.


Tim

what is a material weakness?


material weakness (page 177 )

a significant deficiency in internal control such that there is a reasonable possibility that a material misstatement would not be prevented, or detected and corrected on a timely basis


Ian

what two types of control deficiencies do we report ?


Janet

to whom do we report deficiencies in the internal controls ?


communication of internal control matters

• communicate what– significant deficiency– material weaknesses

• communicate to who– the audit committee– board of directors– owners or senior managementthose

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governance


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Subsequent Events





with Governance• AU-c 265Communicating Internal Control






Fischer vs. Kletz, 266 F. Supp. 180 (SDNY 1967),

the auditor did not disclose errors in a previously issued audit report when (s)he discovered the errors three months later during a consulting engagement

an auditor has a duty to anyone still relying on his report to disclose subsequently discovered errors in the report


subsequent discovery of facts existing at the date of the audit report

the auditor shoulda. discuss the matter with management and, when appropriate, those charged with governance.

b. determine whether the financial statements need revision and, if so, inquire how management intends to address the matter in the financial statements.



.16 If management revises the financial statements, the auditor should

a. apply the requirements of paragraph .

b. if the audited financial statements have been made available to third parties, assess whether the steps taken …. ensure that anyone in receipt of those financial statements is informed of the situation,



.17 If management does not revise the financial statements in circumstances when the auditor believes they need to be revised, thena. if the audited financial statements have not been made available to third parties, the auditor should notify management and those charged with governance—unless all of those charged with governance are involved in managing the entity4—not to make the audited financial statements available to third parties before the necessary revisions have been made and a new auditor's report on the revised financial statements has been provided. If the audited financial statements are, nevertheless, subsequently made available to third parties without the necessary revisions, the auditor should apply the requirements of paragraph .17b.

b. if the audited financial statements have been made available to third parties, the auditor should assess whether the steps taken by management are timely and appropriate to ensure that anyone in receipt of the audited financial statements is informed of the situation, including that the audited financial statements are not to be relied upon..18 If management does not take the necessary steps to ensure that anyone in receipt of the audited financial statements is

informed of the situation, as provided by paragraphs .16b or .17b, the auditor should notify management and those charged with governance—unless all of those charged with governance are involved in managing the entity5—that the auditor will seek to prevent future reliance on the auditor's report. If, despite such notification, management or those charged with governance do not take the necessary steps, the auditor should take appropriate action to seek to prevent reliance on the auditor's report. (Ref: par. .A23–.A26)




end of audit party


great quarterBecause of You

I enjoyed coming to “work” every day


congratulationsto our December 2015 grads







fall 2015auditing chapter 24 Completing the Audit 1.

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