Completing the Audit/

Post-audit
Responsibilities
An internal auditor for a manufacturing company was concerned
about the anomalies in stock levels. He thought someone might be
pinching stock but he couldn’t prove it. He had his eye on one shifty
looking individual who everyday drove his old truck out of the
factory with the load covered by canvas. Time after time, the
auditor stopped the guy, made him remove the canvas, and then
inspected the load. On every occasion, there was only scrap metal
on the truck which the driver said he was taking to the garbage
dump. On 3 occasions, the auditor made the driver offload the scrap
metal in suspicion that something was hidden beneath but there
was nothing. The auditor later got a better offer and resigned. A few
weeks later, he was drinking in a pub when the suspicious looking
character walked in. On an impulse the auditor walked up to him
and asked, “Look, I've left the company, I'm not interested in taking
up the matter, but I just have to know. What were you taking?” and
the guy said, “Canvas.”
Summary of the Audit Process
Phase III
Phase I
Perform analytical
Plan and design an audit
procedures and tests
approach.
of details of balances.

Phase II
Phase IV
Perform tests of controls
Complete the audit and
and substantive tests
issue an audit report.
of transactions.
Phase IV – Completing the
Audit
Review for contingent
Evaluate results.
liabilities.

Review for
Issue audit report.
subsequent events.

Communicate with
Accumulate final
audit committee
evidence.
and management.
 Review of Contingent
Liabilities

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 24 - 5

Contingent Liabilities

A contingent liability is a potential

future obligation to an outside party
for an unknown amount resulting
from activities that have already
taken place.
 Likelihood of Occurrence and
Financial Statement Treatment
Likelihood of Financial statement
occurrence of event treatment

Remote No disclosure
(slight chance) necessary

Reasonably Footnote disclosure is

possible necessary

Probable Adjust financial statements

(likely to occur) or note disclosure
Auditor’s Concerns

 Pending litigation for patent infringement,

product liability, or other actions
 Income tax disputes
 Product warranties
 Notes receivable discounted
 Guarantees of obligations of others
Audit Procedures for Finding
Contingencies
Inquire of management (orally and in
writing) about the possibility of
unrecorded contingencies.

Review current and previous years’ internal

revenue reports for income tax settlements.

Review the minutes of directors’ and

stockholders’ meetings for indications
of lawsuits or other contingencies.
Audit Procedures for Finding
Contingencies
Analyze legal expenses and review invoices
and statements from legal counsel.

Obtain a letter from each major attorney of the

client as to the status of pending litigation.

Review audit documentation for any information

that may indicate a potential contingency.

Examine letters of credit in force.

If an auditor wants to inquire
details from the corporate lawyer,
this things are necessary:

A list including (1) pending threatened litigation

and (2) asserted or unasserted claims or
assessments with which the attorney
has had involvement.

A request that the attorney furnish information

or comment about the progress of each item listed.
If an auditor wants to inquire
details from the corporate lawyer,
this things are necessary:
A request for the identification of any unlisted
pending or threatened legal action 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.
 Review of Subsequent
Events

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 24 - 13

 Period Covered by Subsequent
Events Review
Client’s ending Audit Date client
balance sheet report issues financial
date date statements

12-31-05 3-11-06 3-26-06

Period to which review for Period for

subsequent events applies processing
the financial
statements
Types of Subsequent Events
Those that have a direct effect
1 on the financial statements
and require adjustment

Those that have no direct effect

2 on the financial statements but
for which disclosure is advisable
 Subsequent Events which
Requires Adjustment
 Declaration of bankruptcy by a customer
with an accounts receivable balance
 Settlement of a litigation at an amount
different from the amount recorded
on the books
 Disposal of equipment not being used in
operations at a price below the current
book value
 Sale of investments at a price below
recorded cost
Subsequent Events that shall
be disclosed
 Decline in the market value of securities
held for temporary investment or resale
 Issuance of bonds or equity securities
 Decline in the market value of inventory
as a consequence of government action
barring further sale of a product
 Uninsured loss of inventories as a result
of fire
 A merger or an acquisition
Audit Tests

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
Audit Tests
 Inquire with the management.
 Correspond with attorneys.
 Review internal statements prepared
subsequent to the balance sheet date.
 Review records prepared subsequent
to the balance sheet date.
 Examine minutes issued subsequent
to the balance sheet date.
 Obtain a letter of representation.
 Final Evidence
Accumulation

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 24 - 20

Final Evidence Accumulation
1. Perform final analytical procedures.
2. Evaluate the going-concern assumption.
3. Obtain a management representation
letter.
4. Consider information accompanying the
basic financial statements.
5. Read other information in the annual
report.
Management Representation
Letter

To impress upon management its responsibility

for the assertions in the financial statements

To document the responses from management

to inquiries about various aspects of the audit
Management Representation
Letter
1. Financial statements
2. Completeness of information
3. Recognition, measurement, and disclosure
4. Subsequent events
5. Internal control
Management Representation
Letter: Internal Control

1. Management’s acknowledgment of its responsibility for

establishing and maintaining effective internal control
over financial reporting
2. Management’s conclusion about the effectiveness of
internal control over financial reporting as of the end of
the fiscal period
3. Disclosure of all deficiencies
4. Management’s knowledge of any fraud
Information Accompanying
Basic Financial Statements
Balance sheet
Income statement Basic Standard
financial auditor’s
Statement of statements report
cash flows
Notes to FS
Detailed comparative Information
statements accompanying
basic financial
Statistical data statements
Schedule of
insurance coverage
Evaluation of Result
Sufficiency of evidence

Evidence supports auditor’s opinion

Financial statement disclosures

Evaluation of Result
Audit documentation review

Independent review or Peer-review

Summary of evidence evaluation

 Completing the Engagement
Checklist

YES NO
1. Examination of prior year’s audit
documentation
a. Were last year’s audit files examined
for areas of emphasis in the
current-year audit?
b. Was the permanent file reviewed for
items that affect the current year?
 Completing the Engagement
Checklist
YES NO
2. Internal control
a. Has internal control been adequately
understood?
b. Is the scope of the audit adequate in
light of the assessed control risk?
c. Have all major weaknesses been
included as reportable conditions in
a letter to the audit committee or to
senior management?
 Completing the Engagement
Checklist
YES NO
3. General documents
a. Were all current-year minutes and
resolutions reviewed, abstracted,
and followed up?
b. Has the permanent file been
updated?
c. Have all major contracts and
agreements been reviewed and
abstracted and copied with all
existing legal requirements?
Evaluating Results and
Reaching Conclusions
Actual audit evidence
(by cycle, account, Evaluate results
and objective) (by account and cycle)

Audit procedures Estimated misstatement

Sample size (by account)
Items to select Achieved audit risk
Timing (by account and cycle)
Evaluating Results and
Reaching Conclusions

Evaluate overall
financial statements
Issue
audit
Estimated misstatement
report
(overall statements)
Achieved audit risk
(overall statements)
Issuance of the Audit Report

The audit report is the only thing that most

users see in the audit process, and the
consequences of issuing an inappropriate
report can be severe.
Communicate the report with the
Audit Committee and Management

 Communicate fraud and illegal acts

 Communicate internal control deficiencies
 Other communication with audit committee
 Management letters
 Period Covered by Subsequent
Events Review
Client’s ending Audit Date client
balance sheet report issues financial
date date statements

12-31-05 3-11-06 3-26-06

Period to which Period for Period in which

review for processing subsequent
subsequent the financial discovery of
events applies statements facts is made, hence
the need for another
audit report arises