Auditing and assurance services 14e by arens chapter 24

Completing the Audit
Chapter 24


©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Learning Objective 1
Design and perform audit tests related to
presentation and disclosure audit
objectives.

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Presentation and Disclosure
Audit Objectives
Occurrence and rights and obligations:
Disclosed events and transactions have
occurred and pertain to the entity.
Completeness:
All disclosures that should have been
included in the financial statements
have been included.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Learning Objective 2
Conduct a review for contingent liabilities
and commitments.

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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.

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Likelihood of Occurrence and
Financial Statement Treatment
Likelihood of
Occurrence of Event

Financial Statement
Treatment

Remote
(slight chance)

No disclosure
is necessary

Reasonably
possible

Footnote disclosure
is necessary

Probable
(likely to occur)

Adjust financial statements
or note disclosure
depending on amounts
involved

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Auditor’s Concerns
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Pending litigation for patent infringement,
product liability, or other actions
Income tax disputes
Product warranties
Notes receivable discounted
Guarantees of obligations of others
Unused balances of outstanding letters of credit

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Audit Procedures for Finding
Contingencies
Audit Procedures

Management
Inquiry

Review BOD
Meeting
Minutes

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Review
Revenue
Agent
Reports

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Audit Procedures for Finding
Contingencies
Audit Procedures

Review
legal invoices

Obtain
attorney
letters
re: litigation

Examine
Letters of
Credit

Review Audit work papers for signs of contingencies
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Learning Objective 3
Obtain and evaluate letters from the client’s
attorneys.

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Inquiry of Client’s Attorneys
A list including: (1) pending threatened litigation
and (2) asserted or unasserted claims or
assessments with which the attorney
has had involvement.
Request that the attorney furnish information
or comment about the progress of each item listed.

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Inquiry of Client’s Attorneys
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.

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Sarbanes-Oxley Act
Congress included provisions in this act directing
the SEC to issue rules requiring attorneys serving
public companies to report material violations
by the company of federal securities laws.
The American Bar Association amended its
attorney-client confidentiality rules to permit
attorneys to breach confidentiality if a client
is committing a crime or fraud.
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Learning Objective 4
Conduct a post-balance-sheet review for
subsequent events.

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Period Covered by Subsequent
Events Review

Client’s ending
balance sheet
date

12-31-09

Audit
Date client
report issues financial
date
statements

3-11-10

Period to which review for
subsequent events applies

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3-26-10

Period for
processing
the financial
statements
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Types of Subsequent Events
 Those that have a direct effect

on the financial statements
and require adjustment
 Those that do not have a direct
effect on the financial statements
but for which disclosure is required

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Requiring Adjustment
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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

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Advisability of Disclosure
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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

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Audit Tests
Two categories of audit procedures

for the subsequent events review:
1. Procedures normally integrated as
a part of the verification of year-end
account balances.
2. Procedures performed specifically for
the purpose of discovering events or
transactions that must be recognized
as subsequent events.
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Audit Tests
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Inquire of 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

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Dual Dating
The first date is the date for the completion
of field work except for a specific exception
 The second date, which is always later,
deals with the exception
Example: An auditor returned to the client’s premises to
perform audit tests pertaining only to the acquisition and
completes those tests on March 31. The audit report will
be dual-dated as follows: March 11, 2010, except for
note 17, which is dated March 31, 2010.
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Learning Objective 5
Design and perform the final steps in the
evidence-accumulation segment of the
audit.

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Final Evidence Accumulation
The five types of final evidence accumulation
1.
2.
3.
4.

Perform final analytical procedures.
Evaluate the going concern assumption.
Obtain a management representation letter.
Consider information accompanying the
basic financial statements.
5. Read other information in the annual report.
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Final Analytical Procedures
Partner reads financial statements and footnotes

Considers
adequacy of
evidence

Unusual or
unexpected
balances or
relationships

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Unusual items
not
previously
identified

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Going Concern Assumption
Evaluate a client’s ability to continue operating
another year

Assess as
part of initial
planning

Update
based on
audit results

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Use analytical
procedures &
make final
assessment

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