AUDIT COMPLETION

PROCEDURES IN THE AUDIT COMPLETION

STAGE
• Performing a review of subsequent events
• Review of the adequacy of disclosure in the financial statements such
as reviewing related party transactions, litigations and claims.
• Obtaining management representation letter
• Performing wrap-up procedures such as performing analytical
procedures in the overall review at/near the end of the audit and
assessing going concern assumption.
PERFORMING A RE VIEW OF SUBSEQUENT
EVENTS
• Subsequent events/post-balance sheet events/transactions are events
that occur between the end of the period (the date of the financial
statements or the balance sheet date) and the date of the auditor’s
report that may have an impact on the financial statement and the
auditor’s report.
SUBSEQUENT EVENTS: TYPES

• Those requiring adjustment/adjusting events/Type 1 events.: those that provide evidence of

conditions that existed at the date of the financial statements.
• Settlement of litigation in excess of amount recorded.
• Loss on uncollectible accounts resulting from customer’s continued deteriorating financial condition
leading to bankruptcy.

• Those requiring disclosure/non-adjusting events/Type II events: those events that are indicative of
conditions that arose after the date of the financial statements.
• Issuance of bonds/stocks after the balance sheet date
• Major purchase of a business
• Loss on inventory due to fire or other calamities that occurred in the subsequent period.
• Loss on uncollectible receivable because of a major catastrophe suffered by the customer after the
balance sheet date.
SUBSEQUENT EVENTS: AUDITOR’S
RESPONSIBILITY
• Performing audit procedures designed to identify subsequent events.
• To consider/evaluate the effect of subsequent events (whether such
events are properly accounted for and adequately disclosed) on the
financial statements and on the auditor’s report.
SUBSEQUENT EVENTS: AUDITOR’S
RESPONSIBILITY
• Performing audit procedures designed to identify subsequent events:
• Reviewing procedures the management has established to ensure that subsequent events are
identified.
• Inquiring of management as to whether any subsequent events have occurred which might affect
the financial statements.
• Inquiring of the entity’s legal counsel concerning litigation claims and assessments.
• Reading minutes of the meetings (of shareholders, those charged with governance, audit and
executive committees) including those held after period end and inquiring about matters
discussed at meetings for which minutes are not yet available.
• Reading the entity’s latest available interim financial statements as well as budgets and cash flow
forecasts and other related management reports; compare them with the financial statements
under audit.
SUBSEQUENT EVENTS: AUDITOR’S
RESPONSIBILITY
• When subsequent events that materially affect the financial statements
are identified, the auditor should consider whether such events are
properly accounted for and adequately disclosed in the financial
statements.
• The auditor will provide either a qualified or adverse opinion if the
client fails to make a suitable adjustments to the financial statements
where the auditor feels they need to be revised.
SUBSEQUENT EVENTS

• The auditor’s report should be dated as of the completion of the essential audit
procedures which is the last date of fieldwork. The date of auditor’s report is
significant since it indicates when the auditor’s responsibility for subsequent events
ends. The auditor is not responsible for performing procedures to identify occurrences
that occur after the date of the auditor’s report.
• During this period, management is responsible for informing the auditor of any
occurrences that may have an impact on the financial accounts.
• If the auditor learns of an event that occurred after the date of the report but before
the financial statements were issued, the auditor should investigate whether the
event was correctly accounted for and declared in the notes to financial statements.
SUBSEQUENT EVENTS

• If a major subsequent event necessitating a financial statement adjustment happens after the date of
the auditor’s report but before the financial statements are issued, the financial statements should be
amended and the auditor’s report should bear the original report date.
• If a subsequent event requiring disclosure occurs after the date of the auditor’s report but before the
financial statements are issued, the auditor should evaluate the appropriateness of disclosure and the
date the auditor’s report either:
• As of the date of the subsequent event: under this option, the auditor’s responsibility for the subsequent
events is extended up to the subsequent event date. Thus, the auditor will also need to extend his subsequent
review procedures to include other events that occurred between the original report date and the revised audit
report date.
• Dual date the report: under this option, the auditor’s responsibility for subsequent events occurring between
the original report date and the revised audit report date is limited only to the specific event referred to in the
notes to financial statements.
REVIEW OF THE ADEQUACY OF DISCLOSURES IN THE FINANCIAL
STATEMENTS

• Reviewing related party transactions

• Reviewing litigations, claims and assessments
REVIEW OF THE ADEQUACY OF DISCLOSURES IN THE FINANCIAL
STATEMENTS: REVIEW OF RELATED PARTY TRANSACTIONS

• Auditor’s responsibility
• Review related party transactions to ensure that they have been properly
identified, recorded and disclosed in the financial statements.
• Obtain a written representation from management concerning
completeness of information on identification of related parties and
adequacy of disclosure in the financial statements.
REVIEW OF THE ADEQUACY OF DISCLOSURES IN THE FINANCIAL
STATEMENTS: REVIEW OF RELATED PARTY TRANSACTIONS

• Effect in auditor’s report under unfavorable audit circumstances

Audit Circumstance
Inability to obtain sufficient
appropriate audit evidence
concerning related parties and
transactions with such parties.
Inadequate disclosure of related
party transactions and/or related
party transactions are not
properly accounted for
Effect in Auditor’s Report
This would be tantamount to a
scope limitation and would
ordinarily lead to a qualified
opinion or a disclaimer of
opinion.
Qualified or adverse opinion
REVIEW OF THE ADEQUACY OF DISCLOSURES IN THE FINANCIAL
STATEMENTS: LITIGATIONS, CLAIMS AND ASSESSMENTS

• Audit procedures regarding litigations, claims, and assessments

• Identify existence of any litigation and claims.
• Communicate directly with the entity’s lawyers.
REVIEW OF THE ADEQUACY OF DISCLOSURES IN THE FINANCIAL
STATEMENTS: LITIGATIONS, CLAIMS AND ASSESSMENTS

• Identify existence of any litigations, claims and assessments

• Make appropriate inquiries of management including obtaining
representations.
• Review minutes of those charged with governance and correspondence
with the entity’s legal counsel.
• Examine legal expense accounts
• Use any information obtained regarding the entity’s business including
information obtained from discussions with any in-house legal department.
REVIEW OF THE ADEQUACY OF DISCLOSURES IN THE FINANCIAL
STATEMENTS: LITIGATIONS, CLAIMS AND ASSESSMENTS

• Communicate directly with the entity’s lawyers

• The auditor should seek direct communication with the entity’s lawyers when litigations, claims
and assessments have been identified or when the auditor believes they may exist.
• The inquiry letter to be sent to the client’s attorney’s would ordinarily specify the following:
• A list of litigation and claims
• Management’s assessment of the outcome of the litigation or claim and its estimate of the financial
implications, including costs involved
• 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.
• The letter, which should be prepared by management and sent by the auditor, should request
the lawyer to communicate directly with the auditor.
REVIEW OF THE ADEQUACY OF DISCLOSURES IN THE FINANCIAL
STATEMENTS: LITIGATIONS, CLAIMS AND ASSESSMENTS

• If management refuses to give the auditor permission to communicate

with the entity’s legal counsel or the entity’s legal counsel refuses to
respond in an appropriate manner and the auditor is unable to obtain
sufficient appropriate audit evidence by applying alternative audit
procedures, this would be tantamount to a scope limitation and should
ordinarily lead to a qualified opinion or a disclaimer of opinion.
OBTAINING MANAGEMENT REPRESENTATION
LETTER
Management letter
A letter to addressed to the
management regarding internal control
deficiencies/weaknesses
This is prepared and signed by the
auditor
Management representation letter
A letter prepared by the management
confirming its responsibility and its oral
representations.
Addressed to the auditor.
MANAGEMENT REPRESENTATION LETTER:
PURPOSES
• To emphasize to the management its ultimate responsibility for the financial statements.
• It confirms oral representations made by management during the audit.
• It reduces the possibility of misunderstanding between the auditor and the client concerning
the matters that are the subject of the representations.
• It documents management’s acceptance or acknowledgment of its responsibility for fair
presentation of the financial statements.
• It may provide corroborative evidence when audit evidence may not be reasonably
expected to be available.
• It complements, but do not replace or substitute, other audit procedures or other audit
evidence that the auditor could reasonably expect to be available.
MANAGEMENT REPRESENTATION LETTER:
FORMS
• Verbal (solicited or unsolicited)
• Written (explicitly such as contained in a management representation
letter or implicitly such as contained in financial information provided.
MANAGEMENT REPRESENTATION LETTER:
BASIC ELEMENTS
• Addressee: should be addressed to the auditor
• Contents: should contain the specified information
• Date: should be appropriately dated (ordinarily coincides with date of
the auditor’s report)
• Signatory: should be appropriately signed by the members of
management who have primary or overall responsibility for financial
and operating aspects of the entity.
MANAGEMENT REPRESENTATION LETTER:
BASIC CONTENTS
• That management acknowledges its responsibility for the fair
presentation of the financial statements in accordance with the
applicable financial reporting framework.
• That management has approved the financial statements.
• That management acknowledges its responsibility for the design and
implementation of internal control to prevent and detect error.
• That management believes the effects of those uncorrected financial
statement misstatements aggregated by the auditor during the audit
are immaterial, both individually and in the aggregate, to the financial
statements taken as a whole.
MANAGEMENT REPRESENTATION LETTER:
LIMITATIONS
• Not a substitute for performing other audit procedures or a means to
reduce the auditor’s responsibility.
• Not as the sole source of evidence on significant audit matters
• Cannot be substitute for other audit evidence that the auditor could
reasonably expect to be available.
MANAGEMENT REPRESENTATION LETTER

• Refusal by management to provide a written representation requested

by the auditor that the auditor deems necessary constitutes a scope
limitation and would result in a qualified opinion or a disclaimer of
opinion. In such circumstances, also consider any reliance placed on
other representations made by management during the audit and any
additional implications of the refusal on the auditor’s report.
PERFORMING WRAP-UP PROCEDURES

• Performing analytical procedures in the overall review at/near the end

of the audit
• Assessing going concern assumption
PERFORMING WRAP-UP PROCEDURES

• Performing analytical procedures in the overall review at/near the end

of the audit
• Known as the final analytical procedures. Take note that analytical
procedures are required to be performed during the planning and overall
review stages.
• To ensure that the auditor’s overall conclusion as to whether the financial
statements as a whole are consistent with the auditor’s understanding of
the entity.
• Auditor’s focus when performing analytical procedures in the overall review
stage is the identification of the unusual fluctuations or transactions or
unexpected account balances that were not previously identified and
assessing the validity of the conclusions reached and evaluating the overall
financial statements presentation.
PERFORMING WRAP-UP PROCEDURES

• Assessing going concern assumption: under the going concern

assumption an entity is ordinarily viewed as continuing in business for
the foreseeable future with neither the intention nor the necessity of
liquidation, ceasing trading or seeking protection from creditors
pursuant to laws and regulations.
• Management should assess the entity’s ability to continue as a going
concern, making a judgment about the future outcome of uncertain
events or conditions (for a period of one year from balance sheet date).
PERFORMING WRAP-UP PROCEDURES:
ASSESSING GOING CONCERN ASSUMPTION
• Auditor’s responsibility
• Overall evaluation of the appropriateness of management’s use of the going concern assumption in the preparation of
the financial statements.
• Identifying material uncertainties about the entity’s ability to continue as a going concern that need to be disclosed in
the financial statements.
• Whether such events or conditions are adequately disclosed in the financial statements.
• Consider report modification because of these events or conditions.
• If conditions or events such as those identified previously create a substantial doubt as to the ability of the entity to
continue as a going concern, the auditor should consider whether management has feasible plans (plans for and the
ability to implement alternative means of maintaining adequate cash flows).
• 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 concern problems.
PERFORMING WRAP-UP PROCEDURES:
ASSESSING GOING CONCERN ASSUMPTION
• Audit procedures to identify conditions and events that may cast doubt about an
entity’s ability to continue as a going concern:
• Analytical procedures
• Subsequent events review
• Review of compliance with debt and loan agreements
• Reading minutes of meetings.
• Inquiry of legal counsel.
• Confirmation with related and third parties of arrangements for financial support.
PERFORMING WRAP-UP PROCEDURES:
ASSESSING GOING CONCERN ASSUMPTION
Audit Circumstance
Management refuses to make or extend
its evaluation of the company’s ability
to continue as a going concern for at
least a year after the reporting date.
Use of going concern assumption is
appropriate but a material uncertainty
exists.
Use of going concern assumption is
inappropriate
Multiple material uncertainties exist
Effect in Auditor’s Report
This would be tantamount to a scope
limitation and would ordinarily lead to a
qualified opinion or a disclaimer of
opinion.
If adequately disclosed: unqualified
opinion with emphasis of a matter
paragraph
If not adequately disclosed: qualified or
adverse opinion
Adverse opinion
Disclaimer of opinion
POST-AUDIT RESPONSIBILITIES

• Subsequent of discovery of facts

• In most cases, the auditor is not responsible to perform additional
procedures after the financial statements have been issued. However,
if the auditor discovers that the audit report provided in connection
with the financial statements may not be appropriate, he must take
steps to avoid future reliance on it. Discuss the situation with the
appropriate level of management and see if the financial statements
need to be revised and advise management to take the required
procedures to notify users of previously issued financial statements of
the situation.
POST-AUDIT RESPONSIBILITIES

• Subsequent discovery of facts

• If management makes the necessary adjustments and disclosures to the
financial statement users, the auditor should issue a new audit report that
includes an emphasis of a matter paragraph to highlight the reason for the
revision of the previously issued financial statements.
• If management refuses to modify the financial statements or inform the users
about the newly discovered information, the auditor should inform those
ultimately accountable for the entity’s direction about the management’s
refusal and his intention to prevent users from relying on the audit report.
POST-AUDIT RESPONSIBILITIES

• Subsequent discovery of omitted procedures: omitted audit procedures may be discovered (after the audit
report has been submitted) during a firm’s internal inspection program or during peer review.
• The auditor should assess the important of the omitted procedures to his ability to support the audit
opinion.
• 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.
• If the other hand, the omitted audit procedures impair the auditor’s ability to support the previously
issued opinion and there are people relying (or likely to rely) on the report, then the auditor should
promptly undertake to apply the omitted procedures or the corresponding alternative procedures.
• If, after applying the omitted procedures, the auditor determines that the financial statements are
materially misstated and that the auditor’s report is inappropriate, the auditor should discuss the matter
with the management and take steps to prevent future reliance on the report.