Completing the Audit Principles of Auditing: An Introduction to International Standards on Auditing - Ch. 11

1
Completing the Audit Principles of Auditing An
Introduction to International Standards on
Auditing - Ch. 11

• Rick Stephan Hayes,
• Roger Dassen, Arnold Schilder,
• Philip Wallage

2
Objective Complete the audit procedures and
issue an opinion.

• Procedures
• (1) Evaluate governance evidence
• (2) Perform procedures to identify subsequent
  events
• (3) Review financial statements and other report
  material
• (4) Perform wrap-up procedures
• (5) Prepare Matters for Attention for Partners
• (6) Report to the board of directors
• (7) Prepare Audit report.

3
Quality Control

• ISQC 1 says the audit firm should establish a
  system of quality control designed to provide it
  with reasonable assurance that the firm and its
  personnel comply with professional standards and
  regulatory and legal requirements, and that
  reports issued by the firm or engagement partners
  are appropriate in the circumstances.

4
Audit firm policies and procedures

• (a) General firm activities for which quality
  control policies and procedures are required
  include leadership responsibilities for quality
  within the firm, ethical requirements, acceptance
  and retention of clients, engagement performance,
  and monitoring.
• (b) The firm should set out criteria for
  determining the need for safeguards to reduce the
  familiarity threat to an acceptable level when
  using the same senior personnel on an assurance
  engagement over a long period of time and
• (c) For all audits of financial statements of
  listed entities the rotation of the engagement
  partner after a specified period is required for
  compliance with the IFAC Code and national
  ethical requirements that are more restrictive.

5
The work performed by each person in the audit
team should be reviewed by personnel of at least
equal competence to consider whether

• The work has been performed in accordance with
  the audit program
• The work performed and the results obtained have
  been adequately documented
• All significant audit matters have been resolved
  or are reflected in audit conclusions
• The objectives of the audit procedures have been
  achieved and
• The conclusions expressed are consistent with the
  results of the work performed and support the
  audit opinion.

6
Monitoring Human Resources

• the firm should communicate the results of the
  monitoring including
• A description of the monitoring procedures
  performed.
• The conclusions drawn.
• significant deficiencies and the actions taken to
  resolve or amend those deficiencies.

• Assign responsibility for each engagement to an
  engagement partner and staff with the appropriate
  capabilities, competence, authority and time to
  perform the role.

7
Sarbanes-Oxley Act (SOx)

• The Sarbanes-Oxley Act (SOx) addresses overall
  review procedures required of the auditor such as
  second partner review, partner rotation, and
  quality control. It also discusses the clients
  audit committee responsibilities and inspection
  by PCAOB.
• PCAOB conducts a program of inspections of audit
  firms to determine if they comply with
  professional standards and quality control.

8
SOx requires every public accounting firm to use
quality control policies relating to

• (i) monitoring of professional ethics and
  independence from entities on which the firm
  issues audit reports
• (ii) consultation within the firm on accounting
  and auditing questions
• (iii) supervision of audit work
• (iv) hiring, professional development, and
  advancement of personnel
• (v) the acceptance and continuation of audit
  engagements
• (vi) internal inspection

9
SOx Company Audit Committee

• Under SOx Sec 301 public company audit committees
  are directly responsible for the appointment,
  compensation, and oversight of the work of any
  registered public accounting firm employed by
  their company (including resolution of
  disagreements between management and the auditor
  regarding financial reporting).
• Audit firm reports directly to the audit
  committee. Auditors may also have to discuss
  accounting complaints with the Audit Committee.

10
Evaluate Governance Evidence

• The important governance information to be
  gathered from the client includes
• a legal letter,
• a management representations letter,
• information about contingent liabilities and
  commitments,
• identification of related parties.

11
Field Procedures to Obtain Evidence Concerning
Claims Against Client

• Read corporate meetings minutes
• Read contracts, leases, correspondence and other
  certain documents
• Review guarantees of indebtedness disclosed on
  bank confirmations
• Inspect other documents for client guarantees
• Determine if there are any side letters
• Agreements made outside the standard company
  contracts. These otherwise undisclosed
  agreements may be signed by senior officers, but
  not approved by the board of directors.

12
Legal letters- are the primary procedure auditors
rely on for discovering litigation, claims and
assessments that affect the client. Illustration
11.4

• Legal letters are obtained from the clients legal
  counsel
• Attorney Letter informs the auditor of pending
  litigation or other information involving legal
  counsel that is relevant to the financial
  statements.

13
Legal Letter

• The attorney letter should request evidence
  relating to
• Existence of conditions or circumstances
  indicating a possible loss from litigation,
  claims or assessments
• The period in which the underlying cause
  occurred.
• Likelihood of an unfavorable outcome
• Amount of potential loss, including court costs

14
When management representations relate to matters
that are material to the financial statements,
the auditor must

• seek corroborative audit evidence,
• evaluate whether the representations made by
  management appear reasonable and consistent with
  other audit evidence
• consider whether the individuals making the
  representations are competent to do so.
• request a management representations letter

15
The Management Representations Letter
(Illustration 11.5)

• Is the written communication from the clients
  management to the auditor formalizing statements
  that the client has made about matters that are
  pertinent to the audit and matters that
  are material to the financial
  statements.

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Management Representations Letter Contains

• Managements responsibility for the fair
  presentation of the financial statements.
• Availability of all financial
  records and related data.
• Information regarding
  related party transactions.
• Plans or intentions that may affect the carrying
  value or classification of assets.
• Disclosure of compensating balances and other
  arrangements involving restrictions on cash
  balances.

17
Review for Contingent Liabilities and Commitments

• Contingent liability is a potential future
  obligation to an outside party for an unknown
  amount resulting from the outcome of a past
  event.
• Commitments are agreements that the entity will
  hold to a fixed set of conditions, such as the
  purchase or sale of merchandise at a stated
  price, at a future date, regardless of what
  happens to profits or to the economy as a whole.

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Audit procedures that test for contingencies are

• Reviews of contracts, correspondence and credit
  agreements
• Inquiries of management.
• Evaluation of known contingent liabilities.
• Review of working papers.
• Examination of letters of credit.

19
Related Parties

• Parties are considered to be related if one party
  has the ability to control the other party or
  exercise significant influence over the other
  party in making financial and
  operation
  decisions.

20
Two aspects of related party transactions of
which an auditor must be aware are

• 1. Adequate disclosure of related party
  transactions.
• 2. The possibility that the existence of related
  parties increases the risk of management fraud.

21

• The auditor shall perform the following risk
  assessment procedures specifically directed
  towards identifying related party relationships
  and transactions not identified or disclosed by
  management
• Inquire of management and others within the
  entity about the existence of transactions that
  are both significant and non-routine
• Where a party appears to actively exert dominant
  influence over the entity, perform procedures
  intended to identify the parties to which the
  dominant party is related
• Review appropriate records or documents for
  transactions that are both significant and
  non-routine including
• Bank and legal confirmations obtained by the
  auditor and
• Minutes of meetings of shareholders and those
  charged with governance, and other relevant
  statutory records.

22
alert for material related party transactions

• review minutes of the meetings of shareholders
  and the board of directors and other relevant
  statutory records such as the register of
  directors interests
• inquire of other auditors currently involved in
  the audit, or predecessor auditors, as to their
  knowledge of additional related parties and
• review the entitys income tax returns and other
  information supplied to the regulatory agencies.

23
Review for Discovery of Subsequent Events

• Subsequent events are transactions and other
  pertinent events that occurred after the balance
  sheet date and which have material affect on the
  fair presentation or disclosure of the statements
  being audited.
• Review for subsequent events are the auditing
  procedures performed by auditors to identify and
  evaluate subsequent events.

24
Types of Events After the Balance Sheet Date

• IAS 10 identifies two types of events after the
  balance sheet date
• events that provide further evidence of
  conditions that existed at period end (requires
  adjustment to the financial statements)
• events that are indicative of conditions that
  arose subsequent to period end (if material,
  requires disclosure).

25
Events Up To The Date Of The Auditor's Report.

• The auditor should perform procedures designed to
  obtain sufficient appropriate audit evidence that
  all events up to the date of the auditors
  report that may require adjustment of, or
  disclosure in, the financial statements have been
  identified.

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Procedures to Identify Events That May Require
Adjustment of, or Disclosure in, The Financial
Statements

• Review Management Procedures.
• Read the entitys minutes of the meetings held
  after period end.
• Read the latest available F.S. other related
  Mgmt. Reports

• Inquire of the entitys lawyers concerning
  litigation and claims.
• Inquire of Mgmt. whether any subsequent events
  have occurred that might affect the F.S.

27
Events Between The Auditors Report Date And The
Issuance Of The Statements.

• The auditor has no responsibility to perform
  procedures or make any inquiry regarding the
  financial statements after the date of the
  auditors report.

28
Events Between the Balance Sheet Date and the
Issuance of the Statements

• When management amends the financial statements
• The auditor reviews for subsequent events
• Issue or Reissue New Audit Report
• When management does not amend the financial
  statements
• Qualified Opinion or an Adverse Opinion
  (before report was released) is given
• Notify the top management not to use the F.S.
  auditors report. (after report was released)

29
Discovery Of Facts After The Financial Statements
Have Been Issued.

• After the financial statements have been issued
  the auditor has no obligation to make any inquiry
  regarding such financial statements.
• If, however, the auditor becomes aware of a fact
  which existed at the date of the auditors
  report, revision of the financial statements and
  audit report should be considered.

30
Review Financial Statements and Other Report
Material

• The final review of the financial statements
  involves procedures to determine if disclosures
  of financial statements and other required
  disclosures (for corporate governance, management
  reports, etc.) are adequate.
• Adequate disclosure includes consideration of all
  the financial statements, including related
  footnotes.

31
Review Financial Statements and Other Report
Material

• Financial Statement Disclosures
• Corporate Governance Disclosures
• Other Information In The Annual Report

32
Financial Statement Disclosures

• Disclosures
• Footnotes
• Disclosure Checklist
• Fair Values

33
Corporate Governance

• The London Stock Exchange Code of Best Practice
  state that The directors should report on the
  effectiveness of the company's system of internal
  control and that the business is a going concern,
  with supporting assumptions or qualifications as
  necessary.
• Under the Sarbanes-Oxley Act (SOx) auditors have
  responsibility considering certain governance
  disclosures connected with the financial
  statements.
• The company must disclose whether or not, and if
  not, the reason why, it has adopted a code of
  ethics.
• SOx Section 407 requires company disclosure of
  whether or not, and if not, the reasons, their
  audit committee is comprised of at least one
  member who is a financial expert.

34
Other Information In Annual Reports
ISA 720 Says

• The auditor should read the other information
  (in documents containing audited financial
  statements) to identify material inconsistencies
  with the audited financial statements.

35
Other information, on which the auditor may have
to report, includes

• an annual report,
• a report by management or the board of directors
  on operations
• financial summary or highlights,
• employment data,
• planned capital expenditures,
• financial ratios
• names of officers and directors,
• selected quarterly data
• documents used in securities offerings.

36
Wrap-Up Procedures

• Wrap-up procedures are those procedures done
  at the end of an audit that generally cannot be
  performed before the other audit work is
  complete. They include supervisory review, final
  analytical procedures, working capital review,
  evaluating audit findings for material
  misstatements, review of laws and regulation,
  and evaluation of going concern.

37
Supervisory Review

• Review starts with the in-charge (senior)
  accountant reviewing the work of the staff
  accountant
• The manager and partner in charge of the audit
  review the work submitted by the in-charge
  accountant
• For larger audits, there is an additional review
  of the engagement is performed by a manager or
  partner not working on the engagement
• In auditing firms with multiple offices, it is
  common practice for review teams to visit the
  various offices periodically and review selected
  engagements

38
Working Paper Review

• Working papers (or work papers) are a record
  of the auditors planning nature, timing and
  extent of the auditing procedures performed
  results of such procedures and the conclusions
  drawn from the evidence obtained.
• Two functions
• Aid in conduct in supervision of audit.
• Support for auditors opinion, especially
  representation.

39

Evaluating Audit Findings For Material
Misstatements

• When the audit tests for each item in the
  financial statements are completed, the staff
  auditor doing the work will sign off completion
  of steps, identify monetary misstatements in the
  financial statements, and propose adjustment to
  the financial statements.
• Monetary misstatement are misstatement that cause
  a distortion of financial statement.
• Results from mistakes in processing transactions,
  mistakes in selection of accounting principles,
  and mistakes in facts or judgment about
  accounting estimates.

40
Review Laws and Regulation

• The auditor should
• know the laws that apply to their client,
• review the criteria required to comply with that
  statute,
• test for the client companys compliance.

41
Going Concern

• The going concern assumption is that the
  enterprise is normally viewed as a going concern,
  that is, as continuing in operation for the
  foreseeable future.
• An entity's continuance as a going concern is
  assumed in the preparation of the financial
  statements in the absence of information to the
  contrary.
• For example, assets and liabilities are recorded
  on the basis the entity will be around long
  enough to pay the liabilities and fully
  depreciate the assets.

42
Procedures if Going Concern Doubt

• If there is significant doubt of the entitys
  ability to continue as a going concern, the
  auditor should
• Review managements plans for future actions
  based on its going concern assessment
• Seek written representations from management
  regarding its plans for future action and
• Gather sufficient appropriate audit evidence to
  confirm or dispel whether or not a material
  uncertainty exists through carrying out
  procedures considered necessary.

43
Matters For Attention Of Partners (MAPs)

• Matters for Attention of Partners (MAPs) is a
  report by audit managers to be reviewed by the
  partner or director detailing the audit decisions
  reached by managers or partners and the reasons
  for those decisions.

44
Items included in the MAP

• a cover page signed by audit manager and partners
  stating the basic conclusions of the audit
• general matters, management comments, comments
  on results
• discussions of accounts that required special
  consideration
• compliance with statutory laws, ISAs and IASs
• comments on accounting systems
• comments on management letters
• discussion of any matters that were outstanding
  at that date.

45
Reports to The Board of Directors

• The Board of Directors has significant influence
  over accounting and financial policies of the
  entity. The auditor must communicate their
  important findings to the Board.
• Board has responsibility for hiring independent
  auditor.
• Typical areas of discussion in the Long-Form
  report to the board of directors is information
  which the client has omitted from its notes and
  the errors the auditor has found in performing
  his work.

46
SEC Report to Audit Committee

• SEC requires auditors to report to the audit
  committee of the publicly traded company
• all critical accounting policies and practices to
  be used
• all alternative treatments of financial
  information within generally accepted accounting
  principles that have been discussed and
• other material written communications such as any
  management letter or schedule of unadjusted
  differences.

47
Thank You for Your Attention

• Any Questions?