C HAPTER 19

Completing the Audit and Post Audit

Responsibilities

Learning Objectives

Chapter 19 discusses a variety of auditor responsibilities that occur at the end of the audit. A
section of the chapter also discusses post-audit responsibilities. The learning objectives for
Chapter 19 have been stated in terms of audit decisions that the student should be able to make
when auditing completing the audit. They are:

Audit Decisions
D1: What are the auditor’s responsibilities with respect to subsequent events?
D2: What does an auditor need evidence about with respect to litigation, claims or
assessments (LCA)?
D3: What is the purpose of a client representation letter and what should be included in the
letter?
D4: What is the purpose of performing analytical procedures at the final stages of an
engagement?
D5: What should be addressed in the process of making a final assessment of materiality and
audit risk?
D6: What should the auditor consider when evaluating whether an entity is a going concern?
D7: What is the purpose of a technical review of the financial statements?
D8: What are the key steps involved in forming an opinion and drafting a report on the
financial statements?
D9: What are the key steps involved in forming an opinion and drafting a report on internal
controls over financial reporting?
D10: What is the purpose of a final review of working papers?
D11: What internal control weaknesses should be reported to management and to the public?
D12: What other matters should communicated to the audit committee associated with a
financial statement audit?
D13: What is the auditor’s responsibility for events that occur between report date and issuing
the audit report?
D14: What is the auditor’s responsibility for events that existed at balance sheet date but were
not discovered until after the report is issued?
D15: What is the auditor’s responsibility for the discovery of omitted procedures after report
date?

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Chapter Outline

1. Chapter-opening Vignette: Auditor’s Responsibilities for Events Occurring After Balance

Sheet Date, 894
2. Preview of Chapter 19, 894
3. Focus on Audit Decisions, 895
4. Completing the Fieldwork, 895
4.1. Making Subsequent Events Review, 896
4.1.1. Types of Events, 896………………………….(Figure 19-1: Subsequent Events
Time Dimensions)
4.1.2. Auditing Procedures in the Subsequent Period, 897
4.1.3. Effects on the Auditor’s Report, 898
4.2. Reading Minutes of Meetings, 898
4.3. Obtaining Evidence Concerning Litigation, Claims, and Assessments, 898
4.3.1. Audit Considerations, 899
4.3.2. Letter of Audit Inquiry, 899
4.3.3. Effects of Responses on the Auditor’s Report, 900
4.4. Obtaining Client Representation Letter, 900
4.4.1. Content of Representation Letter, 901……………..(Figure 19-2: Client
Representation Letter)
4.4.2. Effects on the Auditor’s Report, 901
5. Evaluating Audit Findings, 904
5.1. Making Final Assessment of Materiality and Audit Risk, 904…..(Figure 19-3: Analysis
of Aggregate Likely Misstatement Working Paper)
5.2. Evaluating Going Concern, 905
5.3. Making a Technical Review of the Financial Statements, 907
5.4. Formulating Opinion and Drafting Audi t report on the Financial Statements, 908
5.5. Formulating Opinion and Drafting Audi t report on Internal Controls over Financial
Reporting, 908
5.6. Making Final Review(s) of Working Papers, 909
6. Communicating with the Client, 910
6.1. Communicating Internal Control Matters, 910
6.2. Communicating Matters Pertaining to the Conduct of the Audit, 913
6.3. Preparing the Management Letter, 914……………..(Figure 19-4: Summary of
Auditor’s Responsibilities in Completing the Audit)
7. Postaudit Responsibilities, 916
7.1. Subsequent Events Between Report Date and Issuance of the Report, 916
7.2. Discovery of Facts Existing at Report Date, 917
7.3. Discovery of Omitted Procedures, 917

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8. Focus on Audit Decisions, 918 ……………………………… (Figure 19-5: Summary of
Audit Decisions Discussed in Chapter 19)
9. Objective Questions, online at www.wiley.com/college/boynton
10. Comprehensive Questions, 922
11. Cases, 926
12. Professional Simulation, 929

New to the 8th Edition

The 8th edition has several new features:

1. Chapter-opening vignette that describes the auditor’s responsibilities for subsequent events in
the context of Adolph Coors acquisition of Bass Holdings, Ltd. which happened after balance
sheet date. The Adolph Coors Company incurred substantial debt for a company that
previously had almost no financing debt on its balance sheet. This was a classic type II
subsequent event.
2. Focus on audit decisions at the beginning of the chapter, in the margin throughout the chapter
and an end of chapter summary that focus on important audit decisions covered in the
chapter.
3. Discussion of forming an opinion on internal controls over financial reporting (page 908).
4. An example internal control recommendation (page 912).
5. A CPA exam style professional simulation has been added at the end of the chapter.

Focus on Audit Decisions and Teaching Notes

An explicit focus on audit decisions is new to the 8th edition. In this chapter on completing the
audit, all of the learning objectives are stated as audit decisions. The following discussion
addresses each learning objective and the relevant teaching notes that go with each audit
decision.

D1: What are the auditor’s responsibilities with respect to subsequent events?

The chapter opens with a typical discussion of the auditor’s responsibility for subsequent
events. Figure 19-1 may be useful for explaining type I and type II subsequent events.
A good example of type I subsequent events might involve the work that auditors do to
test the net realizable value of inventory by testing subsequent sales of inventory after
balance sheet date. The vignette that opens the chapter provides a good example of type
II events and why they need disclosures. Once students understand the types of
subsequent events that are important to auditors, it is then relatively easy to discuss the
types of audit procedures used to identify subsequent events.

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D2: What does an auditor need evidence about with respect to litigation, claims or
assessments (LCA)?

Chapter 2 introduced the auditor’s responsibilities for illegal acts. This discussion focuses
on how the auditor obtains evidence about indirect effect illegal acts. The key is
obtaining evidence about:
1. The existence of a condition, situation, or set of circumstances indicating an
uncertainty as to the possible loss to an entity arising from litigation, claims, and
assessments.
2. The period in which the underlying cause for legal action occurred.
3. The degree of probability of an unfavorable outcome.
4. The amount or range of potential loss.
The chapter goes on to discuss the how the auditor uses letter from a client’s lawyer to
obtain evidence about these issues. It also discusses how the auditor should respond
when an inadequate response is obtained from the client’s lawyer.

D3: What is the purpose of a client representation letter and what should be included in the
letter?

A key part of the discussion of a representation letter focuses on why the auditor needs
the representation letter when it does not substitute for other evidence. The two things
that the auditor gets out of a representation letter that cannot be obtained in any other
away are:
• Management accepts responsibility for the financial statements in writing.
• Management makes representations about the completeness of information and
evidence furnished to the auditor
Auditor’s also usually get management to make written comments about revenue
recognition issues, accounting estimates, key professional judgments involved in
determining financial statement amounts and the completeness of disclosures. However,
for these latter issues, the representation letter is not a substitute for other evidence.

D4: What is the purpose of performing analytical procedures at the final stages of an
engagement?

The objective of the overall review using analytical procedures at the end of the
engagements is to assist the auditor in assessing conclusions reached in the audit and in
evaluating the financial statement presentation taken as a whole. Analytical procedures
have been discussed throughout the book. A summary of analytical procedures that the
auditor might perform in included in Appendix 8a. This section of the chapter is
intended to reinforce the purpose of an overall reasonableness test of the audited financial
numbers before the auditor signs off on the financial statements.

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D5: What should be addressed in the process of making a final assessment of materiality and
audit risk?

The audit is an iterative process and at the end of the engagement the auditor needs to
consider for a final time previous judgments made about materiality and audit risk. In
addition, the auditor must evaluate the significance of audit findings. In many cases the
auditor will identify misstatements that are immaterial, but may aggregate with other
misstatements to materially misstate the financial statements. Figure 19-3 is quite helpful
in discussing how the auditor evaluates possible misstatements in the context of their
aggregate affect on the financial statements.

D6: What should the auditor consider when evaluating whether an entity is a going concern?

Evaluating going concern issues if often difficult for students – and for auditors. Audit
clients do not want to receive a going concern opinion, and yet the auditor must consider
his or her responsibility to financial statement users.

A key part of the discussion revolves around whether the auditor has substantial doubt
about whether the entity can continue for the next year. Recall from Chapter 2 that
professional standards say that the auditor may conclude that there is substantial doubt
if, for example, an entity has suffered recurring net losses and negative cash flow from
operations and has defaulted on loan contracts. This chapter explores the audit
procedures that the auditor might perform to evaluate substantial doubt and the
disclosures that are necessary if the auditor reaches a conclusion that substantial doubt
about the entity’s ability to continue as a going concern exists.

The Mt. Hood Furniture case (19-33), or the professional simulation at the end of the
chapter, might provide good homework problems around which to discuss going concern
issues.

D7: What is the purpose of a technical review of the financial statements?

The purpose of a technical review is to ensure that the financial statements present fairly
in all material respects. Today, GAAP is extensive and it is common for public
company’s to have in excess of 40 pages of footnotes. How does the auditor evaluate the
completeness of disclosures?

Most auditor firms us a financial statement checklist is to help the auditor evaluate the
completeness and accuracy of the financial statement disclosures. The manager and
partner in charge of the engagement then review the completed checklist and the financial
statements. Prior to the release of the audit report on a publicly held client, there should
also be a technical review of the statements by a partner who was not a member of the
audit team who provides an independent look at the completeness and accuracy of the
financial statements.

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D8: What are the key steps involved in forming an opinion and drafting a report on the
financial statements?

In making a determination of an opinion on the financial statements the auditor needs to

evaluate the fair presentation of the financial statements in accordance with GAAP. This
might be a good time to review the flowchart on the inside cover of the book, and review
the procedures that support an opinion on the financial statements.

Chapter 2 (Figure 2-4, page 71) previously presented the criteria for using different
opinions on the financial statements taken as a whole. All the material presented in the
previous chapters have focused on audit decisions that need to be addressed to ensure that
the auditor has sufficient, competent evidence to support an opinion on the financial
statements.

D9: What are the key steps involved in forming an opinion and drafting a report on internal
controls over financial reporting?

The section reviews the material introduced in chapter 2 about forming an opinion on
internal controls over financial reporting. Recall that the auditor actually issues two
opinions: one on management’s assertion about internal control over financial reporting
and one on the effectiveness of the system of internal control over financial reporting.

This is a good time to review the criteria for a significant deficiency in internal controls
vs. a material weakness in internal controls. This is discussed further on pages 910-911.
Faculty might also use Figure 2-6 and 2-7 as part of this discussion. The chapter
discussion is designed to reinforce previous discussions about forming an opinion on
internal controls.

D10: What is the purpose of a final review of working papers?

This section discusses the purpose of a final review of working paper documentation.
The primary objective of a final review of the working papers by a partner is to obtain
assurance that:
• The work done by subordinates has been accurate and thorough.
• The judgments exercised by subordinates were reasonable and appropriate in the
circumstances.
• The audit engagement has been completed in accordance with the conditions and
terms specified in the engagement letter.
• All significant accounting, auditing, and reporting questions raised during the audit
have been properly resolved.
• The working papers support the auditor’s opinion.
• GAAS and the firm’s quality control policies and procedures have been met.

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D11: What internal control weaknesses should be reported to management and to the public?

This final section focuses on communication regarding internal controls. Hopefully, by

this time students understand that significant deficiencies in internal controls are
communicated only the board of directors and it is material weaknesses that are reported
to the public. The teaching notes to chapter 2 provides an example of the adverse
opinion on internal controls over financial reporting that was received by Eastman Kodak
Co. for the year ended December 31, 2004. This might help illustrate the decisions that
an auditor must make.

In addition, pages 912-913 include an example of recommendation that might be made to

management regarding a significant deficiency in internal controls. Student often have
difficult writing these types of comments from scratch, so an example comment on
internal controls was included in the 8th edition.

D12: What other matters should communicated to the audit committee associated with a
financial statement audit?

This learning objective is focused on other required communications with the audit
committee and the board of directors. In addition to communicating with the audit
committee about significant deficiencies and material weaknesses in internal controls, the
auditor should also discuss the following issues to the audit committee.
• Auditor’s responsibility under GAAS including the assurance provided by an audit
that the financial statements are free of material misstatements, concepts of
materiality used in the audit, and types of audit tests performed.
• Significant accounting policies such as management’s initial selection and changes in
policies, accounting methods used for significant unusual transactions, and effects of
policies in areas that lack authoritative guidance or consensus.
• Auditor’s judgments about the quality of the entity’s accounting principles. The
discussion would normally include management as an active participant since they
have primary responsibility for establishing accounting principles. An open and frank
discussion should include such matters as the consistency of application of
accounting policies. The clarity and completeness of the entities’ financial statements,
and items that have a significant impact on the representational faithfulness,
verifiability, and neutrality of the accounting information included in the financial
statements. Examples include (1) the selection of new or changes to accounting
policies, (2) estimates, judgments, and uncertainties, (3) unusual transactions, (4)
accounting policies related to significant financial statement items, including the
timing of transactions and the period in which they are recorded, or accounting
practices that may be unique to an industry.
• Management judgments and accounting estimates including the basis for judgments
and the process for making accounting estimates.
• Significant audit adjustments that individually, or in the aggregate, have an important
effect on the entity’s financial reporting process.

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 • Disagreements with management that are significant to the financial statements or the
auditor’s report, and disagreements that pertain to the application of accounting
principles and the basis for management’s judgments about accounting estimates.
• Consultation with other accountants on auditing and accounting matters.
• Major issues discussed with management prior to retention including those pertaining
to accounting principles and auditing standards.
• Difficulties encountered in performing the audit such as unreasonable delays by
management in permitting the commencement of the audit and in providing needed
information, unavailability of client personnel, and failure of the client to complete
client-prepared schedules in a timely manner.

D13: What is the auditor’s responsibility for events that occur between report date and issuing
the audit report?

This begins a discussion of three separate responsibilities for events that occur after
report date. It may be helpful to refer to the timeline in Figure 19-1.

The first discusses issues that occur between report date and actually issuing the report.
This focuses on type II events that require disclosure in the financial statements that
occur between report date and issuing the report. The most common solution is to dual
date the report with one date for the new disclosures and the standard report date for
everything else.

D14: What is the auditor’s responsibility for events that existed at balance sheet date but were
not discovered until after the report is issued?

The second discussion focuses on the auditor’s responsibility for events that existed at
report date that the auditor does not learn about until after the report has been issued. In
this case the auditor should determine if these events affect the auditor’s opinion. If they
would have changed the auditor’s opinion, then the auditor needs to take the following
steps to prevent further reliance on the report:
• Notify the client that the audit report must no longer be associated with the financial
statements.
• Notify the regulatory agencies having jurisdiction over the client that the report
should no longer be relied on.
• Notify (generally via the regulatory agency) each individual known to be relying on
the statements that the report should no longer be relied on.

D15: What is the auditor’s responsibility for the discovery of omitted procedures after report
date?

The final discussion focuses on the discovery of omitted procedures after report date
(usually after the issuance of the report). This may happen during an internal quality
review or in a peer review.

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 First, the auditor needs to determine if the omitted procedures could affect the audit
opinion. Second, if the auditor concludes that the omitted procedures could affect the
previously issued opinion, then the auditor needs to perform the omitted procedures.
Third, if the new evidence continues to support the opinion that was previously expressed
the auditor does not need to take further action. If the new evidence does not support the
opinion that was previously expressed the auditor should follow the following
notification procedures.
• Notify the client that the audit report must no longer be associated with the financial
statements.
• Notify the regulatory agencies having jurisdiction over the client that the report
should no longer be relied on.
• Notify (generally via the regulatory agency) each individual known to be relying on
the statements that the report should no longer be relied on.

Key Questions for Students

Following is a list of common questions for students that instructors might want to weave into
class discussion of Chapter 19 topics.

Audit Decisions
D1: What are the auditor’s responsibilities with respect to subsequent events?

o Distinguish between the terms subsequent events and subsequent events period.
o Define the two types of subsequent events and develop an example of each.
o What is the accounting treatment of each type of subsequent event?
o What is the auditor’s responsibility for each type of subsequent event?

D2: What does an auditor need evidence about with respect to litigation, claims or
assessments (LCA)?

o Develop an example of the items covered under the auditor’s responsibility for litigation
claims and assessment.
o What evidence is required in an audit of litigation, claims, and assessments?
o What is a letter of audit inquiry?
o What effects may a lawyer’s failure to respond to a letter of audit inquiry have on the
audit report?

D3: What is the purpose of a client representation letter and what should be included in the
letter?

o If a representation letter is not a substitute for other evidence, what is the primary
purpose of a client representation letter?
o What are the most important items included in a client representation letter?
o What is the impact of a client’s refusal to provide a rep letter?

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D4: What is the purpose of performing analytical procedures at the final stages of an
engagement?

o What is the purpose of performing analytical procedures at the final stages of an

engagement?
o How do analytical procedures performed at the final stages of an engagement differ
from other analytical procedures performed in the audit?

D5: What should be addressed in the process of making a final assessment of materiality and
audit risk?

o For what reason would a final assessment of materiality differ from decisions made in
planning the audit?
o For what reason would final assessments of audit risk (inherent risk, control risk, and
detection risk) differ from decisions made in planning the audit?

D6: What should the auditor consider when evaluating whether an entity is a going concern?

o What is the threshold that requires a modification of the auditor’s report regarding
going concern issues?
o Provide examples of what is meant by substantial doubt about the entity’s ability to
continue as a going concern.
o How might the financial statements change if substantial doubt exists about the
entity’s ability to continue as a going concern?
o Why might an auditor reach a conclusion that substantial doubt does not exist about
the entity’s ability to continue as a going concern, and yet (with hindsight) the client
files for bankruptcy within one year after balance sheet date?

D7: What is the purpose of a technical review of the financial statements?

o What is the purpose of a technical review of the financial statements?

o Who should make this review?

D8: What are the key steps involved in forming an opinion and drafting a report on the
financial statements?

o What are the key steps involved in forming an opinion and drafting a report on the
financial statements?
o What are the criteria for issuing a qualified opinion on the financial statements?
o What are the criteria for issuing an adverse opinion on the financial statements?
o What are the criteria for issuing a disclaimer of opinion on the financial statements?

D9: What are the key steps involved in forming an opinion and drafting a report on internal
controls over financial reporting?

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 o What two opinions does an auditor issue regarding an entity’s internal control over
financial reporting?
o What are the key steps are involved in forming an opinion and drafting a report on
internal control over financial reporting?
o What are the criteria for issuing an adverse opinion on the effectiveness of internal
control over financial reporting?

D10: What is the purpose of a final review of working papers?

o What is the purpose of a final review of working papers?

o Who should make this review?

D11: What internal control weaknesses should be reported to management and to the public?

o What are the criteria for a significant deficiency in internal controls?

o What are the criteria for a material weakness in internal controls?

D12: What other matters should communicated to the audit committee associated with a
financial statement audit?

o In addition to internal controls, what other matters should be communicated to the

audit committee by the auditor?
o What is the purpose of each communication?

D13: What is the auditor’s responsibility for events that occur between report date and issuing
the audit report?

o What should an audit do if information regarding a type I subsequent event occurs

between report date and issuing the financial statements?
o What should an audit do if information regarding a type II subsequent event occurs
between report date and issuing the financial statements?
o What should an auditor do if the auditor decides to change report date?

D14: What is the auditor’s responsibility for events that existed at balance sheet date but were
not discovered until after the report is issued?

o What procedures should be performed when events that existed at balance sheet date
are not discovered until after the report is issued?
o If these events cause the auditor to change his or her opinion, what steps should be
taken by the auditor?

D15: What is the auditor’s responsibility for the discovery of omitted procedures after report
date?

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 o What procedures should be performed when the auditor determine that significant
audit procedures were not performed during the audit and this is discovered after the
audit report is issued?
o If these events cause the auditor to change his or her opinion, what steps should be
taken by the auditor?

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