Auditing Theory
Completing the Audit & Post-Audit Responsibilities
Audit procedures must have a deadline to allow for
adequate review and evaluation of working papers
Considerations in completing the audit
1. Related Party Transactions
- Related parties pose uncertainties in the FS;
PSA 550 establishes standards
- Auditor shall perform modified, extended,
additional procedures in the presence of
indications of MM related to RPs
- Substance over legal form of the relationships is
considered
2. Subsequent Events Review
- PSA 560 – “Subsequent Events”
- Subsequent events
 Events occurring between period end
and date of auditor’s report
 Facts discovered after date of auditor’s
report
- Types of subsequent events that require
consideration by management and evaluation
by auditor:
1. Those that provide further evidence of
conditions that existed at period end
(Should be adjusted)
 Auditors should obtain sufficient
appropriate evidence in addition to
routine procedures applied to specific
transactions at period end
 Auditor is not expected to conduct a
continuing review of all matters with
satisfactory conclusions
2. Those that are indicative of conditions that
arose subsequent to period end (Should be
disclosed)
Facts discovered after date of auditor’s report and
before FS issuance
- Auditor has no responsibility to perform
procedures after date of report
- However, if fact is made known at date of
auditor’s report causing him to amend the
same, auditor shall:
 Discuss with mgmt
 Determine need for amendment of FS
 Inquire how mgmt intends to address
the matter
- If mgmt amends FS, auditor shall
 Carry out necessary procedures for the
amendment
 Extend procedures to date of new
auditor’s report
 Provide a new auditor’s report on the
amended FS (date shall not be earlier
than approval date of amended FS)
- If mgmt does NOT amend when auditor deems
it necessary to do so
 Qualified opinion
 Adverse opinion
- When auditor’s report has been released to the
entity
 FS should not be issued
- If FS is released
 Take action to prevent reliance on
auditor’s report (depending on legal
rights and obligations and the
recommendations of the auditor’s
lawyer)
Facts discovered after FS issuance
- Auditor has no obligation to make any inquiry
re: FS
- When auditor becomes aware of a fact w/c
existed at the date of auditor’s report known at
that date which caused him to modify the
report:
 Consider whether FS needs revision
- When management revises
 Carry out necessary procedures
 Review steps taken by management
 Ensure that anyone who received
previously issued FS is informed
 Issue new report based on revised FS
- New auditor’s report shall
 include emphasis of matter paragraph
(ref to note in FS with extensive
discussion of reason for revision)
 Not be dated earlier than date of
approval of revised FS
- If management does NOT revise FS
 Notify mgmt and TCWG that auditor will
seek to prevent future reliance on
auditor’s report
 If notification is ignored, auditor shall
take appropriate action to prevent
reliance on auditor’s report
1. Letter of Inquiry/Review for Contingent
Liabilities
- Review IA for contingent liabilities
- Disclose if possible
- Adjust if probable and able to estimate;
disclose if probable but unable to estimate
Auditor Inquiry Letter/ Lawyer’s Letter
- Sent by auditor to lawyer to corroborate info re:
litigation, claims, assessments
- Objective: facilitate auditor’s knowledge of
client’s contingencies
Pending litigation, claims, assessments
- Situations in which a claimant has stated that it
has suffered a loss and plans to seek
remuneration; claimant has filed a lawsuit
Unasserted claim
- Potential claim not yet made
Content of Lawyer’s Letter
1. Pending or threatened LCA
 List prepared by management (lawyer
may be alternatively requested to
prepare such list)
 Request for lawyer to furnish info:
 progress of the case
 actions the company plans to
take
 likelihood of unfavorable
outcome
 estimate of potential loss
2. Unasserted claims and assessments
 List prepared by management (probable
assertion) and if asserted, reasonable
possibility of unfavorable outcome
 Request for lawyer to comment if his
views differ
 Statement that lawyer has a
responsibility to inform the client of
matters that may call for FS disclosure
 Request for lawyer to confirm his
responsibility to inform client of such
matters
3. Other matters
 Request for lawyer to specifically
identify nature of and any reasons for
any limitation on his resnse
Lawyer may not disclose unasserted claim to
the auditor, but shall inform the client of
necessary disclosures.
If client fails to inform auditor about unasserted
claims, lawyer is required to resign.
Lawyer’s letter of resignation shall notify
auditor of possibility of inadequate disclosure.
4. Evaluation of Going Concern Assumption
- PSA 570
- Initially made during planning, but revised when
significant new info is obtained
- GC assessment is management’s responsibility
- Auditor is not required to design audit
procedures to identify events that point to
substantial doubt of continuing as a going
concern
- Auditor’s responsibility: consider
appropriateness of management’s use of the
going concern assumption
- Absence of reference re: GC uncertainty is not a
guarantee that entity will continue as a GC
- If management’s assessment of GC is less than 1
months from balance sheet date, ask
management to extend to 12 months
- Auditor should inquire management of its
knowledge of events/conditions beyond period
of assessment that may cast significant doubt
on entity’s ability to continue as a going concern
- When question arises re: GC assumption, some
procedures previously performed may be
significant or it may be necessary to perform
additional procedures
- When auditor concludes there is substantial
doubt, consider need for disclosure of principal
condition + explanatory paragraph to reflect
conclusion
- Going concern assumption appropriate but
material uncertainty exists
 Unqualified opinion, but
 Modify using emphasis of matter
paragraph highlighting the existence of
material uncertainty
E.g. “Without qualifying our opinion, we draw
attention to… These conditions indicate material
uncertainty…”
 For extreme situations involving
multiple material uncertainties:
disclaimer of opinion
 Inadequate disclosure/ departure from
financial reporting standards: qualified
(except for) / adverse opinion + specific
reference to fact that there is material
uncertainty
- Going concern assumption inappropriate
 Adverse opinion (if FS are prepped on a
going concern basis) regardless of
whether disclosure is made or not
  Entity’s management concluded that GC
assumption is not appropriate: FS
should be prepared on an alternative
authoritative basis
 Unqualified opinion
 (May require) Emphasis of
matter paragraph to draw
attention to that basis
- Management is unwilling to make/extend
assessment
 Modify opinion as a result of limitation
of scope of work
 It is not auditor’s responsibility to
rectify lack of analysis by management
- Significant delay in signature/approval of FS
 Consider reasons for delay
 If delay is related to GC assessment,
consider need to perform additional
procedures + effect on conclusion re:
material uncertainties
5. Management Representations
- PSA 580 – “Written Representations”
- Also a subsequent events procedure
- May be unsolicited or may be responses to
inquiries
- Ordinarily dated as same date as auditor’s
report
- Representations by management cannot be a
substitute for evidence that the auditor could
reasonably expect to be available
- If auditor is unable to obtain sufficient
appropriate evidence, this constitutes a
limitation in scope of audit (qualified/
disclaimer of opinion), even if representation is
received
- Failure to comply with auditor’s request for
written representations: qualified/ disclaimer
of opinion
- Forms of written representations
 Representation letter from mgmt.
 Letter from auditor outlining
understanding of management’s
representations, duly signed by mgmt.
 Relevant minutes of meetings of BOD
(or similar body) or a signed copy of the
FS
6. Analytical Procedures
- AP should be applied at or near the end of the
audit when forming an overall conclusion
regarding consistency of FS to auditor’s
knowledge of the business
- Assumption: relationships exist and will
continue to exist in the absence of known
conditions to the contrary
- For final objective look at the FS
- Unusual items: investigate, obtain adequate
explanation and appropriate corroborative
evidence
7. Evaluating Findings, Formulating an Opinion,
Drafting the Audit Report
- Make final assessment of materiality and audit
risk
- Working papers must be reviewed by senior or
audit manager
 Account-by-account basis
 All steps in audit program must be
signed off
 Review addresses broader issues
relating to scope of audit
 Additional review may be made: second
partner review/ cold review
- Integrate results to one conclusion
- Review adequacy of audit evidence
- Evaluate whether evidence supports auditor’s
opinion
- Communicate reportable conditions
Post-Audit Responsibilities
*Refer to PSA 560 “Subsequent Events” section of this reviewer
- Consideration for omitted procedures
 May be disclosed
 Assess importance of effect to
previously issued opinion if disclosed
 Omission impairs ability to support
previous opinion:
 Apply omitted procedure
 Apply alternative procedures
 Evidence obtained from performance of
omitted procedure supports: no further
responsibility for auditor
 Evidence affects previous report: follow
procedures to prevent further reliance
on report
 Auditor unable to apply omitted
procedure: Consult lawyer to
determine responsibilities to client,
regulating authorities, persons relying
on the report