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

　Overview

　Perform additional tests for presentation and disclosure-related audit objectives

　Review for contingent liabilities and commitments

　Review for subsequent events

　Final evidence accumulation

　Evaluate results

　Audit documentation review

　Communicate with the audit committee and management

　Additional problems

　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.

　Overview

　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)

　Audit

　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.

　Asserted claims

　Unasserted claims

　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

　helpful here.

　(See Figure 24-9)

　(See T-24-1)

　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.

　(See T-24-2)

　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.

　(See T-24-3)

　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.

　Additional Problems

　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

　24-6

　CHAPTER 24

　CROSS-REFERENCE OF LEARNING OBJECTIVES AND PROBLEM MATERIAL

　Learning Objectives

　Review Questions

　Multiple

　Choice

　Questions

　Discussion

　Questions and Problems

　Cases

　24-1

　Design and perform audit tests related to presentation and disclosure audit objectives.

　24-1, 24-2, 24-16

　24-26

　24-2

　Conduct a review for contingent liabilities and commitments.

　24-3, 24-4,

　24-5, 24-7

　24-22

　24-26, 24-27

　24-3

　Obtain and evaluate letters fro m the client ' s attorneys.

　24-6, 24-7,

　24-8, 24-9, 24-11

　24-34

　24-4

　Conduct a post-balance-sheet review for subsequent events.

　24-10, 24-11,

　24-12, 24-13, 24-14

　24-24

　24-28, 24-32, 24-33

　24-5

　Design and perform the final steps in the evidenceaccumulation segment of the audit.

　24-15, 24-16,

　24-17, 24-18 24-19

　24-23, 24-25,

　24-30, 24-35

　24-6

　Integrate the audit evidence gathered, and evaluate the overall audit results.

　24-16, 24-20

　24-29

　24-36

　24-7

　Communicate effectively with the audit committee and management.

　24-17, 24-21

　24-31

　24-8

　Identify the auditor ' s responsibilities when facts affecting

　the audit report are discovered after its issuance.

　24-14

　24-28

　DISTINCTION BETWEEN REVIEW FOR

　SUBSEQUENT EVENTS AND SUBSEQUENT

　DISCOVERY OF FACTS AFTER THE

　BALANCE SHEET DATE

　Balance Sheet

　Date

　SUBSEQUENT EVENTS

　Requires Adjustment

　, 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.

　REQUIRES DISCLOSURE

　, 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.

　Audit Report

　Date

　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

　REVIEW

　Types of Review

　Who

　Does

　When

　Done

　Purpose

　In-charge review

　Audit partner review

　Independent review

　Peer review

　Letters Between Auditor and Management

　Letter

　Required or Optional

　Addressee

　Signed By

　Format

　When

　Sent

　Purpose

　Engagement Letter

　Internal Control Deficiencies

　Letter of

　Representation

　Management Letter

　Fraud & Illegal Acts

　Attorney Letter

　Communications to Those Charged with Governance

　T-24-3

　
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