COMPLETING THE AUDIT

Atty. Mary Queen A. Ramos-Umoquit, CPA, MBA

WE’LL TALK ABOUT THE FF:
 Assessing the Quality of the Audit
 Other Considerations in the Final Review
Stage of the Audit
 Adequacy of Disclosures

 Management Representation Letter

 Communications of Audit Matters with those

Charged with Governance
 Evaluating the Going Concern Assumption

 Review of Significant Estimates

 Communicating with the Audit Committee

 Subsequent Events
 ASSESSING THE QUALITY OF THE
AUDIT

 Analytical review of the audit

 Do company results make sense in relation to industry
and economic trends?

 Concurring partner review

 Independent review by an experienced auditor who is
not part of the audit team
OTHER CONSIDERATIONS IN THE
FINAL REVIEW STAGE OF THE
AUDIT
 Contingent losses that are both probable and
reasonably estimated should be accrued and
disclosed.
 Contingent losses that are reasonably possible, and
remote contingencies disclosed because of common
practice, should be disclosed in the notes to the
financial statements.
OTHER CONSIDERATIONS IN THE FINAL
REVIEW STAGE OF THE AUDIT (CONT.)
 Contingencies include:
 collectibility of receivables and loans
 product warranty liability
 litigation and claims
 threat of expropriation of assets in a foreign country
 guarantees of debts of others
 purchase and sale commitments
 agreements to repurchase receivables that have been sold
 obligations of banks under standby letters of credit.
CONTINGENT LIABILITIES
 Responsibilities
Management is responsible for identifying,

evaluating and accounting for contingencies.
 The auditor is responsible for determining client has
properly identified, accounted for and disclosed
material contingencies.
 Sources of evidence

 Primary sources include management and client’s

lawyers.
 Additional sources include corporate minutes,
contracts, correspondence from government
agencies and bank confirmations.
 ADEQUACY OF DISCLOSURES
 The third standard of reporting states: ‘Informative
disclosures in the financial statements are to be
regarded as reasonably adequate unless otherwise
stated in the report.’
 The auditor must be sure that:

 disclosed events and transactions occurred and

pertain to the client
 all disclosures that should be included are included
 disclosures are understandable to users
 disclosures are accurate.
 MANAGEMENT REPRESENTATIONS

 Management representation letter

 Reminds management of its responsibility for the
financial statements
 Confirms significant oral responses made by
management
 Reduces possibility of misunderstandings between
management and auditor
MANAGEMENT REPRESENTATION
LETTER
 Letter is prepared by auditor on client letterhead,
addressed to the auditor, and normally signed by CEO
and CFO.
 Letter is dated as of the audit report date (end of
fieldwork).
 Because management representations are not strong
evidence, the auditor should perform procedures to
corroborate the information in the letter.
 Management’s failure to provide this letter is a scope
limitation sufficient to preclude issuance of unqualified
opinion.
COMMUNICATIONS OF AUDIT MATTERS
WITH THOSE CHARGED WITH
GOVERNANCE
 Auditors often notice things that might make the
client more profitable.
 Many of these observations are related to control
deficiencies or operational matters.
 The observations are included in a management
comment letter typically delivered to the Board of
Directors with the audit report.
 Management letter is not required, but does add value
to the audit.
 EVALUATING THE GOING CONCERN
ASSUMPTION
 The auditor is required to evaluate client’s ability to
remain a going concern for a period not to exceed one
year from the balance sheet date.
 Indicators of potential going concern problems include:
 negative trends in key financial areas such as cash
flow, sales, profits
 internal matters, such as loss of key personnel and
outdated facilities and/or products
 external matters, such as new legislation, loss of
significant customer or supplier, uninsured casualty
loss
 other matters, such as loan default, inability to pay
dividends, attempted debt restructuring.
 EVALUATING THE GOING CONCERN
ASSUMPTION (CONT.)

 If there is substantial doubt about ability of client to

remain a going concern, the auditor should:
 discuss the situation with management
 assess management’s plans to overcome problems
 consider the effects on the financial statements.
 Auditor should evaluate the adequacy of financial statement
disclosure.
 Disclosures might include conditions causing the going concern

doubt and management’s plan to overcome the problem.

EVALUATING THE GOING CONCERN
ASSUMPTION (CONT.)

 Consider the effects on the audit report:

 add explanatory paragraph to the unqualified
audit report
 disclaim opinion
 issue qualified opinion if disclosure is not
adequate.
REVIEW OF SIGNIFICANT ESTIMATES

 Management estimates provide opportunities for the

entity to ‘manage’ or even manipulate earnings. The
auditor provides reasonable assurance that:
 Management has information system to develop
estimates material to the financial statements.
 Estimates are reasonable.
 Estimates are presented per accounting standard
requirements.
REVIEW OF SIGNIFICANT ESTIMATES
(CONT.)

 In evaluating management estimates, the auditor

concentrates on key factors and assumptions that
are
 significant to the accounting estimate
 sensitive to variations
 deviations from historical patterns
 susceptible to misstatement
 inconsistent with current economic trends.
 COMMUNICATING WITH THE AUDIT
COMMITTEE
 Items the auditor should discuss with the audit
committee include:
 the auditor’s responsibility under auditing standards
 management judgements and accounting estimates
 audit adjustments
 uncorrected misstatements
 accounting policies and alternative treatments
 major accounting and reporting disagreements with
management
 difficulties encountered in performing the audit
COMMUNICATING WITH THE AUDIT
COMMITTEE

 copies of significant communications between

auditor and management
 management’s discussion with other accounting
firms
 significant fraud or illegal acts
 significant deficiencies in internal control
 any independence issues
 any other significant matters.
SUBSEQUENT EVENTS
 Subsequent events occur after the balance sheet
date.
 Audit procedures used to identify subsequent events
include:
 reading minutes of meetings of the board of
directors, shareholders and other authoritative
groups held after year-end
 reading interim financial statements and
investigating significant changes
SUBSEQUENT EVENTS (CONT.)

 inquiring of management about:

 significant changes in noted in interim statements
 significant contingent liabilities

 significant changes in working capital, debt or owners’

equity
 status of any tentative items

 unusual accounting adjustments made after the balance

sheet date.
 inquiring of management and lawyer about
subsequent events
 obtaining a management representation letter.
SUBSEQUENT EVENTS (CONT.)
 How an auditor handles a subsequent event depends
on two things:
 whether the subsequent event provides evidence
about conditions that existed at the balance sheet
date (type I), or conditions arising after the balance
sheet date (type II)
 when the subsequent event occurred:
 during fieldwork
 after fieldwork, but before the audit report has been issued

 after the audit report has been issued.

 TYPE I SUBSEQUENT EVENTS
 Type I subsequent events provide evidence about conditions
that existed at the balance sheet date.
 The financial statement numbers should be adjusted to reflect
this information; footnote disclosure may also be necessary.
 Examples of type I subsequent events:
 a major customer, whose deteriorating financial condition
existed prior to the balance sheet date, files for bankruptcy
during subsequent period
 lawsuit settled for different amount from accrual
 bonus share issue or share split during the subsequent
period
 sale of inventory below carrying value when loss occurred
during the subsequent period.
TYPE II SUBSEQUENT EVENTS
 Type II subsequent events provide evidence about conditions that did
not exist at the balance sheet date.
 The financial statement numbers should not be adjusted for these
events, but they should be considered for disclosure.
 Examples of type II subsequent events:
 uninsured casualty loss that occurs after the balance sheet date
 significant lawsuit initiated for incident occurring after the balance
sheet date
 significant loss due to natural disaster occurring after the balance
sheet date
 major decisions made during the subsequent period such as decision
to merge, discontinue a line of business, or issue new securities
 material change in value of investment securities after the balance
sheet date.
SUBSEQUENT EVENTS (CONT.)
 If a subsequent event occurs after end of fieldwork but
before audit report is issued, auditor must decide
whether to single or dual date the audit report.
 In the case of a single date, the date of the
subsequent event is the audit report date. The
auditor must make sure there are no other
subsequent events prior to the report date.
 A dual dated report uses the dates of the end of the
fieldwork and the subsequent event.
 SUBSEQUENT FACTS DISCOVERED
AFTER THE FINANCIAL REPORT
HAS BEEN ISSUED

 Auditor must determine

 reliability of new information
 whether the event had occurred by the audit report
date
 whether users are likely to still be relying on the
financial statements
 whether the audit report would have been affected
had the facts been known.
SUBSEQUENT DISCOVERY OF FACTS EXISTING
AT THE DATE OF THE AUDITOR'S REPORT
(CONTINUED)

 If the auditor decides further reliance on

the financial statements and audit report
is not appropriate, client is advised to
make appropriate and timely disclosure of
these new facts
 Appropriate actions:
 Revise financial statements and audit report
 Revision and explanation reflected in
subsequent period financial statements
 If revision will take extended period, notify
users that statements and audit report should
no longer be relied on
SUBSEQUENT DISCOVERY OF FACTS EXISTING
AT THE DATE OF THE AUDITOR'S REPORT
(CONTINUED)

 If client will not cooperate, auditor should

 Notify client and regulatory agency that the
audit report should no longer be associated
with the financial statements
 Notify known users that the audit report
should no longer be relied on
EXERCISES # 1 TRUE OR FALSE
1. The final review stage of the audit is used for the consideration of unusual or unexpected
balances or relationships that appear after proposed adjustments to the financial
statements have been made.
2. A response from the client's attorney concerning litigation, claims, and assessments
represents material that is protected under the attorney-CPA privilege.
3. A letter is sent to certain of the client's attorneys soliciting a response directly to the
auditor in order to corroborate management's accounting and disclosure for contingent
liabilities.
4. Settlement of a lawsuit in January for a different amount than was accrued at December 31
calls for a footnote.
5. Subsequent events may indicate conditions that did not exist at the balance sheet date, and
should be considered for footnote disclosure.
6. The auditor may discover an event after the last date of field work, but prior to the issuance
of the report. If this event is disclosed, the auditor has no other option but to dual date the
report.
7. If the auditor concludes that the client may have a going-concern problem then the auditor
should identify and assess management's plans to overcome this problem.
8. The auditor communicates certain issues to the audit committee of the board of directors at
the conclusion of an audit merely as a gesture of client service.
9. The failure of management to provide a management representation letter is considered a
scope limitation on the audit.
10. The auditor must force management to make all adjustments, no matter how large or small,
prior to signing off on the financial statements.