Auditing Theory (AT-11)

CKC- BSA 3

COMPLETING THE AUDIT

The procedures to wrap-up an audit engagement are:

1. Review for related party transactions
2. Review for subsequent events
3. Make inquiries of a client’s legal counsel
4. Search for unrecorded liabilities
5. Perform final review stage analytical procedures
6. Review adequacy of disclosures using a disclosure checklist that list all specific disclosures
required by GAAP and the SEC, if appropriate
7. Review of working papers
8. Form an opinion

RELATED PARTY TRANSACTIONS

Identifying transactions with related parties

The following procedures may identify material transactions with known related parties or indicate the
existence of previously unknown related parties:

1. Provide personnel performing all segments of the audit with the names of known related parties
2. Review the minutes of meetings of the board of directors and committees
3. Review filings with SEC and other regulatory agencies
4. Review conflict-of-interest statements obtained from the client’s management
5. Review business transacted with major customers, suppliers, borrowers, and lenders for
indications of undisclosed relationships
6. Consider whether unrecognized transactions are occurring, such as receiving or providing
accounting, management, or other services at no charge
7. Review accounting records for large, unusual, or nonrecurring transactions or balances,
especially those near the end of the period
8. Review invoices from law firms
9. Review confirmations of loan receivable and payable for guarantees.

Examining identified related party transaction

1. Obtain an understanding of the business purpose of the transaction
2. Examine invoices, executed copies of agreements, contracts, and other documents
3. Determine whether the transaction has been approved by the board of directors or other
officials
4. Test for reasonableness the compilation of amounts to be disclosed or considered for disclosure
5. Arrange for the audits of intercompany balances to be performed as of concurrent dates, even
the fiscal years differ, and for the examination of the specified, important, and representative
related party transactions by the auditor for each of the parties with appropriate exchange of
relevant information
6. Inspect or confirm and obtain satisfaction concerning the transferability and value of the
collateral

EVENTS AFTER THE BALANCE SHEET DATE (subsequent events)

(Based on PSA 560 – subsequent events)
1. Events after the balance sheet date are those events, both favorable and unfavorable, that
occur between the balance sheet date and the date when the financial statements are
authorized for issue
2. The following procedures are typically performed at or near the completion of the fieldwork to
detect subsequent events:
a. Read the latest available interim financial statements and compare them with the
financial statements being reported on
b. Read the available minutes of the meetings of stockholders, directors, and
appropriate committees
c. Assemble pertinent findings resulting from inquiries of legal counsel and other
auditing procedures for litigation, claims, and assessments
d. Obtain a letter of representation from management
 3. When the auditor becomes aware of events which materially affect the financial statements, the
auditor should consider whether such events are properly accounted for and adequately
disclosed in the financial statements

INQUIRIES OF CLIENT’S LEGAL COUNSEL

1. The auditor is required to communicate directly with a client’s attorney about liabilities arising
from litigations, claims, and assessments
2. A list of legal issues should be prepared by the client’s management, rather than the client’s
attorney. This information is sent by the auditor to the auditor to the attorney, requesting
information about:
a. Pending or threatened litigation, claims, and assessments
b. Unasserted claims and assessments
3. The client should request the attorney to furnish the following information for all pending or
threatened litigation, claims, and assessments, and to comment on differences between the
attorney’s and management’s views:
a. A description of the nature of the matter, progress to date, and action that client
intends to take
b. An evaluation of the likelihood of an unfavorable outcome and an estimate, if one
can be made, of the amount or range of potential loss
c. A statement that management’s list of pending or threatened claims is complete, or
identification of any omissions
4. The attorney’s refusal to reply to the audit inquiry is a SCOPE LIMITATION that may affect the
audit report
5. In the case of unasserted claims which the client has not disclosed, the lawyer is not required to
note them in his or her reply to the auditor. However, the lawyer is generally required to inform
the client of the omission and to consider withdrawing if the client fails to inform the auditor

MANAGEMENT REPRESENTATION LETTER

(BASED ON PSA 560 – MANAGEMENT REPRESENTATIONS)

1. The representation letter

a. Confirms the oral representations given by management to the auditor and reduces
the possibility of misunderstanding between the client and the auditor
b. Reminds management of its primary responsibility for the financial statements
c. Addressed to the auditor
d. Dated as of the audit report date
e. Signed by the CEO and the CFO
f. Not a substitute for the application of other necessary auditing procedures
2. If management refuses to provide a representation that the auditor considers necessary, this
constitutes a scope limitation and the auditor should express a qualified opinion or a disclaimer
of opinion
3. Written representations requested from management may be limited to matters that are
considered either individually or collectively material to the financial statements

EXAMPLE OF A MANAGEMENT REPRESENTATION LETTER

(ENTITY LETTERHEAD)

(TO AUDITOR) (DATE)

The representation letter is provided in connection with your audit of the financial statements of ABC Company for
the year ended December 31, 20X1 for the purpose of expressing an opinion as to whether the financial
statements present fairly, in all material aspects, the financial position of ABC Company as of December 31, 20X1
and of the results of its operations and its cash flows for the year time ended in accordance with (indicate relevant
financial reporting framework).

We acknowledge our responsibility for the fair presentation of the financial statements in accordance with
(indicate relevant financial reporting framework).

We confirm to the best of our knowledge and belief, the following representations:

Include here representations relevant to the entity. Such representations may include:

 There have been no irregularities involving management or employees who have a significant role in
the accounting and internal control systems or that could have a material effect on the financial
statements
 We have made available to you all the books of account and supporting documentation and all minutes
of meetings and shareholders and BOD (namely those held on (dates) respectively)
  We confirm the completeness of the information provided regarding the identification of
related parties
 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.
 We have no plans or intentions that may affect or alter the carrying value or classification of
asset and liabilities reflected in the financial statement
 (no plans regarding the inventory abandonment or no inventory were stated in an amount in
excess of net realizable value)
 Indicate that there are no events subsequent to period which require adjustments in the statements
 Indicate that the claim is settled in a specific amount and there are no other litigations are
expected to be received
 Indicate that there are no formal or informal compensating balance arrangements with any of the
cash, except those that are disclosed
 Indicate that you have recorded material regarding the capital per se

(Senior Executive Officer)

(Senior Financial Officer)

EVALUATION OF GOING CONCERN

STATUS (BASED ON PSA 570 – GOING
CONCERN)
1. The auditor should evaluate if the entity is going to continue as a going concern
2. The auditor should consider:
 The process followed
 Assumptions that are being based on
 Management’s plans for future action
3. When doubting events with regards to its “going concern assumption”, the auditor should:
 Review the plans of the management
 Gather sufficient evidence that indicates a company will not be able to carry
out the business anymore, consider the effect of any plans and other
mitigating factors
 Seek written representations from the management regarding its future plans
4. Events and conditions that may cast doubt about the going concern
assumption: FINANCIAL
 Net (current) liability position
 Fixed-term borrowings approaching maturity without realistic prospects of
renewal or repayment
 Financial debtors indications of withdrawal
 Negative operating cash flows
 Adverse key financial ratios
 Substantial operating loss or deterioration of assets
 Arrears of dividends
 Inability to pay creditors on time
  Inability to comply with loan terms and agreements
 Conversion of cash to credit when in delivery
 Inability to obtain financing for essential
investments OPERATING
 Loss of key management personnel without replacement
 Loss of major franchise, supplier etc.
 Labor and shortages of important
supplies OTHER
 Non compliance with capital or other statutory requirements
 Pending legal or regulatory proceedings against the entity
 Changes in the legislation or government policy that may affect the entity

WRITING A MANAGEMENT LETTER

1. Reasons:
a. To encourage a better relationship between the auditor and the management
b. To suggest additional tax and management services that the auditor can provide
2. This letter is OPTIONAL and it helps the client operate its business effectively
3. There is no standard format for writing this letter.