Chapter 11Completing the Audit

It aint over till its over. Yogi Berra, former catcher for the New York Yankees11-*

Learning ObjectivesIdentify major activities performed by auditors in completing the substantive procedures following the date of the financial statements.Understand the role of attorney letters in evaluating litigation, claims, and assessments.Explain why auditors obtain written representations and identify the key components of written representations.Identify the final steps in the completion of an audit.Understand auditors responsibility for subsequent events and subsequently discovered facts.Identify important activities and communications following the completion of the audit and audit report release date.11-*

Timeline for Major Activities in Audit

Date of the auditors report(audit completion date)Beginningof yearYear-End Date(date of the financial statements)Audit reportrelease dateInterim testing (tests of controls and substantive procedures)

Complete substantive proceduresAttorneys lettersWritten representationsGoing-concern assessmentAdjusting journal entriesAudit documentation reviewSubsequent events

Subsequently discovered facts

Subsequently discovered factsOmitted audit proceduresManagement letterCommunications with those charged with governance

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Procedures Prior to the Audit Report Release DateCompleting substantive proceduresAttorneys lettersWritten representationsGoing-concern assessmentAdjusting entriesAudit documentation reviewSubsequent eventsSubsequently discovered facts11-*

Completing Substantive ProceduresRoll-forward procedures: Extend work from interim period to date of the financial statementsInclude both tests of controls and substantive proceduresPerformed following date of the financial statementsIdea is to obtain evidence through the date of the financial statements11-*

Completing Substantive ProceduresAnalytical procedures: Study of relationships among financial and nonfinancial dataCan be used in planning (required), substantive testing, and near the end of the audit (required)Near the end of the audit, analytical procedures identify unusual or unexpected relationships not previously identifiedReview accounts for miscellaneous, other, and clearing accounts (may relate to earnings management)11-*

Completing Substantive ProceduresAccounting estimates:Examples include future cash flows in evaluating asset impairments, allowance for doubtful accounts for receivables, and depreciation lives for fixed assetsReview managements process for developing estimatesReview estimates for reasonableness11-*

Procedures Prior to the Audit Report Release DateCompleting substantive proceduresAttorneys lettersWritten representationsGoing-concern assessmentAdjusting entriesAudit documentation reviewSubsequent eventsSubsequently discovered facts11-*

Procedures for Litigation, Claims, and AssessmentsInquiry of clientsReview minutes of meetings of stockholders, directors, and committeesReview contracts, loan agreements, and correspondence from taxing and governmental agenciesObtain information concerning guarantees from bank confirmationsReview documentation related to legal servicesAttorneys letters11-*

Attorneys LettersAttorney Letter (with response)Attorney LetterAuditors Request Client to Prepare Attorney Letter231CLIENTATTORNEYAUDITORSSent by Auditors11-*

Attorneys Letters: ResponsibilitiesAuditorsInitiate request for attorney letterSend letter to attorney including information related to litigation, claims, and assessmentsClientPrepare listing, description, and evaluation of litigation, claims, and assessments for letterAttorneyRespond to auditors directly regarding clients description of litigation, claims, and assessments contained in attorney letter11-*

Attorneys Letters: ContentsListing of pending litigation, claims, and assessmentsDescription of each item or case included in the listingEvaluation of the likelihood of an unfavorable outcomeEstimate of the range of potential lossUnderstanding regarding unasserted claims11-*

Procedures Prior to the Audit Report Release DateCompleting substantive proceduresAttorneys lettersWritten representationsGoing-concern assessmentAdjusting entriesAudit documentation reviewSubsequent eventsSubsequently discovered facts11-*

Written RepresentationsProvided by management to auditorsDated using date of auditors reports (audit completion date)Broad purposeImpress upon management its primary responsibility for the financial statementsMay establish auditors defense if a question related to inquiries subsequently arisesQualify or disclaim an opinion if not provided by the client11-*

Contents of Written RepresentationsInformation related to financial statementsManagements responsibility for F/S and internal control over financial reportingAppropriate disclosure, presentation, and reasonableness of itemsStatement that uncorrected misstatements are immaterialInformation provided to auditors by managementInternal control over financial reporting (for public entities)11-*

Procedures Prior to the Audit Report Release DateCompleting substantive proceduresAttorneys lettersWritten representationsGoing-concern assessmentAdjusting entriesAudit documentation reviewSubsequent eventsSubsequently discovered facts11-*

Going-Concern AssessmentAuditors required to consider whether evidence obtained during audit raises questions about ability to continue as a going concernIf concerns exist, evaluate managements plans to mitigateIf concerns do not remain: No effect on report or financial statementsIf concerns remain: Disclose in F/S and modify auditors report11-*

Adjusting EntriesAccumulate dollar effects of identified misstatementsEvaluate materialityRollover method considers the current period income effect(s) of misstatementsIron curtain method considers the aggregate effect of the adjustments on the entitys balance sheetSAB 108 requires adjustments to be proposed if material under either approachRecommend adjustment of all misstatements identifiedCarry any uncorrected misstatements forward for consideration in future auditsCommunicate all adjustments and misstatements to audit committee or individuals charged with governance11-*

Audit Documentation ReviewAudit supervisorHave all steps in audit plan been performed?Is referencing among documentation clear?Are explanations understandable?Audit manager and partnerIs the overall scope of the audit adequate?Do overall conclusions support the opinion?Reviewing partnerIs the quality of audit work and reporting consistent with quality standards of the firm?Engagement quality review

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Procedures Prior to the Audit Report Release DateCompleting substantive proceduresAttorneys lettersWritten representationsGoing-concern assessmentAdjusting entriesAudit documentation reviewSubsequent eventsSubsequently discovered facts11-*

Timeline and TermsDate of the auditors report(Audit completion date)Beginningof yearYear-End Date(Date of the Financial Statements)Audit reportrelease dateSubsequent EventsSubsequently Discovered FactsSubsequent events occur between the date of the financial statements and date of the auditors reportSubsequently discovered facts become known after the date of the auditors report11-*

Procedures to Identify Subsequent EventsObtain understanding of procedures management performs to identify subsequent eventsInquire of management and those charged with governanceRead minutes of meetings of owners, management, and those charged with governanceReview entitys interim financial statements11-*

Types of Subsequent EventsProvide new information about conditions existing at date of the financial statementsAdjust financial statements to reflect new informationInvolve events that arose following the date of the financial statementsDisclose in financial statements11-*

Subsequently Discovered FactsIf discovered prior to audit report release date, perform procedures related to itemsRevise date of auditors reports to reflect new completion dateDual date auditors reportsFollowing audit report release date: If facts would result in revision of auditors report or F/S and individuals are relying on F/SNotify individuals relying on F/SIssue revised F/S which provide disclosure of facts11-*

Procedures Following Audit Report Release DateSubsequently discovered factsOmitted proceduresCommunication with those charged with governanceManagement letters11-*

Omitted ProceduresPerform procedures if:Omitted procedures are importantIndividuals are currently relying on financial statements and auditors reportsIf previous opinion can be supported, no further action necessaryIf previous opinion cannot be supportedWithdraw the original reportIssue revised reportsInform persons currently relying on the financial statements11-*

Communication with Individuals Charged with GovernanceAuditors responsibility under GAASOverview of planned scope and timing of auditJudgment about quality of accounting policies, estimates, and disclosuresSignificant difficulties encountered during auditUncorrected misstatementsDisagreements with managementMaterial, uncorrected misstatementsRepresentations requested from managementManagement consultations with other auditorsSignificant issues discussed with managementOther findings or issues significant and relevant to those charged with governance

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Management LettersNot required under GAASAre prepared as a by-product of procedures performed in auditProvide recommendations to client for improving effectiveness and efficiency of operationsDelivered by auditors to client following audit engagement11-*

Summary of Audit Communications11-*

TypeFromToTimingMethodEngagement letterAuditorsClientBefore engagementWrittenAcceptance letterClientAuditorsBefore engagementWrittenAttorney letter responseAttorneyAuditorsNear date of auditors reportWrittenWritten representationsClientAuditorsDate of auditors reportWritten

Summary of Audit Communications (Continued)11-**If oral communication, document in audit documentation.

TypeFromToTimingMethodInternal control deficienciesAuditorsIndividuals charged with governanceFor public entities, prior to audit report release dateWrittenCommunication with those charged with governanceAuditorsIndividuals charged with governanceAfter auditOral or written*Management letterAuditorsClientAfter auditOral or written

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