Chapter 16: Auditing Operations & Completing the Audit

Review the Minutes of Meetings

-Review the most recent meetings b/ stockholders and directors, audit committee, investment committee. -Determine whether considered all meeting minutes -Obtain management representation that all minutes have been made available

Conditions for loss contingency

1. Loss sustained probable before balance sheet, according to information before the issuance of financial statements 2. Loss can be reasonably estimated

Substantive Tests for Selling, General & Admin. Expenses

1. Perform analytical procedures a. Develop an expectation of the account balance b. Determine the amount of difference from the expectation that can be accepted without investigation c. Compare the company's account balance with the expected account balance d. Investigate significant deviations from the expected account balance 2. Obtain or prepare analyses of selected expense accounts 3. Obtain or prepare analyses of critical expenses in the income tax return

Required Communications With the Audit Committee

**Fraudulent or illegal acts** **Significant deficiencies, material weakness in Internal Controls** **The auditors' responsibilities for the audit and other information included with the financial statements** **Significant audit adjustments made** **Summary of uncorrected misstatements** Accounting principles selected by management Significant accounting estimates of management **Disagreements with management or other difficulties** The auditors' viewpoint on an accounting or auditing matter if management contacted other auditors about the matter A discussion of the quality of accounting principles and estimates

Procedures to Identify Subsequent Events (perform the review for subsequent events)

1. Review latest available financial statements 2. Minutes of the board and selected committees after F/S date, and inquire about matters dealt with at meetings for which minutes are not available 3. Inquiry of management 4. Obtain an understanding of management procedures (to ensure that subsequent events are identified) 5. Obtain lawyer's letter

Audit Procedures Completed Near the End of Field Work

1. Search for unrecorded liabilities. 2. Review the minutes of meetings. 3. Perform final analytical procedures. 4. Perform procedures to identify loss contingencies. 5. Perform the review for subsequent events. 6. Obtain the representation letter. (could be between date of audit report and issuance of F/S)

Considerations in Letter of Inquiry to Client Attorneys

1. use detail of "legal expense" to identify the attorneys to send to 2. must receive response once sent 3. must dispose of each matter raised in their response 4. their response must be dated near the date of audit report

Significant Defiency

A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Material Weakness

A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis

Subsequent events (definition)

An event occurring after the date of the B/S but prior to the date of the auditor's report

Perform Final Analytical Procedures

Assists auditors in assessing the validity of the conclusions reached, including the opinion issued. -evaluate whether any previously unrecognized risk of material misstatement due to fraud

What management assertion is search for unrecorded liabilities related to?

Completeness

What is Search for Unrecorded Liabilities?

Designed to detect liabilities that existed at year-end but were omitted from the liabilities recorded in the client's financial statements -ex: examining subsequent cash disbursements

Two Types of Subsequent Events

I. Events that provide evidence for conditions existing before B/S date II. Events that provide evidence for conditions existing after B/S date, but before release of financial statements (to differentiate, consider when the conditions came into existence)

Perform Procedures to Identify Loss Contingencies

Identifying loss contingies: 1. Review (a) minutes of meetings (b) litigation documents (c) correspondence with legal councel 2. inquiring client 3. obtain from management description and evaluation of litigation 4. review legal expenses and invoices from legal counsel After Identifying: 5. After identifying, send letter of inquiry to client attorney -ask legal counsel to corroborate info. provided by management, and comment on difference (relating to litigations)

Who prepares the letter of inquiry to client's attorneys

Management

What is P&L analytics and when are they performed?

Profit & Loss analytics are part of auditing operations, i.e. revenue and expense. They are performed at the end of the audit.

Interest-bearing debt--->what rev account? what expense account?

Rev: / Exp: Interest

Accrued liabilities--->what rev account? what expense account?

Rev: / Exp: Various(ex: operational expense)

Inventory--->what rev account? what expense account?

Rev: / Exp: purchases, COGS, payroll

Prepaid Expenses--->what rev account? what expense account?

Rev: / Exp: Various (ex: insurance expense)

N/R--->what rev account? what expense account?

Rev: Interest Exp: uncollectible notes

Securities, Investments--->what rev account? what expense account?

Rev: interest, dividends, gains, investee's income Exp: losses

PP&E--->what rev account? what expense account?

Rev: rent, gains Exp: depreciation, repairs

Intangibles--->what rev account? what expense account?

Rev: royalties Exp: amortization

A/R--->what rev account? what expense account?

Rev: sales Exp: uncollectible accounts

If an auditor learns about information during the course of the audit which differs from the understanding they obtained during planning, what should the auditor do?

The auditor should update planning documentation and revise planned procedures as appropriate

What is the point of auditor's letter of inquiry to client attorney?

To obtain evidence to identify cause, probability of unfavorable outcome, amount of potential loss

The auditor's report should only be dated when?

When they have gathered sufficient, appropriate evidence. The audit report usually before issuance, and = date of management representation letter