Completing The Audit: Principles of Auditing: An Introduction To International Standards On Auditing - Ch. 11

Slide 11.
Completing the Audit

Principles of Auditing: An Introduction to
International Standards on Auditing - Ch. 11
Rick Stephan Hayes,

Roger Dassen, Arnold Schilder,
Philip Wallage
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 11.2
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.
Slide 11.3
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.
Slide 11.4
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.
Slide 11.5
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.
Slide 11.6
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.
Slide 11.7
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.
Slide 11.8
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
Slide 11.9
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.
Slide 11.10
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.
Slide 11.11
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.
Slide 11.12
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.
Slide 11.13
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
Slide 11.14
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
Slide 11.15
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.
Slide 11.16
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.
Slide 11.17
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.
Slide 11.18
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.
Slide 11.19
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.
Slide 11.20
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.
Slide 11.21
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 nonroutine 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.
Slide 11.22
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.
Slide 11.23
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.
Slide 11.24
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).
Slide 11.25
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.
Slide 11.26
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.
Slide 11.27
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.
Slide 11.28
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)
Slide 11.29
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.
Slide 11.30
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.
Slide 11.31
Review Financial Statements and Other Report

Material
Financial Statement
Disclosures
Corporate Governance
Disclosures
Other Information In The
Annual Report
Slide 11.32
Financial Statement Disclosures
Disclosures
Footnotes
Disclosure Checklist
Fair Values
Slide 11.33
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.
Slide 11.34
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.
Slide 11.35
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.
Slide 11.36
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.
Slide 11.37
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
Slide 11.38
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.
Slide 11.39
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.
Slide 11.40
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.
Slide 11.41
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.
Slide 11.42
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.
Slide 11.43
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.
Slide 11.44
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.
Slide 11.45
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.
Slide 11.46
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.
Slide 11.47
Thank You for Your Attention
Any Questions?

Completing The Audit: Principles of Auditing: An Introduction To International Standards On Auditing - Ch. 11

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Slide 11.

Completing the Audit

Rick Stephan Hayes,

Objective: Complete the audit procedures and

Audit firm policies and

(a) General firm activities for which quality control policies

The work performed by each person in the audit

The work has been performed in accordance with

Monitoring & Human

the firm should communicate

Assign responsibility for

Sarbanes-Oxley Act (SOx)

The Sarbanes-Oxley Act (SOx) addresses overall

SOx requires every public accounting firm to

SOx Company Audit Committee

Evaluate Governance Evidence

Field Procedures to Obtain Evidence

Read contracts, leases, correspondence and

Review guarantees of indebtedness disclosed on

Legal letters- are the primary procedure auditors rely on

Legal letters are

When management representations relate to matters

seek corroborative audit evidence,

The Management Representations Letter

Is the written communication from the

Management Representations Letter Contains

Review for Contingent Liabilities and

Audit procedures that test for contingencies are:

Reviews of contracts, correspondence

Parties are considered to be related if

Two aspects of related party transactions of

The auditor shall perform the following risk assessment

Inquire of management and others within the

alert for material related party

Review for Discovery of Subsequent Events

Subsequent events are transactions and

Types of Events After the Balance Sheet

Events Up To The Date Of The Auditor's

Procedures to Identify Events That May Require Adjustment

Inquire of the entitys

Events Between The Auditors Report Date And

The auditor has no

Events Between the Balance Sheet Date

When management amends the financial

When management does not amend the financial

Discovery Of Facts After The Financial

After the financial statements have been

Review Financial Statements and Other

Review Financial Statements and Other Report

Financial Statement Disclosures

The company must disclose whether or not, and if

Other Information In Annual Reports

ISA 720 Says

Other information, on which the auditor may

Wrap-up procedures are those procedures

Review starts with the in-charge (senior)

Working Paper Review

Aid in conduct in supervision of audit.

Evaluating Audit Findings For Material

Review Laws and Regulation

know the laws that apply to their

Procedures if Going Concern Doubt