Lecture Auditing and assurance services (Second international edition) Chapter 17 Completing the audit engagement

Chapter Seventeen

Completing the Audit
Engagement

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Contingency
AAcontingency
contingency is
isaaliability
liabilitythat
thatis
isuncertain
uncertain
because
becausethe
the possible
possible outflow
outflow of
ofresources
resourcesfrom
from
the
theentity
entitywill
willultimately
ultimately be
beresolved
resolved when

whensome
some
future
futureevent
eventoccurs
occursor
orfails
failsto
tooccur.
occur.
Examples
Examples
• •Pending
Pendingor
orthreatened
threatenedlitigation
litigation
• •Actual
Actualor
orpossible
possibleclaims
claimsand
and
assessments
assessments
• •Income
Incometax
taxdisputes
disputes
• •Product

Productwarranties
warrantiesor
ordefect;
defect;
• •Guarantees
Guaranteesof
ofobligations
obligationsto
to
others
others
• •Agreements
Agreementsto
torepurchase
repurchase
receivables
that
receivables thathave
havebeen
beensold
sold
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Probable:
Probable:The
Thefuture
futureevent
eventisismore
more
likely

than
not
to
occur.
likely than not to occur.
Neither
Neitherprobable
probablenor
norremote:
remote: The
The
chance
chanceof
ofthe
thefuture
futureevent
eventisisless
less
likely
than
not
to
occur
but
the
likely than not to occur but the
chance
chanceisismore
morethan
thanslight.

slight.
Remote:
Remote:The
Thechance
chanceof
ofthe
thefuture
future
event
occurring
is
slight.
event occurring is slight.


Audit Procedures for Identifying
Contingencies
Read minutes of meetings
of those charged with
governance, e.g. the board
of directors.

Review contracts, loan
agreements, leases and
correspondence from
government bodies.

Review tax returns, tax
liability and tax authorities’
reports.

Confirm or otherwise
document guarantees and
letters of credit.

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Inspect other documents for
possible guarantees.


Audit Procedures for Identifying
Contingencies
Specific Audit Procedures Conducted
Near Completion of Audit
Inquiry and discussion with
management about its policies
and procedures for identifying,
evaluating and accounting for
contingencies.

Examine documents in the entity’s
records such as correspondence
and invoices from lawyers for
pending or threatened lawsuits.

Obtain a legal letter that
describes and evaluates any
litigation, claims or
assessments.

Obtain written representation from
management that all litigation,
asserted and unasserted claims,
and assessments have been
disclosed in accordance with the
applicable financial reporting
framework.

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Legal Letters
A letter of audit inquiry (a legal letter) sent to
the client’s lawyers is the primary means of
obtaining or corroborating information about
litigation, claims and assessments.

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Example of Legal Letter

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Commitments
Long-term
Long-termcontracts
contractsto

to
purchase
purchaseraw
rawmaterials
materialsor
or
sell
selltheir
theirproducts
productsat
ataafixed
fixed
price.
price.

To
Toobtain
obtainaa
favourable
favourable
pricing
pricing
arrangement.
arrangement.

To
Tosecure
securethe
the
availability

availabilityof
of
raw
rawmaterials.
materials.

Long-term commitments are usually identified through inquiry of
client personnel during the audit of the revenue and purchasing
processes. In most cases, such commitments are disclosed in a note
to the financial statements.
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Review for Subsequent Events
Balance
Sheet Date

Type I Event

Type II Event

Conditions existed at
the balance sheet date
and affect estimates
that are part of
financial statements

Conditions did not exist
at the balance sheet
date and do not affect

the accuracy of the
financial statements

Require adjustment of
the financial
statements.

Require financial
statement disclosure.

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Auditor’s Responsibilities Regarding
Subsequent Events

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Subsequent Events after the Date of the
Audit Report
The auditor is not responsible for making any
inquiries or conducting any audit
procedures after the date of the audit
report.
However, facts may come to the auditor’s
attention after the date of the audit report
that might have affected the audit report
had the auditor known about them.
Auditing

standards (ISA 560) provide guidance to
auditors in this exceptional circumstance.
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Audit Procedures to Look for Subsequent
Events
Examples of audit
procedures

Inquire of
Management

Read Minutes
of Meetings

Read Interim
Financial
Statements

Inquire of
Legal
Counsel
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Examine the
Books of
Original Entry

Final Evidence Evaluation Processes
Perform final
analytical
procedures.

Review working
papers.

Evaluate entity’s
ability to continue
as a going concern.

Obtain a
representation
letter.

Evaluate final of
audit results.

Evaluation of
financial statement
presentation and
disclosure.
Obtain a quality
control review of
the engagement.

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Going-Concern Considerations

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Going-Concern Considerations

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Representation Letter

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Representation Letter (continued)

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Proposed Adjusting Entries

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Other Final Evidence Evaluation Processes
Evaluating Financial Statement Presentation and Disclosure
The auditor reviews the financial statements to ensure compliance
with the applicable financial reporting framework, proper
presentation of accounts, and inclusion of all necessary disclosures.

Engagement Quality Control Review
An engagement quality control reviewer objectively evaluates
the significant judgements that the engagement team made and
the conclusions it reached in formulating the auditor’s report.
Archiving
Archiving and
and Retention
Retention
ISQC1
ISQC1 requires
requires audit
audit documentation
documentation to
to be
be retained
retained
ordinarily
ordinarily for
for minimum
minimum five
five years
years from
from
the
the date
date of
of the
the auditor’s
auditor’s report.

report.
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Communication with those Charged with
Governance and Management

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End of Chapter 17

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