NURSYUHADA BT MOHD ROSDI (2012442534)

NURUL SYAFIQA BT MOHD SOHAIMI (2012618376)

NUR HIDAYAH BT KAMARUZAMAN (2012853298)
SITI NUR ZAIMA NABIHAN BT ZAINUDIN
(2012620406)
SITI KHAIRIAH BT CHE MOHD ZAIN (2011878366)

Completing
Audit

REVIEW FOR CONTINGENT

LIABILITIES

Contingent liabilities - defined as an existing

condition, situation, or set of circumstances
involving uncertainty as to possible loss to an entity
that ultimately will be resolved when some future
event occurs or fails to occur.

IAS 37- ACCOUNTING FOR

CONTINGENCIES
Probable. The future event is likely to occur.
Reasonably possible. The chance of the future
event occurring is more than remote but less than
likely.
Remote. The chance of the future event occurring is

EXAMPLES OF CONTINGENT
LIABILITIES

Pending or threatened litigation.

Actual or possible claims and
assessments.
Income tax disputes.
Product warranties or defects.
Guarantees of obligations to others.
Agreements to repurchase receivables
that have been sold.

AUDIT PROCEDURES FOR

IDENTIFYING CONTINGENT
LIABILITIES
I.
II.
III.
IV.

V.

Reading the minutes of board of directors

and other committees of the board.
Reviewing contracts (e.g., loan agreements
and leases).
Reviewing income tax liability, tax returns,
and IRS agents' reports.
Confirming or otherwise documenting of
guarantees and letters of credit obtained
from financial institutions or other lending
agencies.
Inspecting other documents for possible
guarantees.

SPECIFIC AUDIT PROCEDURES FOR

IDENTIFYING CONTINGENT
LIABILITIES

Inquiry of management about policies and

procedures for identifying, evaluating, and
accounting for contingent liabilities.

Examination of documents such as

correspondence and invoices from attorneys
for pending lawsuits.

Obtaining a legal letter.

Obtaining
letter.

management

representation

LEGAL LETTERS

A letter of audit inquiry (referred to as a legal

letter) sent to the client's attorneys is the
primary means of obtaining or corroborating
information about litigation, claims, and
assessments.

A legal letter should be obtained from the

entity's inside counsel if such a position
exists.

COMMON TYPES OF
LITIGATION

Breach of contract
Patent infringement
Product liability
Violations of governmental legislation
including:

Securities laws, Antitrust.

Discrimination based on race, sex, age, and
other characteristics.
Income Tax.
Environmental protection.

PRIMARY COMPONENTS OF A
LEGAL LETTER

List and evaluation of pending or threatened litigation

and a discussion of the progress of the case, the
action the entity plans to take, the likelihood of
unfavorable outcome and the amount of potential
loss.

List of unasserted claims that are probable or

reasonably possible.

Request to indicate whether the response is limited.

Any unpaid legal fees.

(Refer Exhibit 17-2 : Legal Letter of Earthwear Clothiers)

TQ

COMMITMENTS

Companies enter into long-term

commitments to purchase raw materials or to
sell their product at a fixed price.

The main purposes for entering into such

purchase or sales contracts is to obtain
favorable pricing arrangements or to secure
the availability of raw materials.

Terms are usually disclosed in a footnote;

Losses may have to be recognized even
though no exchange of goods (e.g. market
price < fixed price in contract).

REVIEW FOR SUBSEQUENT EVENTS

Subsequent events are events or transactions that occur
after
the balance sheet date, but prior to the issuance of
the financial statements and auditor's report, that have a
material effect on the financial statements.

TYPES OF SUBSEQUENT EVENTS

Type I: Events that provide additional evidence about conditions

that existed at the date of the balance sheet and effect estimates
that are part of the financial statements.

Type II: Events that provide evidence about conditions that did not
exist at the date of the balance sheet but arose subsequent to that
date.

EXAMPLES OF TYPE I
EVENTS

A loss of an uncollectible account

receivable resulting from continued
deterioration of its financial condition
leading to bankruptcy after the balance
sheet date.

The settlement of a lawsuit after the

balance sheet date for an amount different
from the amount recorded in the year end
financial statements.

EXAMPLES OF TYPE II
EVENTS

Purchase or disposal of a business.

Sale of a capital stock or bond issue.

Loss of a manufacturing facility or assets

resulting from a casualty such as a fire or
flood.

Losses on receivables arising from

conditions such as a casualty arising
subsequent to the balance sheet date.

AUDIT PROCEDURES FOR SUBSEQUENT

EVENTS
I.

Obtain an understanding of any procedures

management has established to ensure that subsequent
events are identified.

II.

Inquire of management about subsequent events.

III.

Read available minutes of meetings of board of directors

and other committees.

IV.

Read interim financial statements available for the period

after year end.

V.

Examining the books of original entry for the subsequent

events period & investigating any unusual transactions

VI.

Inquire of legal counsel concerning litigation, claims, and

assessments against the entity.

FINAL EVALUATION OF AUDIT

EVIDENCE

Perform final analytical procedures.

Evaluate the entity's ability to continue as a
going concern.
Obtain a management representation letter.
Review working papers.
Make final assessment of audit results.
Evaluate financial statement presentation and
disclosure.
Obtain independent and quality review of the
engagement.

PERFORM FINAL ANALYTICAL

PROCEDURES

Conduct analytical procedures to assess the

conclusions reached on the financial
statement accounts.

Auditing standards require that analytical

procedures be conducted as an overall
review.

Generally involve review of account

fluctuations to determine if audit evidence
supports the changes.

EVALUATE GOING
CONCERN
Auditing standards state that the auditor
has a responsibility to evaluate whether
there is substantial doubt about the
entity's ability to continue as a going
concern for a reasonable period of time,
not to exceed one year beyond the date
of the financial statements being audited.

STEPS IN THE GOING CONCERN

EVALUATION

Step 1: Consider if the results of all audit procedures

performed during the audit indicate whether there is
substantial doubt about the entity's ability to continue as a
going concern for a reasonable period of time (one year)

Step 2: If there is substantial doubt, the auditor should obtain

information about management's plans to mitigate the going
concern problem and assess the likelihood that such plans
can be implemented.

Step 3: If the auditor concludes, after evaluating

management's plans, that the entity has a going concern
problem, he or she should consider the adequacy of the
disclosures about the entity's ability to continue and include an
explanatory paragraph in the audit report.

CONDITIONS THAT MAY INDICATE

GOING CONCERN PROBLEMS

Negative financial trends

POOR FINANCIAL
CONDITIONS

Negative cash flow

Current year deficit
Inability to meet interest
payment
Negative income from
operations

POOR RATIOS
Current asset/Current
liabilities
Net income/Total
liabilities
Profit before tax/Net
sales
Total liabilities/Total
assets

CONDITIONS THAT MAY INDICATE GOING

CONCERN PROBLEMS

Other financial difficulties

Internal problems

Default on loans
Dividend in arrears
No additional sources of financing
Uneconomic long term commitments
Dependence on the success of one particular project

External matters

Legal proceedings
Loss of major customers or suppliers

CONSIDERATION OF
MANAGEMENT'S PLANS

Plans to dispose of assets.

Plans to borrow money or restructure

debt.

Plans to reduce or delay expenditures.

Plans to increase ownership equity.

REPRESENTATION
LETTER

Auditing standards require that the auditor

obtain a representation letter from
management.

The representation letter is signed by the

CEO and Chief Financial Officer (CFO) and
is dated the same date as the audit report.

Managements refusal to provide a

management letter constitutes a scope
limitation.

WORKING PAPER
REVIEW

Workpapers should be reviewed by an

audit team member senior to the person
preparing the workpapers.

The reviewer must ensure that

the

audit was properly planned and

supervised
the evidence supports the audit objectives
tested
the evidence is sufficient for the type of
audit report issued.

FINAL ASSESSMENT OF
AUDIT RESULTS

The auditor must evaluate the results of

the audit tests and be concerned with
two issues:
Sufficiency

Effects

of the audit evidence and

of
detected
misstatements
compared to tolerable misstatement

EVALUATE FINANCIAL
STATEMENT PRESENTATION
AND DISCLOSURE

The auditor must ensure

Financial statements comply with Generally

Accepted Accounting Principles (GAAP)

Proper presentation of accounts and include of

all disclosures

Most Certified Public Accounting (CPA) firms

use some type of financial statement
disclosure checklist

INDEPENDENT PARTNER
REVIEW

Most firms have a policy requiring that a

concurring (or Second) partner review the
financial statements for publicly traded
companies and those financial statements
that are expected to be widely distributed.

Concurring partner should understand

audit approach, findings, conclusion
critical audit areas and should review
audit report, financial statements
footnotes for consistency.

the
for
the
and

COMMUNICATIONS WITH
THE AUDIT COMMITTEE

Auditing standards requires that the auditor

communicate certain matters related to the
conduct of the audit to those individuals
responsible for oversight of the financial reporting
process.
The communication should address the following:

The auditor's responsibility under Generally

Accepted Auditing Standard(GAAS).
Significant accounting policies.
Significant accounting estimates.
Significant audit adjustments.
The auditors judgment about the quality of the
entity's accounting principles.

COMMUNICATIONS WITH
THE AUDIT COMMITTEE
(continued)

The communication should address the

following:

Disagreements with management.

Consultation with other accountants.

Difficulties encountered during the audit.

Fraud involving senior management or fraud

that causes material misstatement of the
financial statements.

MANAGEMENT LETTER

Makes recommendations to the client based

on observations made

during the audit and

may include areas such as organizational

structure and efficiency issues.

SUBSEQUENT DISCOVERY
OF FACTS EXISTING AT THE
DATE OF THE AUDITOR'S
REPORT

An auditor has no obligation to make any

inquiries or conduct any audit procedures
after the financial statements and audit report
have been issued.

However, facts may come to the auditor's

attention after the issuance of the financial
statements which may indicate that the
financial statements are in error and the audit
report is affected.

Most common example: Material

misstatements are discovered in financial
statements (unintentional or intentional

SUBSEQUENT DISCOVERY
OF FACTS

If client refuses to cooperate , the auditor

should notify the board of directors and take the
following steps:

Notify the client that the auditor's report must no

longer be associated with the financial statements.

Notify regulatory agencies having jurisdiction over

the client that the auditor report can no longer be
relied upon.

Notify each person known to the auditor to be

relying on the financial statements.
Usually
notification to a regulatory agency is the only
practical way to provide appropriate disclosure.