Lecture 10 Audit finalisation

8/10/2019 Lecture 10 Audit finalisation

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Completing and

Reporting the

Audit

Lecture 10

These slides are based on the resources provided with Arens, Elder, Shailer, Fiedler and Beasley,

(2010). "Essentials of Auditing, Assurance Services and Ethics in Australia", Pearson, Frenchs

Forest


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Learning objectives

1 Design and perform audit tests related to

presentation and disclosure audit objectives.

2 Conduct a review for contingent liabilities and

commitments.

3 Obtain and evaluate letters from clients lawyers.

4 Conduct a post-balance date review for subsequent

events.


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Learning objectives (Contd)

5 Design and perform the final steps in theevidence-accumulation segment of the audit.

6 Integrate the audit evidence gathered, andevaluate the overall audit results.

7 Communicate effectively with the auditcommittee and management.

8 Identify the auditors responsibilities when facts

affecting the audit report are discovered after itsissuance.


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Different audit opinions from

Chapter 2 An unmodified audit report contains an unqualifiedor

clean opinion.

All other reports are modified opinions.

A report can be an unqualified modified report when anemphasis of matteris added.

An emphasis of matter is used so that the reader can payappropriate attention to the issue raised, but does notchange the auditors opinion


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Different audit opinions (Contd)

Other modified reports are qualified (ASA 705). Aqualified opinion is given when there are reservationsabout the truth and fairness of the financialstatements.

Can include a qualified or except for opinion. This iswhen issue(s) are material but not pervasive.

Adverse opinionwould arise when financial report ismisstated and is material and pervasive.

Disclaimer of opinion would arise when there is aninability to obtain sufficient appropriate auditevidence and is material and pervasive.


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Summary of the audit: phase IV


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Additional presentation and disclosure

tests Examples of substantive procedures:

Review debt contracts to determine that accountsreceivable are pledged as collateral

Use a disclosure checklist to determine if thefinancial statements include all required disclosures

Review financial statements to determine if assetsare properly classified between current and non-

current categories Reconcile amounts included in the long-term debt

footnotes to information in the auditors workingpapers


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Reviewing for contingent liabilities

and commitments Contingent liability:

A potential future obligation to an outside party for an

unknown amount resulting from activities that have

already taken place but are conditional on some futureevent

Examples of considerable concern to the auditor:

Pending legal action

Income tax disputes Product warranties

Notes receivable discounted

Guarantees of obligations of others

Unused balances in letters of credit


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Reviewing for contingent liabilities and

commitments (Contd)

Commitments, e.g.:

To purchase raw materials; or

To lease facilities at a certain price

Agreements to sell merchandise at a fixed price

Procedures for finding contingencies, e.g.:

Inquire of management

Review ATO correspondence

Review minutes of meetings

Analyse legal expense


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Inquiries regarding litigation and claims

Lawyers representation letter:

Initiated by auditor

Prepared and sent by management

Sent direct to auditor

Some solicitors may be reluctant:

Lack of knowledge about matters

Refusal to disclose due to confidentiality


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Reviewing for subsequent events

Auditors responsibility for reviewing forsubsequent events is normally limited to the

period:Beginning with the balance sheet date; and

Ending with the date of the auditors report


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Types of subsequent events

Those events that have a direct effect on the financial

statements and require adjustment:

Provide additional information to management and

auditors to the valuation of account balances Require an adjustment of account balances if

amounts are material, e.g.:

Bankruptcy of a major debtor

Settlement of litigation at a different amount

Disposal of equipment below current book value


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Types of subsequent events (Contd)

Those events that have no direct effect on the financialstatements but for which disclosure is advisable: Provide evidence of conditions that didnt exist at

the date of the financial report but are so significant

that they require disclosure Ordinarily can be adequately disclosed in the notesto the financial report, e.g.: Decline in market value of securities Issuance of bonds or shares Decline in market value of inventory Uninsured loss of inventory from fire Merger or acquisition


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Audit tests for subsequent events

Inquiring of management

Corresponding with lawyers

Reviewing internal statements prepared subsequent

to the balance sheet date: Major changes in the business or environment

Reviewing records prepared subsequent to thebalance sheet date

Examining minutes issued subsequent to thebalance sheet date

Obtaining a letter of representation


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Final evidence accumulation

Performing final analytical procedures:

Final review for material misstatements

Evaluating going-concern assumption: Analytical procedures are important

Adverse opinion where highly improbable the

entity will continue as a going concern


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Final evidence accumulation (Contd)

Obtaining a management representation letter: To impress on management its responsibility

for the assertions in the financial report

To document the responses from managementto inquiries about various aspects of the audit

Reading other information accompanying thefinancial reports:

To ensure correspondence with information inthe financial statements


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Evaluating results

Sufficiency of evidence:

Reviewing the audit program

Evidence supports auditors opinion:

Summarising the misstatements uncovered

in the audit

Financial report disclosures:

Adequacy of financial statement disclosures


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Evaluating results (Contd)

Working paper review: To evaluate performance of inexperienced

personnel

To ensure the audit meets the public accounting

firms standard of performance

To counteract the bias that often enters into the

auditors judgement

Independent review: By a staff member with no experience on the

engagement


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Communicating with the audit

committee and management Communicate any irregularities:

Including fraud and other illegal acts

Communicate reportable internal controlstructure conditions

Communicate auditor independencerequirements


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Communicating with the audit

committee and management

(Contd)

Other communication with the audit committee, e.g.:

General approach and overall scope of the audit

Selection of, and changes to, significant accountingpolicies

Material audit adjustments

Management letter: To inform client management of the auditors

recommendations for improving the clientsbusiness


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Subsequent discovery of facts

After the auditor issues the audit report andcompletes all communication withmanagement and the audit committee:

The audit is finished

If the auditor becomes aware after the auditedfinancial statements have been issued thatsome information included in the statements ismaterially misleading:

The auditor is obliged to inform statementusers and may decide to re-issue the auditopinion unless the report is changed

Documents

Lecture 10 Audit finalisation