Completing the Audit

By: Waynie Jane Osing

 WRAP – UP PROCEDURES

A. Identifying liability items not given appropriate accounting

treatment
• Search for unrecorded liabilities
• Perform other procedures, including inquiry of entity’s legal
counsel
B. Addressing required disclosures
• Perform review for related parties
• Review of entity’s ability to continue as a “going concern” entity
• Perform review for subsequent events that may affect the
financial statements
• Review of adequacy of disclosures using a disclose checklist that
all lists all specific disclosures required by PFRS/IFRS and the SEC,
if appropriate
 WRAP – UP PROCEDURES
C. Overall review of the audit engagement and formation of the
audit opinion
• Perform final review stage analytical procedures
• Review of working papers performed by managers, partner and
possibly a second partner review
• Evaluate audit findings
• Communicate with the audit committee
• Forming an audit opinion
D. Other wrap-up procedures
• Obtain management representation letter
• **Audit documentation
• **Communication with those charged with governance
 IMPORTANT NOTES
 These procedures may be performed as early as planning the audit, testing
controls, and/or substantive testing but should be extended up to completing the
audit phase.

 These procedures may be performed all throughout the audit and as timely as
practicable, but generally finalized or completed at the end of the audit
engagement ( see AUDIT DOCUMENTATION AND COMMUNICATIO for more
detailed discussion).
Related Parties (PSA 550)
1. In performing review for related parties, the auditor’s primary concerns are
whether the management had
a) Completely provided information regarding the identification of related parties; and
b) Adequately disclosed information regarding related parties in the financial statements.

2. Definition of terms
Related party – if one party has the ability to control the other party or exercise significant
influence over the other party in making financial and operating decisions.
Related party transactions – a transfer of resources/ obligations between related parties,
regardless of whether a price is charged.
Management and those charged with governance responsibility

3. Management - identification and disclosure of related parties and

transactions with such parties. To ensure that transactions with related
parties are appropriately identified in the accounting records and disclosed in
the financial statements

4. Those charged with governance – monitoring how management is

discharging its responsibility for such control. To enable them to
understand the nature and business rationale of the entity’s related party
relationship and transactions.
Auditor’s responsibility

5. Auditor – Obtain sufficient appropriate audit evidence regarding the

identification and disclosure by management of
a. Related parties
b. Effects of related party transaction that are material to the financial statement
Audit procedures
6. The auditor needs to have level of knowledge about entity’s business and
industry that will enable identification of the events, transactions and practices
that may have a material effect on the financial statements. The existence of
related parties and transactions between such parties are considered ordinary
features of business, the auditor needs to be aware of them because:
a. GAAP in the Philippines require disclosure in the financial statements of certain
related party relationships and transactions, such as those required by PAS 24
b. The existence of related parties or related party transactions may affect the financial
statements.
c. The source of audit evidence affects the auditor’s assessment of its reliability. A
greater degree of reliance may be placed on audit evidence that is obtained from or
created by unrelated third parties; and
d. A related party transaction may be motivated by other than ordinary business
consideration, for example profit sharing or even fraud.
Audit procedures
7. Procedures to check the completeness of client-provided information
regarding related parties include
a. Review prior year working papers for names of known related parties;
b. Review the entity’s procedures for identification of related parties;
c. Inquire as to the affiliation of directors and officers with other parties;
d. Review shareholder records to determine the names of principal shareholders or, if
appropriate, obtain a listing of principal shareholders from the share register;
e. Review minutes of the meetings of shareholders and the board of directors and other
relevant statutory records such as the register of directors’ interests;
f. Inquire of other auditors currently involved in the audit, or predecessor auditors, as to
their knowledge of additional related parties; and
g. Review the entity’s income tax returns and other information supplied to regulatory
agencies
Audit procedures
8. The auditor should consider the adequacy of control procedures over the
authorization and recording of related party transactions.

9. The auditor needs to be alert for transactions that appear unusual in the
circumstances and may indicate the existence of previously unidentified related
parties.
• Transactions that have abnormal terms of trade
• Transactions that lack an apparent logical business reason for their occurrence
• Transactions in which substance differs from form
• Transactions processed in an unusual manner
• High volume/ significant transaction with certain customers or suppliers as compared
with others.
• Unrecorded transactions
Audit procedures

10. The auditor carries out procedures which may identify the existence of
transactions with related parties
• Performing detailed tests of transactions and balances
• Reviewing minutes of meetings of shareholders and directors
• Reviewing accounting records for large/ unusual transactions or balances, paying
particular attention to transactions recognized at or near the end of reporting period
• Reviewing confirmations of loans receivable and payable and confirmations from banks.
It may indicate guarantor relationship and other related party transactions.
• Reviewing investment transactions (purchase or sale of an equity interest in a joint
venture or other entity.
Examining identified related party transactions

11. The auditor should obtain sufficient appropriate audit evidence as to

whether these transactions have been properly recorded and disclosed.

After identifying related party transactions, the auditor should become satisfied
about their purpose, nature, extent, and effect. The ff. should be considered:
a. Obtain understanding of the business purpose of the transaction
b. Examine invoices, executed copies of agreements, contracts and other documents
c. Determine whether the transaction has been approved by the BOD or other officials
d. Test for reasonableness of the amounts to be disclosed in the financial statements
Examining identified related party transactions

12. Given the nature of related party relationships, evidence of related party
transaction may be limited for example, regarding the existence of inventory
held by related party on consignment or an instruction from parent company
to a subsidiary to record a royalty expense. Because of the limited availability
of appropriate evidence about such transactions, the auditor would consider
performing procedures such as:
• Confirming the terms and amount of the transaction with the related party
• Inspecting evidence in possession of the related party.
• Confirming or discussing information with persons associated with the transactions
Management representations

13. The auditor should obtain a written representation letter from

management concerning:
a. Completeness of information provided regarding the identification of related parties ;
and
b. Adequacy of related party disclosure in the financial statements.

Audit conclusions and reporting

14. If auditor unable to obtain sufficient appropriate audit evidence concerning
related parties and transactions with such parties or concludes that their
disclosure in the financial statement is not adequate, the auditor should
modify the audit report appropriately.
 Going Concern (PAS 570)
1. 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 or
regulations.

2. When planning and performing audit procedures and

in evaluating the results thereof, the auditor should
consider the appropriateness of management’s
use of the going concern assumption in
preparation of the financial statements
Management’s responsibility

3. Management – make a specific assessment of

the entity’s ability to continue as a going
concern, and standards regarding matters to be
considered and disclosures to be made in
connection with going concern
Assessment of Going Concern Assumption
4. When there is a history of profitable operations and a ready
access to financial resources, management may make its
assessment without detailed analysis.

5. Management’s assessment involves making a judgment, at a

particular point in time, about the future outcome of events or
conditions which are inherently uncertain. The ff. factors are
relevant:
• In general terms, the degree of uncertainty associated with the
outcome of an event/ condition increases significantly the further
into the future a judgment is being made about the outcome of
an event or condition
• Any judgement about the future is based on information available
at the time at which judgment is made. Subsequent events can
contradict a judgment which was reasonable at the time it was
made.
• The size and complexity of the entity, the nature and
condition of its business and the degree to which it is affected
by external factors all affect the judgment regarding the
outcome of events or conditions.
Assessment of Going Concern Assumption
6. Example of events/conditions, which individually or
collectively, may cast significant doubt about the going
concern assumption are set out below.
a. Financial
 Net liability or net current liability position
 Indications of withdrawal of financial support by debtors and
other creditors
 Inability to comply with the terms of loan agreement
 Inability to pay creditors on due dates
b. Reporting
 Management intentions to liquidate the entity/ cease operations
 Loss of major market, key customer(s), franchise, license, or
principal supplier(s).
 Emergence of a highly successful competitor
c. Other
 Non-compliance with capital or other statutory requirements
 Changes in legislation or government policy expected to
adversely affect the entity
 Uninsured or underinsured catastrophes when they occur
Auditor’s responsibility

7. The auditor’s responsibilities include

a. To consider the appropriateness of
management’s use of the going concern
assumption in the preparation of the FS
b. To consider whether there are material
uncertainties about the entity’s ability to
continue as a going concern that need to be
disclosed in the FS
c. To evaluate management’s assessment of the
entity’s ability to continue as a going concern
d. To inquire of management as to its knowledge
of events or conditions beyond the period of
assessment used by management that may
cast significant doubt on the entity’s ability to
continue as going concern.
Auditor’s responsibility

8. If the management’s assessment covers less than

twelve months from the reporting date, the auditor
should ask management to extend its assessment
period to twelve months from the reporting
date.

9. To inquire of management as to its knowledge

of events or conditions beyond the period of
assessment used by management that may cast
significant doubt on the entity’s ability to
continue as going concern.
Additional audit procedures when event
or conditions are identified

10. When the events or conditions have been

identified, the auditor should:
a. Review management’s plan for future actions
based on its going concern assessment
b. Gather sufficient appropriate audit evidence to
confirm or dispel whether or not a material
uncertainty exists through carrying out
procedures considered necessary.
c. Seek written representation from management
regarding its plan for future action
Additional audit procedures when event
or conditions are identified

11. In reviewing management future plan, the auditor

should obtain sufficient appropriate audit evidence
regarding the feasibility and the outcome
(improvement in the situation) of these plans by
performing one combination of the ff. procedures:
• Analyzing and discussing cash flow, profit and other
relevant forecasts with management
• Analyzing and discussing the entity’s latest available
interim financial statements
• Reviewing the terms of debentures and loan agreements
and determining whether any have been breached
• Reading minutes of meetings of shareholders, BOD and
important committees for reference to financing
difficulties
 Audit conclusions and Reporting

12.The auditor should determine if, in the auditor’s

judgment, a material uncertainty exists related to events
or conditions that alone or in aggregate, may cast
significant effect on the entity’s ability to continue as
going concern.

13.Going concern assumption appropriate but a material

uncertainty exists

o if adequate disclosure is made in the FS, the auditor should express an

unqualified opinion but modify the auditor’s report by adding an
emphasis of matter paragraph.

o If adequate disclosure is not made in the financial statement, the

auditor should express a qualified or adverse opinion, as
appropriate.
 Audit conclusions and Reporting
14. Going concern assumption inappropriate
o If, in the auditor’s judgment, the entity will not be able to continue
as a going concern, the auditor should express an adverse opinion
if the financial statements have been prepared on a going concern
basis.

15. Management unwilling to make or extend its

assessment
o even if requested by the auditor, the auditor should consider the
need to modify the auditor’s report as a result of the limitation on the
scope of the auditor’s work. The auditor should express either
qualified or disclaimer of opinion.

16. In extreme cases, such as situations involving multiple

material uncertainties that are significant to the FS, the auditor
may consider it appropriate to express a disclaimer of opinion
instead of adding an emphasis of matter paragraph.
Significant delay in the signature of
approval of financial statements

17. When there is significant delay in the

signature/approval of the financial statements by
management after the balance sheet date, the
auditor considers the reason for the delay.

The auditor considers

a. The need to perform additional audit
procedures
b. The effect on the auditor’s conclusion regarding
the existence of a material uncertainty
Subsequent Events (PSA 560)

1. Auditor should consider the effect of subsequent events on the financial

statements and on the auditor’s report. These events could neither be:
a. Events that provide evidence of conditions that existed at the date of the
financial statements; or
b. Events that are indicative of conditions that arose after the date of the financial
statements
Subsequent Events (PSA 560)
Example of Type I Events
a. Loss on receivables resulting from the bankruptcy of major customer that was in a deteriorating
condition.
b. Settlement of litigation for an amount different from an estimate at year-end
c. Disposal of an investment or of obsolete/ scrap inventory at a price below book value
d. Disposal of a segment that has been incurring operating losses if the disposal is at a price
below book value
Example of Type II Events
e. Sales of a bond/ capital stock issue
f. Purchase of a business
g. Settlement of litigation when the event giving rise to the claim occurred subsequent to the
balance sheet date
h. Loss of plant or inventories as a result of fire or flood
i. Loss on receivables resulting from conditions arising subsequent to the balance sheet date.
Subsequent Events (PSA 560)
2. Definitions
Subsequent events – those events occurring between the date of the FS and the date of auditor’s
report, and facts that become known to the auditor after the date of the auditor’s report.
Date of the financial statements – the date of the end of the latest period covered by the FS,
which is normally the date of the most recent statement of financial position in the financial statement
subject to audit
Date of approval of the financial statements – the date on which those with recognized
authority assert that they have prepared the entity’s complete set of financial statements, including
the related notes, and that they have taken responsibility for them
Date of the auditor’s report – the date the auditor dates the report on the FS
Date the financial statement are issued - the date the auditor’s report and the audited
financial statements are made available to third parties, which may be, in many circumstances, the
date that they are filed with regulatory authority
 Auditor’s responsibility

3. The auditor should perform procedures designed to obtain sufficient

appropriate audit evidence that all events up to the date of the auditor’s
report that may require adjustment of, or disclosure in, the financial statement
identified.

4. To identify these events, the ff procedures may be performed:

a. Reviewing procedures management has established to ensure that subsequent events
are identified.
b. Reading MoM of shareholders, BOD, and audit and executive committees held after the
date of the FS and inquiring about the matters discussed at meetings for which the
minutes are not yet available
c. Reading entity’s latest available interim financial statements, budgets, cash flow
forecasts and other related management reports
Auditor’s responsibility
d. Inquiring, or extending previous oral or written inquiries, of the entity’s lawyers
concerning litigation and claims.
e. Inquiring of management as to whether any subsequent events have occurred which
might affect the financial statements. Example on specific matters are:
• The current status of items that were accounted for on the basis of preliminary or
inconclusive data
• Whether new commitments, borrowings or guarantees have been entered into
• Whether sales or assets have occurred or are planned
• Whether the issue of new shares or debentures or an agreement to merge or liquidate has
been made or is planned
• Whether any assets have been appropriated by government or destroyed (fire or flood)
• Whether there have been any developments regarding risk areas and contingencies
• Whether any unusual accounting adjustments have been made or are contemplated
• Others
 Auditor’s responsibility

5. When the auditor becomes aware of events materially affect the financial
statements, the auditor should consider whether such event are properly
accounted for and adequately disclosed in the financial statements.

Subsequent event

Date of FS Approval Auditors report Issued FS

Facts discovered after the date of the auditor’s report but before the
date the financial statements are issued
6. During the period from the date of the auditor’s report to the date the
financial statements are issued, the responsibility to inform the auditor of facts
which affect the financial statements rests with management.

7. The auditor should

a. Consider whether the financial statements need amendment
b. Discuss matter with the management; and
c. Should take the appropriate action in the circumstances

8. When management amends the financial statements, the auditor would

d. Carry out the procedures necessary in the circumstances; and
e. Provide the management with a new report on the amended financial statements
Facts discovered after the financial statement are issued
9. After FS have been issued, the auditor has no obligation to make any inquiry
regarding such financial statements

10. The auditor should

a. Consider whether the financial statements need revision;
b. Discuss matter with the management; and
c. Should take the appropriate action in the circumstances.

11. When management revises the financial statements, the auditor would
d. Carry out the procedures necessary in the circumstances,
e. Review the steps taken by management that anyone in receipt of the previously issued
financial statements together with the auditor’s report thereon is informed of the
situation; and
f. Issue a new report on the revised financial statement
Facts discovered after the financial statement are issued

12. The new auditor’s report should include an emphasis of a matter

paragraph referring to a note to financial statements that more extensively
discusses the reasons for the revision of the previously issued financial
statements and to the earlier report issued by the auditor.
Omitted Procedures
1. A post engagement review performed as part of the
firm’s quality control inspection program could lead to
identification or discovery of omitted procedures.

2. In case of omitted procedures, the ff. shall be the

procedures to be performed by the auditor:
a. The auditor should assess the importance of the omitted
procedure to the auditor’s ability to support the opinion
expressed on the financial statements taken as a whole.
b. If the auditor concludes that the omission of a
substantive procedure considered necessary at time of
examination, the auditor determines whether or not the
results of other procedures that were applied tend to
compensate for the procedure omitted (known as
compensating procedures)
Omitted Procedures
c. If there are no compensating procedures, the auditor
shall undertake to apply the omitted procedure or will
make its omission less important
d. The results of procedures may lead the auditor to
conclude:
1. The auditor conclude that there are no necessary
revisions to be made on the financial statements and
the auditor’s report issued may still be relied upon. If
this is the case, no communication is required to be
made to the entity’s audit committee or BOD
2. The auditor concluded that necessary revisions to be
made on the financial statements and auditor’s report
issued should not be relied upon by users. In this case,
the auditor shall apply the same procedures
required for facts discovered after the date of the
auditor’s report.
Written representation letter (PSA 580)
1. The auditor should obtain appropriate representations from management.
Acknowledgment by management of its responsibility for the financial
statements
2. The auditor should obtain evidence that management acknowledge its
responsibility for the fair presentation of the financial statements in accordance
with GAAP in the Philippines, and has approved the financial statements.
3. The auditor can obtain this acknowledgment
a. From relevant MoM of the board of directors or similar body; or
b. By obtaining a written representation from management or a signed copy of
the financial statements.
4. Management letter vs. Management representation letter
• Management letter
 Written by the auditor and provided to the client to;
a. Encourage a better relationship between the auditor and the management
b. Suggest additional tax and management services that the auditor can provide
 May include recommendations that are intended to help the client operate
its business effectively
 Optional
 No standard format or approach
4. Management letter vs. Management representation letter
• Management representation letter
 Confirms the oral representations given by management to the auditors and
reduces the possibility of misunderstanding between the client and auditor
 Reminds management of its primary responsibility for the financial statements
 Cannot be a substitute for other audit evidence that the auditor. Could reasonably
expect to be available
 Can serve as audit evidence when such representation may be the only evidence
which can reasonably be expected to be available.
Basic elements of management representation letter

5. The auditor would request that it

• Be addressed to the auditor
• Contain specified information
• Be appropriately dated (date of the auditor’s report) and signed by the
members of management who primarily responsibility for the entity and its
financial aspects (ordinarily the senior executive officer and the senior financial
officer)
Representations by management representation letter

6. Auditor should obtain written representations from management on matters material to

the financial statements when other sufficient appropriate audit evidence cannot reasonably
be expected to exist. The possibility of misunderstandings between the auditor and
management is reduced when oral representations are confirmed by management in
writing.

7. Representations by management cannot be a substitute for other audit evidence

that the auditor could reasonably expect to be available

8. If a representation by management is contradicted by other audit evidence, the auditor

should investigate the circumstances and, when necessary, reconsider the reliability of
other representations made by management.
Documentation of representations by management

9. The auditor would ordinarily include in audit working papers evidence of

management’s representations in the form of a summary of oral discussions
with management or written representation made by management.

10. A written representation is better audit evidence than an oral

representation and can take the form of:
A. A representation letter from management;
B. A letter from the auditor outlining the auditor’s understanding of management’s
representations, duly acknowledged and confirmed by management; of
C. Relevant MoM of the BOD or similar body or a signed copy of the financial
statements.
Actions if management refuses to provide representation

11. The auditor considers necessary, this constitutes a scope limitation and
the auditor should express a qualified opinion or a disclaimer of opinion.
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