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Accounting 4P62
External Auditing II
Section 1
Completing The AuditCICA 3290, 3840, 5405, 6550, 6560
Completing the Audit
Divided into two categories
Contingent liabilities
Subsequent event review
Inquiries of client lawyers
Related party transactions
Client representation letter
Overall analytical review
General review of statement of cash flow
Completion of Field Work Evaluation of Findings
Final assessment of materiality and risk
Formulate opinion on F/S
Complete review of working papers
Technical review of F/S
Internal control weakness communication to client
Management letter
Contingent Liabilities CICA 3290
Three conditions needed:1.2.3.
Three levels of possibility1. likely
2. unlikely
3. not determinable
What do contingent liabilities typically include?
The problem for the auditor?
Notes to the Financial Statements» 1.
» 2.
» 3.
Subsequent Event Review
CICA 6550
Time dimension of subsequent events
B/S Date
Dec. 31 Mar. 1 Mar. 31
End of Field Work
(Report Date)
Report Issuance Date
Subsequent Events Period
Subsequent Events
Type 1» main feature?
Type 2
Types of Subsequent Events
Interim F/S
Enquiry of management
Minutes
Legal counsel
Letter of representation
Audit Tests for Subsequent Events
Inquiries of Client Lawyers
Claims and possible claims may have a material effect on F/S
» auditor’s responsibility?
Obtain form management1.
2.
Letter of audit enquiry to client’s outside legal counsel
ABC Company
123 Main Street
Toronto, Ontario
Dewey, Cheatem, and Howe
Barristers and Solicitors
456 King Street
Hamilton, Ontario
Dear Sir(s):
In connection with the preparation and audit of our financial statements for the fiscal period ended December 31, 200X, we have made the following evaluations of claims and possible claims with respect to which your firm’s advice or representation has been sought:
Description Evaluation
Name of entity, name of other party, nature, amount claimed and current status.
Likelihood of loss (or gain) and estimated amount of ultimate loss (or gain), if any; or indicate that likelihood is not determinable or amount cannot be reasonably estimated.
Would you please advise us, as of March 31, 200Y, on the following points:
(a) Are the claims and possible claims properly described?
(b) Do you consider that our evaluations are reasonable?
(c) Are you aware of any claims not listed above which are outstanding? If so, please include in your response letter the names of the parties and the amount claimed.
This inquiry is made in accordance with the Joint Policy Statement of January 1978 approved by the Canadian Bar Association and the Auditing Standards Committee of the Canadian Institute of Chartered Accountants.
Please address your reply, marked “Privileged and Confidential”, to this company and send a signed copy directly to our auditor, Ace and Co., Chartered Accountants, 789 West Avenue, Toronto, Ontario.
Yours truly
Susan Bleach, President
cc. Ace and Co.
Susan Bleach
Related Party Transactions
CICA 3840
What type of transactions?1.
2.
3.
4.
– Be aware– Apply procedures– Proper accounting and F/S disclosures
Additional procedures:– review minutes– conflict of interest statement– filings
Auditor must:
Client Representation Letter
Objective:– confirm oral representations
– document continuing appropriateness of these representations
– reduce misunderstanding
– F/S responsibility of management
Dated– date of the auditor’s report
1. Acknowledgement of management's responsibility
2. Completeness and availability of data
3. Absence of unrecorded T/As , error, and fraud
4. Compliance with law
5. Existence of related party T/As and contingencies
6. Information concerning subsequent events
7. Management’s plans or intentions
Content of the letter
Overall Analytical Review
Applied to final draft of F/S
– compare F/S subtotals and total with prior year
– calculate relevant ratios
– non-financial data comparison
– common size statements
General Review of Statement of Cash Flow
1. Verify the accuracy of the statement by recalculation.
2. Ascertain that the statement format is the most informative in the circumstances.
3. Ascertain that the statement discloses all important aspects of the company’s operating, financing, and investing activities.
4. Determine that the statement discloses the important sources and uses of cash.
Audit Program WP Ref. Done by Date
Auditor must express an opinion on this F/S
Audit Program
5. Ascertain that the format correctly and prominently shows cash provided from or used by operations and cash provided from or used by extraordinary items.
6. Verify that the statement is based on the balances shown in the audited financial statements at the beginning and end of the period covered by the audit.
7. Establish that the statement of cash flow is presented for each period for which the income statement is presented.
8. Trace, match, or agree statement amounts to like amounts in other financial statements and/or in the working papers.
WP Ref. Done by Date
Final Assessment of Materiality and Audit Risk
Two steps• aggregate errors found during examination
• determine affect on B/S and I/S
Components • uncorrected errors
• projected errors from audit sampling
• estimated errors form other procedures
What is the total of these called?
Determining aggregate errors
ABC Corp.Over/Under
December 31, 200X
Description Current Non-Current Current Non-Current Shareholder EquityASSETS LIABILITIES
Prepared by: D.F.Date:2/12/0YReviewed by: T.L.Date:2/17/0Y
S 1
Uncorrected Known Errors1590 Acc. Depreciation4590 Depn. Expense2995 Income Tax Payable
Overstatement of Depn. Expense D 1
3,500
(1,750)(3,500) 1,750
Uncorrected Projected Errors4200 COGS1200 Inventory2995 Income Tax Payable
Overstatement of Ending Inventory projected from a statistical sample C 1
(8,000)4,000
8,000
(4,000)
Other Estimated Errors 0 0 0 0 0
Aggregate likely error 2% 5% 1% 0% 4%
Final Trial Balance 400,000 735,000 225,000 375,000 535,000
Aggregate likely error (8,000) 3,500 2,250 0 2,250
immaterial
The Opinion on the Financial Statements
Each staff auditor summarizes their own section
Reviewed by audit senior and manager
Who has ultimate responsibility?
Audit meeting with client
Review of Working Papers First level review
Manager review
Partner-in-charge review» work done accurate and thorough» judgements exercised were reasonable» audit completed according to engagement letter» significant questions resolved» working papers support opinion» GAAS have been met
Technical Review of Financial Statements
Publicly held companies
Partner not a member of the audit team
Checklist
Communication of Material Weaknesses
Material weaknesses in internal control» what part of the audit does this result from?
Orally or in writing?
How are such weaknesses communicated?
Management Letter Recommendations for improving the efficiency and
effectiveness of matters observed in the audit
What provides the documentation for the components of the letter?
Includes comments on:» internal control weaknesses» AIS and EDP» management of resources» tax-related matters
I.M. Capable & Co.
Chartered Accountants
Toronto, Ontario
Ms. T.P. Black March 31,200Y
President, ABC Inc.
825 Willowbank Ave.
Toronto, Ontario
Dear Ms. Black:
Our examination of the financial statements of ABC Inc. for the year ended December 31, 200X has disclosed certain opportunities for improvements in your organization and operations. Items that we believe should be brought to your attention are set forth below.
Internal Accounting Control
One individual is both the cashier and custodian of marketable securities. We believe these duties should be segregated between two employees in order to minimize the possibility of unauthorized purchases and sales of marketable securities.
Data Processing
Because of the size of the Company and the widespread geographic location of its operations, we believe you should begin to develop a long-range data processing plan. Without such a plan the Company might find itself in the position of utilizing several service bureaus, developing non-coordinated procedures, or possibly acquiring small pieces of equipment at outlying locations that are not compatible.
Insurance Coverage
The Company presently carries life insurance coverage on the President. We recommend that life insurance coverage be considered for other executives vital to the Company's continued success.
This letter is issued solely for the information of the Company’s management; it should not be presented or quoted to anyone outside the Company. We would be pleased to discuss the matters reported or to answer any questions you may have at your convenience.
Yours very truly,
I.M. Capable
I.M. Capable & Co.
Chartered Accountants
Post-Audit Responsibility
Following the completion of fieldwork
1. Subsequent Events
– between end of field work and issuance of audit report
– CICA 6500, requires audit tests for the event to be extended
Dual Dating» ……December 31, 200X, except for the information
in Note A for which the date is February 6, 200Y.
» In scope and opinion paragraph
Redating» redating the entire report extends the auditor’s
overall responsibility beyond completion of fieldwork to the subsequent event
If client has correctly accounted for it» what does this mean?
» how does this affect the F/S?
CICA 5405» if material, users who rely on the F/S must be informed
Management may decide to» notify users
» issued revised F/S
» advise appropriate agencies
Issuance of a new audit report
2. Subsequent Discovery of Facts» audited F/S already issued
» no audit responsibility
On discovery auditor should:» assess importance of the procedure re the opinion
expressed
» review working papers
If the opinion cannot be supported by the omitted procedure
» what should auditor do?
3. Discovery of Omitted Procedures» after the date of the audit report
» a procedure has been omitted from the examination