Completing The Audit: 2003 Pearson Education Canada Inc

CHAPTER 21
Completing the
Audit
Copyright 2003 Pearson Education Canada Inc. 21 - 1
Audit Completion Procedures
Search for unrecorded contingent liabilities.
What is a
contingent liability
and what are the
relevant related
GAAP
recommendations?

What is a a potential future

contingent obligation to an
liability and what outside party for an
are the relevant unknown amount
GAAP resulting from
recommenda- activities that have
tions? already taken place

likely and reasonably
What is a estimated - accrual
contingent likely and not estimable -
liability and what footnote disclosure
are the relevant
not determinable -
GAAP footnote disclosure
recommenda-
tions? unlikely - no financial
statement or disclosure
unless significant
adverse effect
What is a Footnote disclosure

contingent should describe the
liability and what contingency and the
are the related opinion of legal
GAAP counsel or manage-
recommenda- ment regarding the
tions? expected outcome.

- enquire of management

- review:
~ client copies of Revenue Canada
correspondence
~ minutes of board and shareholder
meetings
~ invoices from client lawyers
~ existing audit workpapers
~ contracts, agreements, etc.

- review:
~ client copies of Revenue Canada
correspondence
~ minutes of board and shareholder
meetings
~ invoices from client lawyers
~ existing audit work papers
~ contracts, agreements, etc.
- obtain letters of confirmation from all
client lawyers Joe Lawyer
Canada48
Jill Auditor, CA

Lawyer Enquiry
The auditor should ask the client to prepare

a letter (on client letterhead, signed by
client officer) asking the lawyer to respond
directly to the auditor concerning:

Lawyer Enquiry

directly to the client with a copy to the
auditor concerning:
- client’s description of the nature & current
status of all outstanding & possible claims
with which the lawyer has been involved

Lawyer Enquiry
- client’s evaluation of the amount &
likelihood of loss or gain for each listed
outstanding & possible claim

Lawyer Enquiry
- client’s evaluation of the amount &
likelihood of loss or gain for each listed
outstanding & possible claim
- any unlisted or potential items, or whether
the status of each claim or assessment
Lawyer Enquiry
If an lawyer refuses to respond

or refuses to provide adequate
information, the audit opinion
will be qualified or denied.

Review for Subsequent Events

Subsequent events are events or trans-
actions having a material effect on
the financial statements that
occur after the balance sheet
date but before field
work completion.
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period under audit subsequent events period
balance sheet field work report

date completion issue date
Types of Subsequent Events
1.events that provide additional evidence
about conditions that existed at the
balance sheet date (e.g., settlement of
liabilities, realiza-
tion of assets)
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1.events that provide additional evidence
about conditions that existed at the
balance sheet date (e.g., settlement of
liabilities, realiza-
tion of assets)
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Client financial statements for the period

under audit must be adjusted to reflect
this subsequent event information.
2. events that occur after the balance
sheet date and do not relate to condi-
tions that existed at year-end
(e.g., bond/stock issue, acquisition,
fire/flood loss, major customer/vendor
bankruptcy)
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2. events that occur after the balance
sheet date and do not relate to condi-
tions that existed at year-end
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date disclose completion issue date
These subsequent events must be disclosed

in the footnotes of the period under audit. The
auditor may also consider:
- pro forma financial statements
What
auditing
procedures
will identify
subsequent
events?

Subsequent Events Auditing Procedures
Near field work completion, auditors should:
- read post-balance sheet interim statements
and records
Ace Company
Financial
Statements
For the month of

January 2005

and records
- obtain a management representation letter
and discuss with management:
~ contingent liabilities
~ significant changes in owners’ equity
~ items accounted for on tentative data
~ unusual adjustments in subsequent period

and records
- read minutes of board and shareholder
meetings that have occurred since year-end

and records
- read minutes of board and shareholder
meetings that have occurred since year-end
- obtain letter from client’s lawyer
Joe Lawyer Canada 48
Jill Auditor, CA

12/31 2/14 2/28

What
responsibility
does the auditor
have for
subsequent
events that
occur between
field work
completion and
the issue date?

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- the auditor is not
responsible for dis- What
covering subsequent responsibility
does the auditor
events during this have for
period subsequent
events that
occur between
field work
completion and
the issue date?

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- the auditor is not
responsible for dis- What
covering subsequent responsibility
does the auditor
events during this have for
period subsequent
events that
- if, however, auditors occur between
learn of a subsequent field work
completion and
event during this period, the issue date?
they are responsible for
ensuring correcting
accounting for it Copyright 2003 Pearson Education Canada Inc. 21 - 27
If auditors learn of a subsequent event
during this period, they are responsible for
its disclosure.
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The auditors then have two options:

- expand all subsequent events tests to the
date of the event and change the report date
to the date of the event (e.g., 2/21)

If auditors learn of a subsequent event
during this period, they are responsible for
its disclosure.
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- restrict testing only to matters relating to the
new event and dual-date the report:
Taylor & Tower, CAs
February 14, 2005, except for Note 3, as to which
the date is February 21, 2005
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- restrict testing only to matters relating to the
new event and dual-date the report
What are the trade-offs

between these options?
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period subsequent events period
under audit
What
responsibility
does the
auditor
have for
subsequent
events that
occur after
the issue
date?

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under audit
What
responsibility
Auditors have no obligation to does the
perform additional procedures auditor
after the report date unless have for
subsequent
they become aware of facts events that
that existed at the report date. occur after
the issue
date?

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under audit
With regard to this information,

auditors should determine:
- did the information exist at What
responsibility
the report date? does the
auditor
have for
subsequent
events that
occur after
the issue
date?

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under audit

responsibility
- is the information reliable? auditor
have for
subsequent
events that
occur after
the issue
date?

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under audit

responsibility
- is the information reliable? auditor
- would the audit report have have for
subsequent
been different if the informa- events that
tion had been available prior occur after
to the report date? the issue
date?

12/31 2/14 2/28
under audit

responsibility
the report date?
does the
- is this information reliable? auditor
- would the audit report have have for
subsequent
been different if the informa-
events that
tion had been available prior occur after
to the report date? the issue
date?
- are persons still relying on
the audit report? Copyright 2003 Pearson Education Canada Inc. 21 - 36
12/31 2/14 2/28
under audit
With regard to this information, If the

auditors should determine: answer to
any of these
- did the information exist at questions is
the report date? no, the
- is this information reliable? auditors do
not need to
- would the audit report have take any
been different if the informa- action.
tion had been available prior
to the report date?
12/31 2/14 2/28
under audit
With regard to this information, If the

answer to
auditors should determine: all of these
- did the information exist at questions is
the report date? yes, the
auditors must
- is this information reliable? act to prevent
- would the audit report have future
been different if the informa- reliance on the
audit report.
tion had been available prior
to the report date?
How do auditors prevent future
reliance on a previously-issued
audit report?
Auditors’ Report
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audit report?
If the financial statement effect of the
subsequently-discovered information
can be determined promptly
the client must revise

and reissue the
financial statements
audit report?
If the financial statement effect of the
subsequently-discovered information
cannot be determined promptly
the client must notify

persons known to be (and
those likely to be) relying
on the financial statements
What should the auditor do if the client
refuses to reissue the statements or contact
those relying on the auditors’ report?
revise
and
reissue?
NO!

-first, notify the audit committee, or
other body, such as the board, of
management’s refusal

- first, notify the audit committee, etc. of
- then:
~ inform client management that the audit
report may no longer be associated with
the statements

- then:
the statements
~ consider obtaining legal advice

- then:
the statements
~ consider obtaining legal advice
~ consider the appropriateness of other
actions such as withdrawing

Client Representation Letter

The auditor must obtain a letter from the
client documenting the client’s represen-
tations during the engagement.
% $@!!!} Client
Representation
{ @@?”{ Letter
+&*##@ % $@!!!}
{ @@?”{
+&*##@


The primary purposes are to:

- confirm and document oral statements
- reduce auditor-client misunderstanding
- remind management of its responsibili-
ty for the financial statements
The primary purposes are to:

- confirm and document oral statements
- reduce auditor-client misunderstanding
- remind management of responsibilities
The letter should be signed by the client
CFO and CEO and dated with the field
work completion date. Copyright 2003 Pearson Education Canada Inc. 21 - 50
If the client refuses to

give the auditor a
representation letter,
the auditor must qualify
or deny the opinion.
probable Copyright 2003 Pearson Education Canada Inc. 21 - 51
Final Audit Steps
1. Incorporating all audit evidence,

materiality, and judgment, the
auditor draws overall conclusions
and prepares the audit report.

Final Audit Steps
2. The auditor prepares the
management letter.
? Copyright 2003 Pearson Education Canada Inc. 21 - 53

Final Audit Steps
management letter.
recommendations for
improving the client business

Final Audit Steps
management letter.
3. The auditor communicates the results
to the audit committee/management
and gives them the audit report and
management letter. Copyright 2003 Pearson Education Canada Inc. 21 - 55
GAAS suggests that auditors to
communicate (oral or written) to audit
committees, etc.:
- the auditor’s responsibilities under GAAS

GAAS suggests that auditors
committees, etc.:
- significant accounting policies selected, &
judgments used by management

committees, etc.:
- audit planning

committees, etc.:
- audit planning
- disagreements with management

committees, etc.:
- audit planning
- difficulties in
performing the
audit

committees, etc.:
- audit planning
- difficulties in
performing the
audit
- consultations with
other accountants
What are the required
communications with the
audit committee, etc.?

What are other suggested
communications with the
audit committee?
- significant deficiencies in
internal control
- misstatements that are other
than trivial
- illegal or possible illegal acts

Completing The Audit: 2003 Pearson Education Canada Inc

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CHAPTER 21

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What is a a potential future

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What is a Footnote disclosure

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The auditor should ask the client to prepare

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The auditor should ask the client to prepare

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If an lawyer refuses to respond

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balance sheet field work report

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balance sheet field work report

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balance sheet field work report

Client financial statements for the period

balance sheet field work report

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balance sheet field work report

These subsequent events must be disclosed

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For the month of

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balance sheet field work report

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balance sheet field work report

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balance sheet field work report

balance sheet field work report

The auditors then have two options:

Copyright 2003 Pearson Education Canada Inc. 21 - 28

balance sheet field work report

The auditors then have two options:

balance sheet field work report

The auditors then have two options:

What are the trade-offs

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With regard to this information,

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With regard to this information,

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With regard to this information,

Copyright 2003 Pearson Education Canada Inc. 21 - 35

With regard to this information,

With regard to this information, If the

With regard to this information, If the

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