Completing the Audit Chapter 16

1
Completing the AuditChapter 16

• Professor Juan M. Garcia

2
Search for Unrecorded Liabilities

• Includes procedures performed through the last
  day of field work in order to identify or detect
  liabilities that existed at year end but were
  omitted from the financial statements.
• Examining subsequent cash disbursements.
• Examining pending receiving reports.

3
Review the Minutes of the Board of Directors

• Includes meetings held through the last day of
  field work.
• Objectives
• Identify unrecorded liabilities.
• Determine possible dispositions.
• Identify lawsuits or contingencies.
• Detect subsequent events.

4
Perform Final Analytical Reviews

• To assist the auditors in assessing the validity
  of the conclusions reached, including the opinion
  to be issued.
• To identify areas that need to be examined
  further as well as provide a consideration of the
  adequacy of data gathered in response to unusual
  or unexpected relationships identified during the
  audit.

5
Perform Procedures to Identify Loss Contingencies

• Types of contingencies
• Litigation
• Income tax disputes
• Environmental issues
• Commitments
• Guarantees
• Accounts receivable sold or assigned

6
Perform Procedures to Identify Loss Contingencies

• Review the minutes of the board of directors.
• Send a letter of inquiry to clients lawyer.
• Send confirmation letters to financial
  institutions to request information.
• Review reports from regulatory agencies for
  fines.

7
Subject to the foregoing and to the last
paragraph of this letter we advise you that since
January 1, 1997 we have not been engaged to give
substantive attention to, or represent the
Company in connection with material loss
contingencies coming within the scope of clause
(a) of Paragraph 5 of the Statement of Policy
referred to in the last paragraph of this letter,
except as follows We are responding to an
action which has been initiated against Apple
Blossom Cologne Company alleging injury due to
product liability. The action, Vila v. Apple
Blossom Cologne Company, is not in litigation.
Investigation, preparation, including development
of the factual data and legal research and
progress of the matter have reached a stage
whereby a judgment can be made, taking all
relevant factors into account that may affect the
outcome. Although the litigation is being
defended vigorously and the Company has
meritorious defenses, we are of the opinion that
the plaintiff will likely prevail in this action
and it is extremely doubtful that the Company
will prevail. As to the amount of potential loss,
total costs and damages that might ultimately be
assessed against the Company will be much less
than the 75,000 damages claimed by the
plaintiff. However, at this time the amount is
not susceptible of reasonable estimation. (Continu
ed)
8
Perform a Review of Subsequent Events

• Event or transaction that occurs after the date
  of the balance sheet but prior to the completion
  of the audit and issuance of the audit report.
• Two types
• Type 1.
• Type 2.

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Perform a Review of Subsequent Events Type 1

• Provides additional evidence as to conditions
  that existed at the balance sheet date and
  affects the estimates inherent in the process of
  preparing financial statements. This type
  requires that the financial statements amounts be
  adjusted to reflect the changes in estimates
  resulting from the additional evidence. Examples
• Litigation
• Bankruptcies

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Perform a Review of Subsequent Events Type 2

• Involves conditions coming into existence after
  the balance sheet date. These events do not
  require adjustment to the financial statements,
  but they should be disclosed if the financial
  statements otherwise be misleading. Examples
• Business combinations
• New litigation
• Early retirements of debt
• Death of CEO

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Perform a Review of Subsequent Events Proc.

• Review the latest available interim financial
  statements and minutes of directors,
  stockholders, and appropriate committee meetings.
• Inquire about matters dealt with a meeting for
  which minutes are not available.

12
Perform a Review of Subsequent Events Proc.

• Inquire of appropriate client officials as to
  loss contingencies.
• Obtain a letter from the clients lawyer
  describing as of the last day of field work any
  pending litigation, unasserted claims, or other
  loss contingencies.
• Include in the rep. Letter a representation from
  the client concerning subsequent events,

13
Obtain Representation Letter

• Primary purpose is to have the clients principal
  officers acknowledge that they are primarily
  responsible for the fairness of the financial
  statements.
• Summarizes the most important oral
  representations made by management.

14
Final Procedures

• Evaluating Audit Findings
• Known misstatements
• Projected misstatements
• Reviewing the engagement
• Client approval of adjusting entries and
  disclosures

15
Final Procedures

• Responsibilities of other information in the
  financial report
• Opinion formulation and report issuance
• Communication with the audit committee

16
Post-Audit Responsibilities

• The auditors subsequent discovery of facts
  existing at the date of their report.
• Subsequent discovery of omitted procedures.