ACC415

Advanced Auditing

Fall 2023

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
 Chapter 17
Completing the
Audit
Engagement

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Completing the Audit Engagement
Once the financial statement accounts and related controls in each
of the various business processes have been audited, the auditor
summarizes and evaluates the evidence.

Before determining the appropriate audit report, the auditor

evaluates the results of audit tests and considers a number of
possible additional issues that could impact the entity’s internal
control over financial reporting and its financial statements.

From this chapter we will discusses the Review for contingent

liabilities in which the auditor has responsibilities in completing
the audit
 LO# 1

Review for Contingent Liabilities

A contingent liability is an existing condition or set
of circumstances involving uncertainty as to
possible loss that will ultimately be resolved when
some future event occurs or fails to occur.
FASB ASC Topic 450, “Contingencies,” states that
when a contingent liability exists, the likelihood
Examples
that the future event will result in a loss is to be
• pending or threatened litigation assessed using three categories:
• actual or possible claims and
assessments Probable: The future event is likely to occur.
• income tax disputes
Reasonably Possible: The chances of the
• product warranties or defects
future event occurring is more than remote
• guarantees of obligations to but less than likely.
others
• agreements to repurchase Remote: The chance of the future event
receivables that have been sold occurring is slight.
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 Completing the Audit Engagement
If the event is probable and the amount of the loss can be reasonably
estimated, the loss associated with the contingency is accrued by a charge to
income. When the outcome of the event is judged to be reasonably possible or
the amount cannot be estimated, a disclosure of the contingency is made in the
footnotes to the financial statements. In general, loss contingencies that are
judged to be remote are neither accrued in the financial statements nor
disclosed in the footnotes.
 LO# 2

Audit Procedures for Identifying

Contingent Liabilities
Read minutes of meetings
of the board of directors,
committees of the board,
and stockholders.
Review contracts, loan
agreements, leases, and
correspondence from
government agencies.

Review tax returns, IRS

reports, and schedules
supporting the entity’s
income tax liability.

Confirm or otherwise Inspect other documents for

document guarantees and possible guarantees or
letters of credit. other similar arrangements.

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 LO# 2

Audit Procedures for Identifying

Contingent Liabilities
Specific Audit Procedures Conducted Near
Completion of Audit
Inquire and discuss with
Examine documents in the entity’s
management about its policies and
records such as correspondence
procedures for identifying,
and invoices from attorneys for
evaluating, and accounting for
pending or threatened lawsuits.
contingent liabilities.

Obtain a written representation

from management that all litigation,
Obtain a legal letter that describes
asserted and unasserted claims,
and evaluates any litigation, claims,
and assessments have been
or assessments.
disclosed in accordance with FASB
ASC Topic 450.
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 LO# 3

Legal Letters
A letter of audit inquiry (legal letter) sent to the entity’s
attorneys is the primary means of obtaining or
corroborating information about litigation, claims, and
assessments.
Auditors typically analyze legal expense for the entire period and then
ask management to send a letter to in-house attorneys (often referred
to as general counsel) and to external attorneys who have been
consulted by management.

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 LO# 3

Legal Letter
Management should request that the attorneys provide information
about a number of items, including the following:
∙ A list of any pending or threatened litigation or any probable but as
yet unasserted claims
∙ A request that the attorney describe and evaluate each pending or
threatened litigation; (case progress, plans to take, unfavorable
outcome, and potential loss)
∙ A request that the attorney identify any pending or threatened
litigation or claims not included in management’s list or a
statement that the list is complete.
∙ A request that the attorney comment on unasserted claims where
his or her views differ from management’s evaluation
∙ A request that the attorney indicate if his or her response is
limited in any way and the reasons for such limitations.

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 LO# 3

Example of Legal Letter

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 LO# 8

Final Evidential
Evaluation Processes
Perform final analytical Obtain a management Review working
procedures. representation letter. papers.

Evaluate financial Obtain an independent

Final evaluation of
statement presentation review of the
audit results.
and disclosure. engagement.

Evaluate entity’s ability

to continue as a going
concern.

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 Final Evidential
Evaluation Processes
Obtain a management representation letter.

-During the course of a financial statement audit or an integrated audit,

management makes a number of representations in response to
auditor inquiries.
-Auditing standards require that the auditor obtain a representation
letter from management. The purpose of this letter is to document, in
writing, significant oral representations made to the auditor by
management. The representation letter also reduces the possibility of
misunderstanding between management and the auditor.
Representation letter

Page 574 and 575

 Representation letter
Note the types of important information management is asked to
represent to the auditor.
Note also that the representation letter is addressed to the auditor
and is typically signed by the chief executive officer (CEO) and the
chief financial officer (CFO).
It generally bears the same date as the auditor’s report.

Management’s refusal to provide a representation letter would result

in a scope limitation that is sufficient to preclude (prevent) an
unqualified opinion and, in fact, is ordinarily sufficient to cause an
auditor to disclaim an opinion or withdraw from the engagement.
 Representation letter
For public companies, some of these management representations
are required to be made public. The Sarbanes-Oxley Act of 2002,
Section 302, “Corporate Responsibility for Financial Reports,”
requires the CEO and CFO of publicly traded companies to certify
the appropriateness of their financial statements and related
disclosures and to certify that they fairly present, in all material
respects, the operations and financial condition of the company.

These certifications required under Section 302 are included with

each quarterly and annual filing of financial statements with the
SEC.
Representation letter
 Representation letter
a. In an audit of financial statements, in what circumstances is
the auditor required to obtain a management representation
letter? What are the purposes of obtaining the letter?
 Representation letter
b. To whom should the representation letter be addressed, and
when should it be dated? Who should sign the letter, and what
would be the effect of his or her refusal to sign the letter?
 Representation letter
c. In what respects may an auditor’s other responsibilities be
relieved by obtaining a management representation letter?
End of Lecture 9

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