Chapter 11 - Audit Completion

Subsequent events (previously known as Type 2):

- involve events occurring after the balance sheet date - disclose in financial statements as a note

Internal Control over Financial Reporting requires public clients to:

- management has performed a control assessment - management's conclusion with respect to the operating effectiveness of its ICFR - No subsequent changes in ICFR that significantly affect ICFR - any control deficiencies from prior engagements have been properly resolved

Information related to financial statements in the written management representation includes:

- management's responsibility for F/S and internal control over financial reporting - appropriate disclosure, presentation, and reasonableness of items - statement that uncorrected misstatements are immaterial

Audit supervisor:

- needs to make sure that all steps in the audit program been performed - is referencing documentation clear - all explanations understandable

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 for this time frame - review entity's interim financial statements

Extra procedures must be performed if:

- omitted procedures are important - individuals are currently relying on financial statements and auditors' reports

If subsequent event/discovered fact discovered PRIOR TO THE AUDIT REPORT RELEASE DATE:

- perform procedures, - revise date of auditors' report to reflect new completion date, or dual date auditors' report

Attorney letter client role:

- prepare listing, description, and evaluation of litigation, claims, and assessments for letter - send letter to attorney including information related to litigation, claims, and assessments

Subsequent events (previously known as Type 1):

- provide new information about conditions existing at the balance sheet date - adjust financial statements to reflect new information

After the audit report release date occurs:

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

Audit partner:

- verify overall scope is adequate - do overall conclusions support the opinion - is quality of audit work and reporting consistent with quality firm standards

If previous opinion cannot be supported:

- withdraw the original report - issue revised reports - inform persons currently relying on the financial statements

IF subsequent event/discovered fact discovered following audit report release date and facts would result IN REVISION of auditors' report or F/S and individuals relying on F/S:

- Notify individuals relying on F/S - Issue revised F/S which provide disclosure of facts

Proposed Adjusting Journal Entries:

- accumulate proposed entries on "score sheet" - consider pre tax and after tax effects - accumulate identified misstatements and evaluate need for adjustments to financial statements

Items beyond substantive and control testing include:

- contingencies - attorney letters - management representations - client posting of adjusting entries - audit documentation review - subsequent events - subsequent discovery of facts - omitted audit procedures - management letter - audit committee communications

Management representations have a broad purpose of:

- impressing upon management its primary responsibility for financial statements - may establish an auditor's defense if a question related to inquiries subsequently arise

Concurring partner/technical partner/2nd partner review:

- independent review by some one not otherwise involved in this audit - required for public company and OMB audits - looks for things specific to their expertise (OMB, SEC)

Contents of written management representation:

- information related to the F/S - disclosure of significant deficiencies in internal control - information concerning fraud - information provided to auditors by management

Contingency procedures:

- inquiry of client and attorney - review of minutes of meetings of stockholders/directors - review contracts, loan agreements, and correspondence from taxing and governmental agencies - review documentation related to legal services

When proposing adjusting journal entries, required adjustment for:

1. All material entries 2. Require adjustment for proposed entries totaling a material around - if the client ignores the request, adjust the audit opinion accordingly 3. Recommend adjustment for all other items

WHAT really happens with an attorney letter

Attorneys: respond and usually tells you nothing (5 pages of lingo that doesn't mean shit) because they do NOT want to be held liable. Cannot subpoena information told by client to attorney BUT CAN SUBPOENA information in the letter

Between the year end date and the date of the auditor's report:

Completion of substantive and control testing from previous chapters is concluded ( also attorney letters, written representations, going-concern assessment, adjusting journal entries, audit documentation review, and knowledge of subsequent events are acquired)

Between beginning of year and year end date:

Interim testing (testing of controls and substantive procedures is performed)

Contents of the attorney letter includes:

Provide attorney listing of pending litigation, claims, and assessments Ask attorney for: - comment on completeness of listing - Any limitations on attorney's response - Description of each case listed - Evaluation of likelihood of unfavorable outcome of litigation - Estimate of the range of potential loss

Non response of an attorney letter is:

a scope limitation

Optional procedures at year end include:

analytical procedures as substantive tests during field work to verify reasonableness of revenues and expenses

Management letters are delivered by:

auditor to client following audit engagement and are intended for internal purposed ONLY!!!

Subsequently discovered facts:

become known after the date of the auditor's report

Iron curtain method:

considers the aggregate effect of the adjustments on the entity's balance sheet-balance sheet focus

Rollover method:

considers the current period income effects of misstatements-income statement focus

Management representations offer:

corroborative evidence provided to the auditor on the AUDIT COMPLETION DATE

Responsibilities regarding contingent liabilities for auditors include:

determining client properly identified, accounted for, and disclosed material contingencies

After year end, indirect evidence must be supplemented with:

direct tests for all material expense and revenue accounts (SALES IS ALWAYS MATERIAL)

After year end substantive tests include

doing substantive procedures for balance sheet accounts (to attain indirect evidence about revenue and expense accounts)

Responsibilities regarding contingent liabilities for management include:

identification, evaluation, and accounting for contingencies

Corroborative evidence can become a scope limitation:

if the client refuses to sign it; this allows auditor to issue qualified or disclaimer opinion on statements

Attorney letter auditor role:

initiate request for attorney letter

If previous opinions can be supported:

no further action necessary

Management letters are:

not required under GAAS but are prepared as a by-product of procedures performed in an audit

Subsequent events:

occur between the date of the financial statements and date of the auditors' report

Theory on attorney letters:

offers corroborateive evidence concerning litigation, claims, and assessments

If subsequent event/discovered fact discovered PRIOR to the DATE OF THE AUDITORS' Report:

perform procedures and evaluate disclosure

Internal Control Letter are even used for:

private company audits

Management representations - ICFR:

public clients are required by the PCAOB regarding internal control over financial reporting

Management letters often provide:

recommendations to the client for improving effectiveness and efficiency of operations

Auditors opine on controls for public companies but must also:

report significant deficiencies and material weaknesses in writing to audit committee

Analytical review in the Review Phase:

required by GAAS in planning and review stage

Attorney letter ATTORNEY role:

respond to auditor regarding client's description of litigation, claims,and assessments contained in the letter

If direct testing of revenues and expenses in interim period was performed you must:

roll account balances forward

Completing the audit means:

rolling forward interim work like substantive and control testing (especially substantive testing revenue and expense accounts)

When rolling balances forward, doing more substantive testing of the accounts includes:

scanning accounts for large and unusual entries or investigating misc, other, or clearing accounts

Between the date of the auditor's report and audit report release date:

subsequently discovered facts come about