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5 6262722265062834310 PDF
5 6262722265062834310 PDF
2. Review related party transactions (to ensure that they have been properly identified, recorded
and disclosed in the financial statements)
Audit procedures to determine completeness of related party infor mation prov ided by
those charged with governance and management:
1. Reviewing prior year’s working papers for names of know n related parties
2. Review the entity’s procedures for identification of related parties
3. Inquire as to the affiliation of those charged with governance and officers with other entities
4. Review shareholder recor ds to determine the names of principal shareholders or, if
appropriate, obtain a listing of principal shareholders from the share registrar
5. Review minutes of meetings of shareholders and those char ged with governance and other
relevant statutory recor ds such as the register of director’s interest
6. Inquire of other auditors currently involved in the audit, or predecessor auditors, as to their
knowledge of additional related par ties
7. Review the entity’s income tax returns and other information supplied to regulator y agencies
(such as SEC filings)
3. Ident ify and evaluate contingencies (arising from litigation, claims, and assessments) and
commit ments
Contingency – an existing condition/situation/circumstances involving a possible gain or loss to an
entity the ultimate outcome of which depends on the occurrence or non-occurrence of one or more
uncertain future events
Examples of loss contingencies:
1. Pending or threatened lawsuit/litigation
2. BIR assessment of prior years’ taxes
3. Guarantees of obligation of others
Commit ment – represent future cash flow requirements (such as a purchase commitment)
Management should adopt policies and procedures to identify, evaluate, and account for
litigations, claims, and assessments as a basis for the preparation of financial statements in
accordance with applicable financial reporting framewor k. Thus, the auditor’s primary source of
information about litigation, claims, and assessments is the client’s management.
b. Seek direct communication with the entity’s external legal counsel (through a letter of inquiry )
when litigation or claims have been identified or when the auditor believes they may exist
The auditor should corroborate the information furnished by client’s management by sending
a letter of inquiry to lawyers with w hom the client has consulted regar ding litigation,
claims, and assessments.
Direct communication with the entity’s legal counsel assists the auditor in obtaining sufficient
appropriate audit evidence as to whether potent ially material lit igat ion and claims
are known and management’s estimates of the financ ial implications, including
costs, are reasonable.
The letter of inquir y should be prepared by management and sent by the auditor, requesting
the entity’s external legal counsel to communicate directly with the auditor.
Management’s refusal to permit the a uditor to communicate with the entity’s lawyer or the
lawyer’s refusal to reply to the letter of inquiry w ould be considered a scope limitation that
would or dinarily lead to either qualified or disclaimer of opinion.
(1) Letter of specific inquiry – this letter of inquir y would ordinarily include:
(a) A list of litigation and claims
(b) Management’s assessment of the outcome of the litigation or claim and its estimate of the
financial implications, including costs involved; and
(c) A request that the entity’s legal counsel confirm the reasonableness of management’s
assessments and provide the auditor with further information if the list is considered by the
entity’s legal counsel to be incomplete or incorrect.
(2) Letter of general inquiry – requests the entity’s external legal counsel to inform the auditor
of:
(a) Any lit igat ion and claims that the counsel is aware of
(b) Assessment of the outcome of the litigation and claims, and
(c) An estimate of the financial implications, including costs
c. Discuss with the entity’s external legal counsel the likely outcome of litigation and claims where:
Ordinarily, such meetings with enti ty’s exter nal legal counsel require management’s
per mission and are held with a representative of management in attendance.
4. Review subsequent events that may require adjust ment of, or disclosure in the financial
statements
Subsequent events (post-balance sheet events ) refer to events occurring between
period end (balance sheet date) and the date of the auditor’s report that may affect the
financial statements and the auditor’s report.
Subsequent events may also refer to facts discovered after the date of the auditor’s repor t.
Subsequent period is the period between the date of the financial statements (balance
sheet date) and the date of the auditor's report. During this period, the auditor should
investigate subsequent events that would require adjustment or disclosure in the financial
statements because his responsibility to search for subsequent events is up to the date of the
auditor’s report.
5. Assess the appropr iateness of management’s use of the going concer n assumpt ion in the
preparation of the financial statements
Going concern assumption is a fundamental principle in the preparation of financial statements.
Going concern means an entity is ordinarily viewed as continuing in business for the
Audit procedures to ident ify conditions and events that may cast doubt about an ent ity’s
ability to cont inue as a going concern:
Analytical procedures
Subsequent events review
Review of compliance with debt and loan agreements
Reading minutes of meetings
Inquir y of legal counsel
Confirmation with related and third parties of arrangements for financial support
The auditor has no responsibility to predict future events or conditions that may cause an entity to
cease to continue as a going concern. Thus, auditors are not required to design audit procedures
solely to detect going concer n problems.
Events or conditions that may give rise to business risks, that individually or collectively, may cast
doubt about the entity’s ability to continue as a going concern:
There are factors that can mitigate the adverse effects of identified material going concern
uncertainty. The auditor should consider whether management has plans for and the ability to
implement alternat ive means of maintaining adequate cash flows to mitigate events and
conditions that may cast doubt about the entity’s ability to continue as a going concern.
Disclosure requirements if the financial statements are not prepared on a going concern
basis:
a. The fact that financial statements are not prepared on a going concer n basis
b. The basis on which the financial statements are prepared, and
c. The reasons why the entity is not regarded as a going concern
6. Obtain written representations from management (on matters material to the financial
statements)
Management representation letter is a letter from the management confirming its
responsibility and its oral representations.
The auditor’s responsibility is to obtain written representation, whereas the management’s
responsibility is to provide written representations (this responsibility is included in the engagement
letter that sets out the terms of an audit engagement).
The auditor’s responsibility on representations relating to matters that are material to the financial
statements:
a. Seek corroborative audit evidence from sources inside or outside the entity;
b. Evaluate whether the representations made by management appear reasonable and consistent
with other audit evidence obtained, including other representations; and
c. Consider whether the individuals making the representations can be expected to be well
informed on the particular matters.
This representation letter is provided in connection with your audit of the financial statements of
ABC Company for the year ended December 31, 19X1 for the purpose of expressing an opinion as to
whether the financial statements present fairly, in all material respects, the financial position of ABC
Company as of December 31, 19X1 and of the results of its operations and its cash flows for the
year then ended in accordance with (indicate applicable financial repor ting framework).
We acknowledge our responsibility for the fair presentat ion of the financial statements
in accordance with (indicate applicable financial reporting framewor k).
We confirm, to the best of our knowledge and belief, the following representations:
There have been no irregularities involving management or employees who have a significant
role in internal control or that could have a material effect on the financial statements.
We have made available to you all books of account and suppor ting documentation and all
minutes of meetings of shareholders and the board of directors (namely those held on March
15, 19X1 and September 30, 19X1, respectively).
We confirm the completeness of the information provided regarding the identification of related
parties.
If required, add “On behalf of the boar d of directors (or similar body).”
The financial statements are free of material misstatements, including omissions.
The Company has complied with all aspects of contractual agreements that could have a
material effect on the financial statements in the event of noncompliance.
There has been no noncompliance with requirements of regulatory authorities that could have a
material effect on the financial statements in the event of noncompliance.
The following have been properly recorded and, w hen appropriate, adequately disclosed in the
financial statements:
The identity of, and balances and transactions with, related par ties.
Losses arising from sale and purchase commitments.
Agreements and options to buy back assets previously sold.
Assets pledged as collateral.
We have no plans or intentions that may materially alter the carrying value or classification of
assets and liabilities reflected in the financial statements.
We have no plans to abandon lines of product or other plans or intentions that will result in any
excess or obsolete inventor y, and no inventory is stated at an amount in excess of net realizable
value.
The Company has satisfactory title to all assets and there are no liens or encumbra nces on the
company’s assets, except for those that are disclosed in Note X to the financial statements.
We have recor ded or disclosed, as appropriate, all liabilities, both actual and contingent, and
have disclosed in Note X to the financial statements all guarantees that we have given to third
parties.
Other than . . . described in Note X to the financial statements, there have been no events
subsequent to period end w hich require adjustment of or disclosure in the financial statements
or Notes thereto.
The . . . claim by XYZ Company has been settled for the total sum of XXX which has been
properly accrued in the financial statements. No other claims in connection with litigation have
been or are expected to be received.
There are no formal or informal compensating balance arrangements with any of our cash and
investment accounts. Except as disclosed in Note X to the financial statements, we have no
other line of credit arrangements.
We have properly recorded or disclosed in the financial statements the capital stock repurchase
options and agreements, and capital stock reserved for options, warrants, conversions and other
requirements.
Yours truly,
_____________________
(Senior Executive Officer)
_____________________
(Senior Financial Officer)
Analytical procedures involve analysis of significant ratios and trends including the resultant
investigation of fluctuations and relationships that are inconsistent with other relevant
information or expectation.
Analytical procedures are required to be performed during the planning and overall review
stages.
10. Obtain approval of the client regarding disclosures and adjust ments made to the financial
statements
12. Review of other infor mation or documents that contain the audited financial statements
and ascertain their consistency
13. Communicate with management and those charged with governance regarding the scope of
the audit and other matters of interest to the client
Reporting to audit committee
Report on internal control using a management letter
Such management letter contains:
a. Reportable conditions which refer to significant deficiencies in the design or operation of
the internal control structure that could adversely affect the financial statements
b. Recommendat ions for improvement in the existing internal control structure
Omitted audit procedures may be discovered (after the audit report has been submitted) during a
firm's internal inspection program or during peer review.
Auditor’s action:
a. The auditor should assess the impor tance of the omitted procedures to his ability to support the
audit opinion.
b. The auditor should determine whether other audit procedures that were applied tend to
compensate for the omitted audit procedures. If so, no further action is necessary.
c. If, on the other hand, the omitted audit pr ocedures impair the auditor's ability to support the
previously issued opinion, and there are people relying (or likely to rely) on the repor t, then the
auditor should promptly undertake to a pply the omitted procedures or the corresponding
alternative pr ocedures.
d. If, after applying the omitted procedures, the auditor determines that the financial statements are
materially misstated and that the auditor's repor t is inappropriate, the auditor should discuss the
matter with the management and take steps to prevent future reliance on the repor t.