[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.1 Completing.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 11.1

Completing the Audit Principles of Auditing: An Introduction to

International Standards on Auditing - Ch. 11

Rick Stephan Hayes,

Philip Wallage, and Hans Gortemaker


Slide 11.2

AUDIT PROCESS MODEL – PHASE IV EVALUATION AND REPORTINGObjective: Complete the audit procedures and issue an opinion.Procedures(1) Evaluate governance evidence.(2) Perform procedures to identify subsequent events.(3) Review financial statements and other report material.(4) Perform wrap-up procedures.(5) Prepare Matters for Attention of Partners.(6) Report to the board of directors.(7) Prepare Audit report.


Slide 11.3

ISQC 1 says The objective of the firm is to establish and maintain a system of quality control to provide

it with reasonable assurance that:

(a) The firm and its personnel comply with professional standards and applicable legal and regulatory requirements; and

(b) Reports issued by the firm or engagement partners are appropriate in the circumstances.


Slide 11.4

Audit firm policies and procedures

General firm activities for which quality control policies and procedures are required include leadership responsibilities for quality within the firm, ethical requirements, acceptance and retention of clients, HR, engagement performance, and monitoring.

The firm’s chief executive officer (partners, board or equivalent) shall assume ultimate responsibility for the firm’s system of quality control.

The firm shall establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements.


Slide 11.5

The work performed by each person in the audit team should be reviewed by personnel of at least

equal competence to consider whether:

The work has been performed in accordance with the audit program;

The work performed and the results obtained have been adequately documented;

All significant audit matters have been resolved or are reflected in audit conclusions;

The objectives of the audit procedures have been achieved; and

The conclusions expressed are consistent with the results of the work performed and support the audit opinion.


Slide 11.6

Sarbanes-Oxley Act (SOx)

The Sarbanes-Oxley Act (SOx) addresses overall review procedures required of the auditor such as second partner review, partner rotation, and quality control. It also discusses the client’s audit committee responsibilities and inspection by PCAOB.

PCAOB conducts a program of inspections of audit firms to determine if they comply with professional standards and quality control.


Slide 11.7

SOx requires every public accounting firm to use quality control policies relating to

(i) monitoring of professional ethics and independence from entities on which the firm issues audit reports;

(ii) consultation within the firm on accounting and auditing questions;

(iii) supervision of audit work;(iv) hiring, professional development, and

advancement of personnel;(v) the acceptance and continuation of audit

engagements;(vi) internal inspection


Slide 11.8

SOx Company Audit Committee

Ω Under SOx Sec 301 public company audit committees are directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by their company (including resolution of disagreements between management and the auditor regarding financial reporting).

Ω Audit firm reports directly to the audit committee. Auditors may also have to discuss accounting complaints with the Audit Committee.


Slide 11.9

Evaluate Governance Evidence

• The important governance information to be gathered from the client includes:

a legal letter, a written representations by management

(management representations letter) information about contingent liabilities and

commitments identification of related parties.


Slide 11.10

Field Procedures to Obtain Evidence Concerning Claims Against Client

Read corporate meetings minutes

Read contracts, leases, correspondence and other certain documents

Review guarantees of indebtedness disclosed on bank confirmations

Inspect other documents for client guarantees

Determine if there are any side letters*

Agreements made outside the standard company contracts. These otherwise undisclosed agreements may be signed by senior officers, but not approved by the board of directors.


Slide 11.11

Legal letters- are the primary procedure auditors rely on for discovering litigation, claims and assessments that

affect the client. Illustration 11.4

Legal letters are obtained from the clients legal counsel

Attorney Letter informs the auditor of pending litigation or other information involving legal counsel that is relevant to the financial statements.


Slide 11.12

Legal Letter

The attorney letter should request evidence relating to:

Existence of conditions or circumstances indicating a possible loss from litigation, claims or assessments

The period in which the underlying cause occurred.

Likelihood of an unfavorable outcome Amount of potential loss, including court costs


Slide 11.13

Written Representations by ManagementWritten Representations by Management

• A written statement by management is provided to the auditor to confirm certain matters or to support other audit evidence.

• The objectives of the auditor are: 1. To obtain written representations from management that

they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor

2. To support other audit evidence relevant to the financial statements


Slide 11.14

Review for Contingent Liabilities and Commitments

Contingent liability is a potential future obligation to an outside party for an unknown amount resulting from the outcome of a past event.

Commitments are agreements that the entity will hold to a fixed set of conditions, such as the purchase or sale of merchandise at a stated price, at a future date, regardless of what happens to profits or to the economy as a whole.


Slide 11.15

Subsequent Events

Subsequent events are events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.


Slide 11.16

Types of Events After the F/S Date

Financial frameworks usually identify two types of events after the date of the financial statements:

Those that provide evidence of conditions that existed at the date of the financial statements(requires adjustment to the financial statements)

Those that provide evidence of conditions that arose after the date of the financial statements.(if material, requires disclosure).


Slide 11.17

The auditor shall take into account the auditor’s risk assessment in determining the nature and extent of such audit procedures, which shall include the following:Obtaining an understanding of any procedures management has established to ensure that subsequent events are identified.Inquiring of management and those charged with governance as to whether any subsequent events have occurred which might affect the financial statements.Reading minutes of the meetings of the entity’s owners and management that have been held after the date of the financial statements and inquiring about matters discussed for which minutes are not yet available.Reading the entity’s latest subsequent interim financial statements.Reading the entity’s latest available budgets, cash flow forecasts and other related management reports for periods after the date of the financial statements;Consider whether written representations covering particular subsequent events may be necessary to support other audit evidence and thereby obtain sufficient appropriate audit evidence.


Slide 11.18

Events Between the Balance Sheet Date and the Issuance of the Statements

When management amends the financial statementsThe auditor reviews for subsequent eventsIssue or Reissue New Audit Report

When management does not amend the financial statementsQualified Opinion or an Adverse Opinion

(before report was released) is givenNotify the top management not to use the F.S.

& auditor’s report. (after report was released)


Slide 11.19

Discovery Of Facts After The Financial Statements Have Been Issued.

After the financial statements have been issued the auditor has no obligation to perform any audit procedures regarding such financial statements.

If, however, the auditor becomes aware of a fact which existed at the date of the auditor’s report, the new or amended auditor’s report should include an emphasis of a matter paragraph.


Slide 11.20

Review Financial Statements and Other Report Material

The final review of the financial statements involves procedures to determine if disclosures of financial statements and other required disclosures (for corporate governance, management reports, etc.) are adequate.

Adequate disclosure includes consideration of all the financial statements, including related footnotes.


Slide 11.21

Review Financial Statements and Other Report Material

• Financial Statement Disclosures

• Disclosure ChecklistDisclosure Checklist• Corporate Governance

Disclosures

• Fair Values• Other Information In The

Annual Report


Slide 11.22

Corporate Governance

• The London Stock Exchange Code of Best Practice state that: The directors should report on the effectiveness of the company's system of internal control and that the business is a going concern, with supporting assumptions or qualifications as necessary.

• Under the Sarbanes-Oxley Act (SOx) auditors have responsibility considering certain governance disclosures connected with the financial statements.

– The company must disclose whether or not, and if not, the reason why, it has adopted a code of ethics.

– SOx Section 407 requires company disclosure of whether or not, and if not, the reasons, their audit committee is comprised of at least one member who is a financial expert.


Slide 11.23

Other Information In Annual Reports

‘The auditor should read the other information (in documents containing audited financial statements) to identify material inconsistencies with the audited financial statements’.

ISA 720 Says


Slide 11.24

Other information, on which the auditor may have to report, includes

an annual report, a report by management or the board of directors

on operations financial summary or highlights, employment data, planned capital expenditures, financial ratios names of officers and directors, selected quarterly data documents used in securities offerings.


Slide 11.25

Material Inconsistency

A material inconsistency exists when other information contradicts information contained in the audited financial statements. A material inconsistency may raise doubts about the audit conclusions drawn from audit evidence obtained and, possibly, about the basis for the auditor’s opinion on the financial statements.


Slide 11.26

Wrap-Up Procedures

Wrap-up procedures are those procedures done at the end of an audit that generally cannot be performed before the other audit work is complete. They include supervisory review, final analytical procedures, working capital review, evaluating audit findings for material misstatements, review of laws and regulation, and evaluation of going concern.


Slide 11.27

Supervisory Review

• Review starts with the in-charge (senior) accountant reviewing the work of the staff accountant

• The manager and partner in charge of the audit review the work submitted by the in-charge accountant

• For larger audits, there is an additional review of the engagement is performed by a manager or partner not working on the engagement

• In auditing firms with multiple offices, it is common practice for review teams to visit the various offices periodically and review selected engagements


Slide 11.28

Working papers (or ‘work papers’) are a record of the auditor’s planning; nature, timing and extent of the auditing procedures performed; results of such procedures and the conclusions drawn from the evidence obtained.

Two functions: Aid in conduct in supervision of audit. Support for auditor’s opinion,

especially representation.

Working Paper Review


Slide 11.29

$ When the audit tests for each item in the financial statements are completed, the staff auditor doing the work will sign off completion of steps, identify monetary misstatements in the financial statements, and propose adjustment to the financial statements.

$ Monetary misstatement are misstatement that cause a distortion of financial statement.$ Results from mistakes in processing transactions,

mistakes in selection of accounting principles, and mistakes in facts or judgment about accounting estimates.

Evaluating Audit Findings For Material Misstatements


Slide 11.30

Review Laws and Regulation

The auditor should:– know the laws that apply to their

client,– review the criteria required to

comply with that statute, – test for the client company’s

compliance.


Slide 11.31

Going Concern

The going concern assumption is that the enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future.

An entity's continuance as a going concern is assumed in the preparation of the financial statements in the absence of information to the contrary.

For example, assets and liabilities are recorded on the basis the entity will be around long enough to pay the liabilities and fully depreciate the assets.


Slide 11.32

Procedures if Going Concern Doubt

• If there is significant doubt of the entity’s ability to continue as a going concern, the auditor should– Review management’s plans for

future actions based on its going concern assessment;

– Seek written representations from management regarding its plans for future action; and

– Gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists through carrying out procedures considered necessary.


Slide 11.33

Matters For Attention Of Partners (MAPs)

Matters for Attention of Partners (MAPs) is a report by audit managers to be reviewed by the partner or director detailing the audit decisions reached by managers or partners and the reasons for those decisions.


Slide 11.34

Items included in the MAP:

a cover page signed by audit manager and partners stating the basic conclusions of the audit

general matters, management comments, comments on results

discussions of accounts that required special consideration

compliance with statutory laws, ISAs and IASscomments on accounting systemscomments on management lettersdiscussion of any matters that were outstanding

at that date.


Slide 11.35

Reports to The Board of Directors

The Board of Directors has significant influence over accounting and financial policies of the entity. The auditor must communicate their important findings to the Board.– Board has responsibility for hiring

independent auditor. Typical areas of discussion in the Long-Form

report to the board of directors is information which the client has omitted from its notes and the errors the auditor has found in performing his work.


Slide 11.36

• SEC requires auditors to report to the audit committee of the publicly traded company– all critical accounting policies and practices to be used;– all alternative treatments of financial information within

generally accepted accounting principles that have been discussed; and

– other material written communications such as any management letter or schedule of unadjusted differences.

SEC Report to Audit Committee


Slide 11.37

Thank You for Your Attention

Any Questions?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.1 Completing.

Documents

audit procedures

audit principles of

audit firm policies

audit report

audit conclusions

audit opinion

audit program

audit team