COMPLETING

THE AUDIT
By: ATTY. PETER JAY S. GENISTON, CPA
 COMPLETING THE AUDIT

- procedures are usually performed by audit

managers or other senior members of the
audit team who have extensive audit
experience with the client because the
procedures involve many subjective
judgments by the auditor
 COMPLETING THE AUDIT

STANDARD AUDIT PROCEDURES performed to

WRAP-UP an AUDIT ENGAGEMENT:

SLOWR
❑ PERFORM SUBSEQUENT EVENTS REVIEW

❑ LITIGATIONS AND CLAIMS

❑ OBTAINING MANAGEMENT REPRESENTATION LETTER

❑ PERFORMING WRAP-UP PROCEDURES

❑ REVIEWING RELATED PARTY TRANSACTIONS

 COMPLETING THE AUDIT

PERFORM SUBSEQUENT EVENTS REVIEW

❑ SUBSEQUENT EVENTS – refer to events occurring between
period end (the date of the financial statements or the
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 report

❑ The period between the date of the financial statements

and the date of the auditor's report is called the
SUBSEQUENT PERIOD. During this period, the auditor has
an active responsibility to investigate certain subsequent
events.
 PERFORM SUBSEQUENT EVENTS REVIEW

TYPES OF SUBSEQUENT EVENTS:

1. THOSE REQUIRING ADJUSTMENT – those that provide

evidence of conditions that existed at the date of the
financial statements.
EXAMPLES:
a. Settlement of litigation in excess of amount recorded
b. Loss on uncollectible accounts resulting from customer’s
continued deteriorating financial condition leading to bankruptcy
 PERFORM SUBSEQUENT EVENTS REVIEW

TYPES OF SUBSEQUENT EVENTS:

2. THOSE REQUIRING DISCLOSURE – events that are

indicative of conditions that arose after the date of the
financial statements.
EXAMPLES:
a. Issuance of bonds / stocks after the balance sheet date
b. Major purchase of a business
c. Loss on inventory due to fire that occurred in the subsequent
period
d. Loss of plant due to flood
e. Loss on uncollectible receivable because of a major catastrophe
suffered by the customer after the balance sheet date
 PERFORM SUBSEQUENT EVENTS REVIEW

AUDITOR’S RESPONSIBILITY for

SUBSEQUENT EVENTS:
1. Perform audit procedures designed to identify subsequent
events
These procedures would include:
a. Reviewing procedures management has established to ensure that subsequent events are
identified.
b. Inquiring of management as to whether any subsequent events have occurred which might
affect the financial statements
c. Inquiring of the entity‘s legal counsel concerning litigation claims, and assessments
d. 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
e. 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.
f. Obtaining representation letter from management regarding whether any events occurred
during the subsequent period that require adjustments to or disclosure in the financial
statements.
 PERFORM SUBSEQUENT EVENTS REVIEW

AUDITOR’S RESPONSIBILITY for

SUBSEQUENT EVENTS:

2. Consider/evaluate the effect of subsequent events

❑ Whether such events are properly accounted;

❑ Whether such events are properly disclosed;

❑ Both in the financial statements and on the Auditor’s

Report.
 COMPLETING THE AUDIT

LITIGATIONS AND CLAIMS

1. Identify existence of any litigations and claims which may

result in a material misstatement of the FS.

These procedures would include:

a. Make appropriate inquiries of management including
obtaining representations.
b. Review minutes of those charged with governance and
correspondence with the entity’s legal counsel
c. Examine legal expense accounts; and
d. Use any information obtained regarding the entity’s business
including information obtained from discussions with any in-
house legal department.
 COMPLETING THE AUDIT

LITIGATIONS AND CLAIMS

2. Communicate directly with the entity’s lawyers.

The communication letter would ordinarily specify the following:
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.
❑ The letter, which should be prepared by Management and sent by the Auditor,
should request the lawyer to communicate directly with the auditor.
 COMPLETING THE AUDIT

OBTAINING MRL (MANAGEMENT

REPRESENTATION LETTER)
❑ AUDITOR’S RESPONSIBILITY – The auditor should obtain
written representations from Management.

❑ MANAGEMENT’S RESPONSIBILITY – Management has

responsibility to provide written representations (this
responsibility is included in the engagement letter that sets
out the terms of engagement).
 COMPLETING THE AUDIT

OBTAINING MRL (MANAGEMENT

REPRESENTATION LETTER)

MANAGEMENT
MANAGEMENT LETTER
REPRESENTATION LETTER
- is a letter to management - is a letter from the
regarding internal control management confirming its
deficiencies/weaknesses responsibility and its oral
representations.
 OBTAINING MRL

BASIC ELEMENTS OF MRL

❑ ADDRESSEE: Should be addressed to the Auditor

❑ CONTENTS: Should contained 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 the Management who have primary or overall
responsibility for financial and operating aspects of the
entity (e.g. Owner-manager; Chief/Senior Executive Officer;
Chief/Senior Financial Officer; Other members of
Management)
 OBTAINING MRL

BASIC CONTENTS OF MRL

1. That management acknowledges its responsibility for the fair

presentation of the financial statements in accordance with
the applicable financial reporting framework
2. That management has approved the financial statements
3. That management acknowledges its responsibility for the
design and implementation of internal control to prevent and
detect error
4. 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
 OBTAINING MRL

LIMITATIONS OF MANAGEMENT
REPRESENTATIONS:

❑ Although management representations are considered part

of evidential matter, they are:

1. Not a substitute for performing other audit

procedures or a means to reduce the auditor‘s
responsibility;
2. Not as the sole source of evidence on significant
audit matters
3. Cannot be substitute for other audit evidence that
the auditor could reasonably expect to be available
 OBTAINING MRL

AUDITOR’S RESPONSIBILITY ON REPRESENTATIONS

RELATING TO MATTERS THAT ARE MATERIAL TO THE FS:

1. Seek corroborative audit evidence from sources inside or

outside the entity;
2. Evaluate whether the representations made by management
appear reasonable and consistent with other audit evidence
obtained, including other representations; and
3. Consider whether the individuals making the representations
can be expected to be well informed on the particular
matters.
 OBTAINING MRL

EFFECT IF MANAGEMENT REFUSES TO PROVIDE NECESSARY

WRITTEN REPRESENTATIONS:

❑ Constitutes a scope limitation and would result in a qualified

opinion or a disclaimer of opinion. In such circumstances, also
consider:
1. Any reliance placed on other representations made by
management during the audit; and
2. Any additional implications of the refusal on the auditor‘s
report.
 COMPLETING THE AUDIT

PERFORMING WRAP-UP PROCEDURES

❑ PERFORMING ANALYTICAL PROCEDURES – in the overall

review at / near the end of the audit
➢ Purpose: 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.
➢ Focus when performing analytical procedures in the overall
review stage:
1. Identifying unusual fluctuations or transactions or unexpected account
balances that were not previously identified; and
2. Assessing the validity of the conclusions reached and evaluating the
overall financial statements presentation.
 COMPLETING THE AUDIT

PERFORMING WRAP-UP PROCEDURES

❑ ASSESSING GOING CONCERN ASSUMPTION

➢ Financial statements are ordinarily prepared based on going
concern basis, contrary to the quitting concern basis, in the
absence of information to the contrary. This means that the
assets and liabilities are recorded on the basis that the
entity will be able to realize its assets and discharge its
liabilities in the normal course of business.

➢ 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.
 COMPLETING THE AUDIT

PERFORMING WRAP-UP PROCEDURES

❑ ASSESSING GOING CONCERN ASSUMPTION

➢ MANAGEMENT’S RESPONSIBILITY:
1. 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);
2. To disclosure (based on the result of assessment)

➢ DISCLOSURE REQUIREMENTS – if FS not prepared on a going

concern basis
1. The fact that FS are not prepared on a going concern basis
2. The basis on which the FS are prepared, and
3. The reasons why the entity is not regarded as a going concern
 COMPLETING THE AUDIT

PERFORMING WRAP-UP PROCEDURES

❑ ASSESSING GOING CONCERN ASSUMPTION

➢ AUDITOR’S RESPONSIBILITY:
1. Overall evaluation of the appropriateness of management‘s use of the
going concern assumption in the preparation of the financial statements
2. Identifying material uncertainties about the entity‘s ability to continue as a
going concern that need to be disclosed in the financial statements
3. Whether such events or conditions are adequately disclosed in the
financial statements
4. Consider report modification because of these events or conditions
5. If conditions or events such as those identified previously create
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)
 COMPLETING THE AUDIT

PERFORMING WRAP-UP PROCEDURES

❑ ASSESSING GOING CONCERN ASSUMPTION
➢ EXAMPLES OF EVENTS/CONDITIONS THAT MAY SIGNIFY EXISTENCE OF
A MATERIAL GOING CONCERN UNCERTAINTY
Financial events and conditions:
▪ Net liability or net current liability position
▪ Maturing fixed-term borrowings without realistic prospects of renewal or repayment
▪ Indications of withdrawal of financial support by debtors and other creditors
▪ Negative operating cash flows
▪ Adverse key financial ratios
▪ Substantial operating losses
▪ Significant deterioration in value of assets used to generate cash flows
▪ Arrears or discontinuance of dividends
▪ Inability to pay creditors on due dates
▪ Inability to comply with the terms of loan agreements or other statutory requirements
▪ Change from credit to cash-on-delivery transactions with suppliers
▪ Inability to obtain financing for essential new product development or other essential
▪ investments
 COMPLETING THE AUDIT

PERFORMING WRAP-UP PROCEDURES

❑ ASSESSING GOING CONCERN ASSUMPTION
➢ EXAMPLES OF EVENTS/CONDITIONS THAT MAY SIGNIFY EXISTENCE OF
A MATERIAL GOING CONCERN UNCERTAINTY
Operating events and conditions:
▪ Loss of key management without replacement
▪ Loss of a major market, franchise, license, or principal supplier
▪ Labor difficulties or shortages of important supplies

Other events and conditions:

▪ Noncompliance with capital or statutory requirements
▪ Pending legal or regulatory proceedings against the entity that may, if successful,
result in claims that are unlikely to be satisfied
▪ Changes in legislation or government policy expected to adversely affect the entity
 COMPLETING THE AUDIT

PERFORMING WRAP-UP PROCEDURES

❑ ASSESSING GOING CONCERN ASSUMPTION
➢ FACTORS THAT CAN MITIGATE ADVERSE EFFECTS OF IDENTIFIED GOING
CONCERN UNCERTAINTY: The auditor should consider whether
management has plans for and the ability to implement alternative 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

EXAMPLES OF MITIGATING FACTORS:

▪ When there is a history of profitable operations and a ready access to financial
resources
▪ Management has plans and ability to maintain adequate cash flows by alternative
means
▪ Availability of alternative source of supply in case of loss of a principal supplier
 COMPLETING THE AUDIT

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
 COMPLETING THE AUDIT

REVIEWING RELATED PARTY TRANSACTIONS

❑ MANAGEMENT’S RESPONSIBILITY – Identification and

disclosure of: (a) related parties; and (b) related party
transactions

❑ AUDITOR’S RESPONSIBILITY –
1. Review related party transactions to ensure that they have
been properly identified, recorded and disclosed in the
financial statements;
2. Obtain a written representation from management
concerning: (a) Completeness of information on identification
of related parties; and (b) Adequacy of disclosure in the FS
 COMPLETING THE AUDIT

REVIEWING RELATED PARTY TRANSACTIONS

❑ REASONS FOR THE REVIEW – The Auditor should modify the

auditor’s report in case of:

1. Inability to obtain sufficient appropriate audit evidence

concerning related parties and transactions with such parties;
2. Inadequate disclosure in the FS