Arens Aas17 PPT 24

Auditing and Assurance Services
Seventeenth Edition
Chapter 24
Completing the Audit
Copyright © 2020, 2017, 2014 by Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 2)
24.1 Design and perform audit tests related to presentation
audit objectives
24.2 Conduct a review for contingent liabilities and
commitments
24.3 Obtain and evaluate letters from the client’s attorneys
24.4 Conduct a post-balance-sheet review for subsequent
events
Learning Objectives (2 of 2)
24.5 Design and perform the final steps in the evidence-
accumulation segment of the audit
24.6 Integrate the audit evidence gathered and evaluate
the overall audit results
24.7 Communicate effectively with the audit committee and
management
24.8 Identify the auditor’s responsibilities when facts affecting
the audit report are discovered after its issuance
Learning Objective 24.1
Design and perform audit tests related to presentation audit
objectives
Perform Additional Tests for
Presentation and Disclosure
• As part of Phase IV of the audit, auditors evaluate evidence they
obtained during the first three phases of the audit to determine
whether they should perform additional procedures for
presentation and disclosure-related objectives
• One of the auditor’s primary concerns related to presentation is
determining whether management has disclosed all required
information
Table 24.1 Presentation and
Disclosure Audit Objectives
Audit Objectives Examples of Substantive Procedures
Transaction-Related Review the organization’s revenue recognition
Presentation— Transactions policies to determine whether the disclosures of
are appropriately aggregated those policies are accurately and clearly
or disaggregated and described.
described, and disclosures Reconcile amounts included as disposals in
are relevant and schedules of activities affecting changes in
understandable. property, plant, and equipment during the year to
footnote disclosures of net gains or losses on
sales of properties.
Balance-Related Presentation Review debt contracts and financial statement

—Amounts are appropriately footnotes to determine that accounts receivable
aggregated or disaggregated pledged as collateral are properly disclosed.
and described and Use a disclosure checklist to determine whether
disclosures are relevant and the financial statements include all disclosures
understandable. required by accounting standards.
Conduct a review for contingent liabilities and commitments
Review for Contingent Liabilities and
Commitments (1 of 4)
• Three conditions are required for a contingent liability (a
potential future obligation) to exist:
– There is a potential future payment to an outside party or the
impairment of an asset that resulted from an existing
condition
– There is uncertainty about the amount of the future payment
or impairment
– The outcome will be resolved by some future event or
events
• The auditor’s primary objectives in verifying contingent
liabilities are:
– Evaluate the accounting treatment of known contingent
liabilities to determine whether management has properly
classified the contingency
– Identify to the extent practical any contingencies not already
identified by management
• Audit procedures commonly used to search for contingent
liabilities include (1 of 2):
– Inquire of management
– Review current and previous years’ internal revenue agent
reports
– Review the minutes of directors’ and stockholders’ meetings
– Analyze legal expense for the period under audit
• Audit procedures commonly used to search for contingent
liabilities include (2 of 2):
– Obtain a letter from each major attorney performing legal
services for the client
– Review audit documentation
– Examine letters of credit in force as of the balance sheet
date
Table 24.2 Likelihood of Occurrence
and Financial Statement Treatment
Likelihood of Occurrence of
Financial Statement Treatment
Event
Remote (slight chance) No disclosure is necessary.
Reasonably possible (more Footnote disclosure is necessary.
than remote, but less than
probable)
Probable (likely to occur) • If the amount can be reasonably
estimated, financial statement accounts
are adjusted.
• If the amount cannot be reasonably
estimated, footnote disclosure is
necessary.
Figure 24.1 Contingent Liability
Footnote
Let’s Discuss (1 of 7)
• Identify and describe the transaction-related and balance-related
presentation audit objectives.
– Explain how many of the procedures to test presentation
objectives are integrated with tests performed in earlier
stages of the audit.
• Distinguish between a contingent liability and an actual liability
and give three examples of each.
Obtain and evaluate letters from the client’s attorneys
Inquiry of Client’s Attorneys (1 of 4)
• Inquiry of the client’s attorneys is a major procedure auditors
rely on for evaluating known litigation or other claims against
the client and identifying additional ones
• The standard inquiry to the client’s attorney should include
the following (1 of 2):
– A list including (1) pending threatened litigation and (2)
asserted or unasserted claims or assessments with which the
attorney has had significant involvement
• The standard inquiry to the client’s attorney should include
the following (2 of 2):
– A request that the attorney furnish information or comment
about the progress of each item listed
– A request of the law firm to identify any unlisted pending or
threatened legal actions or a statement that the client’s list is
complete
– A statement informing the attorney of the attorney’s
responsibility to inform management of legal matters
requiring disclosure in the financial statements and to
respond directly to the auditor
• The nature of the refusals by attorneys to provide auditors
with complete information about contingent liabilities falls
into two categories:
– The attorneys refuse to respond due to a lack of knowledge
about matters involving contingent liabilities
– The attorneys refuse to disclose information that they
consider confidential
• If an attorney refuses to provide the auditor with information
about material existing lawsuits (asserted claims) or unasserted
claims, auditors must modify their audit report to reflect the
lack of available evidence
• The Sarbanes–Oxley Act requires attorneys serving public
companies to report material violations of federal securities
laws committed by the company
Conduct a post-balance-sheet review for subsequent events
Figure 24.3 Period Covered by
Subsequent Events Review
Review for Subsequent Events (1 of 4)
• The third part of completing the audit is the review for
subsequent events
• The auditor’s responsibility for reviewing subsequent events is
normally limited to the period beginning with the balance sheet
date and ending with the date of the auditor’s report
• There are two types of subsequent events:
– Those that have a direct effect on the financial statements
and require adjustment of the current year’s financial
statement amounts
– Those that have no direct effect on the financial statement
amounts but for which disclosure is required
• There are two categories of audit procedures for the
subsequent events review:
– Procedures normally integrated as a part of the verification
of year-end account balances
– Procedures performed specifically for the purpose of
discovering events or transactions that must be recognized
as subsequent events
• Occasionally, the auditor determines that a subsequent event
that affects the current period financial statements occurred after
the date of the audit report but before the audit report was issued
• In that situation, the auditor has two equally acceptable
options for expanding subsequent events tests:
– Expand all subsequent events tests to the new date
– Restrict the subsequent events review to matters related to
the new subsequent event
• What procedures do auditors typically follow to address the
completeness of disclosures?
• Describe a contingency.
– What conditions are required for a contingent liability to
exist?
• Distinguish between the two general types of subsequent events
and explain how they differ.
– Give two examples of each.
• Describe the action that an auditor should take if an attorney
refuses to provide information that is within the attorney’s
jurisdiction and may directly affect the fair presentation of the
financial statements.
• What major considerations should the auditor take into account
in determining how extensive the review of subsequent events
should be?
Design and perform the final steps in the evidence-accumulation
segment of the audit
Final Evidence Accumulation (1 of 3)
• Auditing standards require auditors to perform analytical
procedures during the completion of the audit
• It is common for a partner to do the analytical procedures
during the final review of audit documentation and financial
statements
• Results from final analytical procedures may indicate that
additional audit evidence is necessary
• Auditors can use software to scan through populations of
journal entries to identify transactions with unusual
characteristics that may require additional consideration
• For example, data analytic tools can be used to flag:
– Transactions with rounded dollar amounts
– Unusual posting dates and times
– Transactions that fall just below a specified approval
threshold
• Other final steps in the evidence-accumulation segment of
the audit include:
– Evaluate going-concern assumption
– Obtain management representation letter
– Consider supplementary information in relation to financial
statements as a whole
– Read other information in the annual report
Figure 24.4 Supplementary
Information Accompanying Basic
Financial Statements
Integrate the audit evidence gathered and evaluate the
overall audit results
Figure 24.5 Completing the Audit
Checklist
Evaluate Results (1 of 2)
• After performing all audit procedures in each audit area, the
auditor must integrate the results into one overall conclusion
about the financial statements
• The auditor must decide whether sufficient appropriate
audit evidence has been accumulated to warrant:
– The conclusion that the financial statements are stated in
accordance with the applicable accounting framework
– An overall conclusion about the effectiveness of internal
control over financial reporting
Evaluate Results (2 of 2)
• The five main aspects of evaluating the results include:
– Evidence supports auditor’s opinion
– Financial statement disclosures
– Audit documentation review
– Engagement quality review
– Summary of evidence evaluation
Figure 24.7 Financial Statement
Disclosure Checklist: Property,
Plant, and Equipment
Figure 24.8 Evaluating Results and
Reaching Conclusions on the Basis
of Evidence
Evaluate Results
• The auditor should wait to decide the appropriate audit report to
issue until all evidence has been accumulated and evaluated,
including all steps of completing the audit
• Most CPA firms have comprehensive audit reporting manuals to
assist them in selecting the appropriate wording of the report
they decide to issue
• Miles Lawson, CPA, believes that the final summarization is the
easiest part of the audit if careful planning is followed
throughout the audit. He makes sure that each segment of the
audit is completed before he goes on to the next. When the last
segment of the audit is completed, he is finished with the audit.
He believes this may cause each part of the audit to take a little
longer, but he makes up for it by not having to do the final
summarization.
– Evaluate Lawson’s approach.
• Compare and contrast the accumulation of audit evidence and
the evaluation of the adequacy of the disclosures in the financial
statements.
– Give two examples in which adequate disclosure could
depend heavily on the accumulation of evidence and two
others in which audit evidence does not normally
significantly affect the adequacy of the disclosure.
Communicate effectively with the audit committee and
management
Communicate with the Audit
Committee and Management (1 of 3)
• After the audit is completed, several potential
communications from the auditor may be sent to the audit
committee or others charged with governance, including:
– Communication of detected fraud and illegal acts
– Internal control deficiencies
– Other communications with the audit committee
– A management letter
• Communication of detected fraud and illegal acts
– Auditing standards require the auditor to communicate all
fraud and illegal acts to the audit committee or similarly
designated group, regardless of materiality
• Internal control deficiencies
– The auditor must communicate in writing significant
internal control deficiencies and material weaknesses in the
design or operation of internal control to those charged with
governance
• Other communications with the audit committee
– Auditing standards require the auditor to communicate
certain additional information obtained during the audit to
those charged with governance
• A management letter
– It is intended to inform client personnel of the CPA’s
recommendations for improving any part of the client’s
business
• Describe matters that the auditor must communicate to audit
committees of public companies.
• How might the matters communicated to those charged with
governance impact the nature of information included in the
auditor’s report?
Identify the auditor’s responsibilities when facts affecting the
audit report are discovered after its issuance
Subsequent Discovery of Facts (1 of 3)
• Auditors sometimes learn after the audited financial statements
have been issued that the financial statements are materially
misstated
• When this subsequent discovery of facts occurs, the auditor:
– Has an obligation to make certain that users who are relying
on the financial statements are informed about the
misstatements or change in the conclusion on the
effectiveness of internal controls
• If the auditor discovers that the statements are misleading
after they have been issued:
– The most desirable action is to request that the client issue
an immediate revision of the financial statements that
includes an explanation of the reasons for the revision
• If the client refuses to disclose the misstated statements, the
auditor must:
– Inform the board of directors
– Notify regulatory agencies
– Notify each person who relies on the financial statements
Figure 24.9 Review for Subsequent
Events and Subsequent Discovery of
Facts
• Explain the purpose of a client letter of representation. What
types of information are normally included in the letter?
• How does an auditor evaluate the unadjusted misstatement
schedule (also called summary of possible misstatements) at the
end of the audit engagement to assess whether the financial
statements are fairly presented?
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