McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 11
Completing the Audit

It aint over till its over. Yogi Berra, former catcher for the New York Yankees

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Timeline for Major Activities in Audit

Beginning of year Year-End Date (date of the Financial Statements) Date of the auditors report (audit completion date)

Audit report release date

Interim testing (tests of controls and substantive procedures

Completing substantive procedures Attorneys letters Written representations Going-concern assessment Adjusting journal entries Audit documentation review Subsequent events

Subsequently discovered facts

Subsequently discovered facts Omitted audit procedures Management letter Communications with those charged with governance

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Completing Substantive Procedures

Roll-forward procedures: Extend work from interim period to date of the financial statements
Perform analytical procedures to identify unusual or unexpected relationships not previously identified Review accounts for miscellaneous, other, and clearing accounts (may relate to earnings management)

Evaluate management estimates and process for developing estimates for reasonableness

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Procedures for Litigation, Claims, and Assessments

Inquiry of clients Review minutes of meetings of stockholders, directors, and committees Review contracts, loan agreements, and correspondence from taxing and governmental agencies Obtain information concerning guarantees from bank confirmations Review documentation related to legal services Attorneys letters
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Attorneys Letters
Responsibilities for Attorneys Letter
Auditors Initiate request for attorney letter

Contents of Attorneys Letter Listing of pending litigation, claims, and assessments

Client Prepare listing, description, and evaluation of litigation, claims, and assessments for letter Send letter to attorney including information related to litigation, claims, and assessments

Description of each item or case included in the listing

Evaluation of the likelihood of an unfavorable outcome Estimate of the range of potential loss Understanding regarding unasserted claims
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Attorney Respond to auditors regarding clients description of litigation, claims, and assessments contained in attorney letter

Written Representations
Provided by management to auditors
Dated using date of auditors reports (audit completion date)

Broad purpose
Impress upon management its primary responsibility for the financial statements May establish auditors defense if a question related to inquiries subsequently arises

Qualify or disclaim an opinion if not provided by the client

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Contents of Written Representations

Information related to financial statements
Managements responsibility for F/S and internal control over financial reporting Appropriate disclosure, presentation, and reasonableness of items Statement that uncorrected misstatements are immaterial

Information provided to auditors by management

Internal control over financial reporting (for public entities)

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Other Procedures Performed Prior to Date of Auditors Report

Consider whether evidence obtained during audit raises questions about ability to continue as a going concern
Accumulate identified misstatements and evaluate need for adjustments to financial statements
Rollover method considers the current period income effect(s) of misstatements Iron curtain method considers the aggregate effect of the adjustments on the entitys balance sheet

Review of audit documentation

Supervisor: Have all steps been performed?

Manager and partner: Scope of audit and support for conclusions

Reviewing partner: Consistency of work and reporting with quality standards of the firm (engagement quality review)

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Subsequent Events/ Subsequently Discovered Facts

Beginning of year Year-End Date (date of the financial statements) Date of the auditors report (audit completion date) Audit report release date

Subsequent Events

Subsequently Discovered Facts

Subsequent events occur between the date of the financial statements and date of the auditors report Subsequently discovered facts become known after the date of the auditors report
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Procedures to Identify Subsequent Events

Obtain understanding of procedures management performs to identify subsequent events
Inquire of management and those charged with governance Read minutes of meetings of owners, management, and those charged with governance

Review entitys interim financial statements

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Auditors Response
If discovered prior to date of auditors reports, perform procedures and evaluate disclosure
If discovered prior to audit report release date, perform procedures
Revise date of auditors reports to reflect new completion date

Dual date auditors reports

If discovered following audit report release date: If facts would result in revision of auditors report or F/S and individuals are relying on F/S
Notify individuals relying on F/S Issue revised F/S which provide disclosure of facts

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Omitted Procedures
Perform procedures if:
Omitted procedures are important Individuals are currently relying on financial statements and auditors reports

If previous opinion can be supported, no further action necessary If previous opinion cannot be supported
Withdraw the original report Issue revised reports Inform persons currently relying on the financial statements

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Communication with Individuals Charged with Governance

Auditors responsibility under GAAS
Overview of planned scope and timing of audit Judgment about quality of accounting policies, estimates, and disclosures Significant difficulties encountered during audit

Material, uncorrected misstatements

Representations requested from management Management consultations with other auditors Significant issues discussed with management Other findings or issues significant and relevant to those charged with governance

Uncorrected misstatements
Disagreements with management

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Summary of Audit Communications

Type From To Client Auditors Auditors Auditors Timing Before engagement Before engagement Method Written Written Engagement letter Auditors Acceptance letter Attorney letter response Written representations Client Attorney Client

Near date of Written auditors report Date of Written auditors report

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Summary of Audit Communications (Continued)

Type Internal control deficiencies From Auditors To Individuals charged with governance Individuals charged with governance Client Timing For public entities, prior to audit report release date After audit Method Written

Communication with those charged with governance Management letter

Auditors

Oral or written

Auditors

After audit

Oral or written

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