Completing the Audit
We always cover completing the audit near the end of the course. The following are the topics we cover:
Chapter opening vignette
Perform additional tests for presentation and disclosure-related audit objectives
Review for contingent liabilities and commitments
Review for subsequent events
Final evidence accumulation
Audit documentation review
Communicate with the audit committee and management
Chapter Opening Vignette - “Good Review Requires More Than Looking at Audit Files ”
A significant portion of the overall audit process consists of work being reviewed by supervisory personnel. Although this is both prudent and required by auditing standards, it is important to realize that review is inherently limited in terms of its effectiveness. This underscores the importance of staff doing a good job in the first place. If staff work sloppily thinking that their mistakes will get caught by reviewers, or if supervisors are lax in their delegation procedures thinking that they can compensate through review, audit risk is significantly increased. This vignette illustrates these concepts.
Two other concepts covered in the vignette are the importance of the reviewer havin g a complete understanding of the client ' s business and the use of independent
analytical procedures as a part of the review. The combination of these two things enabled the manager to uncover the staff deficiencies.
We find this a good time to return to Figure 13-9 (page 426) for a review of what the auditor has done to this point, and where completing the audit fits in. Naturally, special emphasis is put on phase IV.
(See Figure 13-9)
AuditPerform Additional Tests for Presentation and Disclosure-Related Objectives (page 778)
Throughout the various chapters focusing on the transaction cycles and related account balances, we have highlighted specific audit procedures performed to satisfy unique presentation and disclosure-related audit objectives, in addition to audit procedures performed to satisfy transaction-related audit objectives and balance- related audit objectives. However, we emphasize the importance of evaluating the need to perform additional audit procedures during Phase IV of the audit to satisfy the four presentation and disclosure-related audit objectives. Review question 24-1 can be used to help students focus on the four presentation and disclosure-related audit objectives first presented in Chapter 6.
We emphasize that in Phase IV, the auditor evaluates the overall presentation of the financial statements and related footnotes to determine if they comply with GAAP. Auditors are particularly concerned about the completeness of required disclosures, especially those related to contingent liabilities and commitments discussed next. Review question 24-2 emphasizes the benefits of using a disclosure checklist to assess the completeness of management ' s disclosures.
Review for Contingent Liabilities and Commitments (page 779)
First, we define the term contingent liability , and discuss the following three conditions that are required for a contingent liability to exist:
There is a potential future payment to an outside party or a potential future assets impairment.
There is an uncertainty about the amount of payment or asset impairment. The outcome will be resolved by some future event.
Next, we discuss the three levels of likelihood of uncertainty (probable, reasonably possible, and remote) and the consequences of each on the financial statements and the auditor's report.
We use Problem 24-27 to discuss contingent liabilities, why they are important to the auditor, and the nature of the related audit procedures. We do the following:
Go over part a - define a contingent liability
Ask students why contingencies are important to auditors
Have students identify general types of contingencies and the disclosure and reporting requirements, if any, for each
Go over parts b and c simultaneously - audit procedures for each of the three situations
Next we briefly discuss SAS 12 (AU 337).
Reason why attorneys are reluctant to provide auditors with unlimited statements about contingencies.
Need for auditor to obtain evidence of the following:
Existence of conditions or circumstances indicating a possible loss from litigation, claims or assessments
Likelihood of an unfavorable outcome
Amount of potential loss
Illustration of typical inquiry of attorney (see Figure 24-2 , page 783)
Auditor's responsibility if the attorney fails to respond or responds improperly
Desired date of letter from attorney
(See Figure 24-2)
Finally, we discuss commitments, their importance to the auditor, and common audit procedures used to discover commitments. Review Question 24-5 is helpful here. Discussion Question 24-26 - part a - can also be used to help students distinguish commitments from contingent liabilities.
Review for Subsequent Events (page 784)
We do the following in this area:
Ask students to define a review for subsequent events
Ask why it is important to audit subsequent events
Relate review for subsequent events to the audit report
Distinguish between the following two types of subsequent events and give an example of each:
Those that have a direct effect on the financial statements and require adjustment
Those that have no direct effect on the financial statements, but for which disclosure is advisable
Timing of subsequent events review procedures (See Figure 24-3 , page 785)
(See Figure 24-3)
Distinguish between a review for subsequent events and a subsequent discovery of facts after the balance sheet date (see page 798 for discussion of subsequent discovery of facts). Figure 24-9 (page 799) and T-24-1 are
(See Figure 24-9)
Problem 24-28 - (This problem ties everything together nicely.)
Nature of subsequent events review procedures
Impact of subsequent events on a public company auditor ' report on internal control over financial reporting.
Final Evidence Accumulation (page 788)
It is worthwhile to go over the four most important parts of the auditor's final evidence accumulation process:
Final analytical procedures
Evaluate going concern assumption
Client representation letter
Other information in annual reports
Students should already be familiar with the first three items from their study of previous chapters, but the last item is new information.
Evaluate Results (page 791)
We find it worthwhile to briefly discuss the need to combine the results of all of the tests. We briefly discuss how the auditor does each of the following items and draws conclusions about each:
Evaluate whether sufficient appropriate evidence has been accumulated
Review for financial statement disclosures
Determine the appropriate type of opinion to issue
Figure 24-8 (page 795) helps students see where evaluating results fits in with the rest of the audit.
(See Figure 24-8)
Audit Documentation Review (page 794)
We spend little time on this except to discuss the purpose of audit documentation review and different levels of review. T-24-2 helps illustrate the different levels of audit documentation review.
Communicate with the Audit Committee and Management (page 796)
Students have difficulty remembering the primary letters between the CPA firm and management or the audit committee. T-24-3 includes six types of letters with information that we ask students to provide.
The newly issued SAS 114 (AU 380) requires the auditor to communicate certain additional information obtained during the audit to those charged with governance, which is often the audit committee. We emphasize that the purpose of these required communications is to encourage two-way dialogue between the auditor and those charged with governance about matters affecting the audit.
To the extent there is time, we use the following:
24-22 to 24-25 - Multiple choice
24-29 - Review of audit files
24-34 - Inquiry of client's attorneys
CROSS-REFERENCE OF LEARNING OBJECTIVES AND PROBLEM MATERIAL
Questions and Problems
Design and perform audit tests related to presentation and disclosure audit objectives.
24-1, 24-2, 24-16
Conduct a review for contingent liabilities and commitments.
Obtain and evaluate letters fro m the client ' s attorneys.
24-8, 24-9, 24-11
Conduct a post-balance-sheet review for subsequent events.
24-12, 24-13, 24-14
24-28, 24-32, 24-33
Design and perform the final steps in the evidenceaccumulation segment of the audit.
24-17, 24-18 24-19
Integrate the audit evidence gathered, and evaluate the overall audit results.
Communicate effectively with the audit committee and management.
Identify the auditor ' s responsibilities when facts affecting
the audit report are discovered after its issuance.
DISTINCTION BETWEEN REVIEW FOR
SUBSEQUENT EVENTS AND SUBSEQUENT
DISCOVERY OF FACTS AFTER THE
BALANCE SHEET DATE
, Transaction or event took place before the balance sheet date.
? An event or transaction occurred between balance sheet and audit report date that affects the valuation of the original transaction.
, An event or transaction that occurred between balance sheet and audit report date is so significant that it requires disclosure even though it does not directly affect current period transactions.
SUBSEQUENT DISCOVERY OF FACTS
Original event took place before audit report date.
Auditor discovered event after the audit report date.
If auditor had known of facts existing on the balance sheet date he or she would have required adjustment or issued a different opinion.
REQUIRES RECALL OF FINANCIAL STATEMENTS
TYPES OF AUDIT FILE
Types of Review
Audit partner review
Letters Between Auditor and Management
Required or Optional
Internal Control Deficiencies
Fraud & Illegal Acts
Communications to Those Charged with Governance