Completing the Audit | CPA Exam Auditing and Attestation

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This page covers completing the audit including subsequent events,  contingent liabilities, communication with Audit Committee and management letter and attorney letter.

Completing the audit presentation and disclosures

Completing the Audit Contingent Liabilities Letters from Client Attorney

Subsequent Events and Discovery of Facts

Completing the Audit Evidence Accumulation

Completing the Audit Evaluating Evidence

Completing the Audit Communication with Audit Committee and Management Letter

Example: Auditing Subsequent Events and Subsequent Discovery of Facts

Audit Adjustment Summary of Possible Misstatement Audit Schedule

The procedures for completing this audit phase are: ■ evaluate governance evidence; ■ carry out procedures to identify subsequent events; ■ review financial statements and other report material; ■ carry out wrap-up procedures; ■ prepare Matters for Attention of Partners; ■ report to the board of directors and prepare audit report.

Disclosures of financial statements and other required disclosures (for corporate governance, management reports, etc.) are adequate. The auditor is responsible for all information that appears with the audited financial statements, so therefore the auditor must also see if there are any inconsistencies between this other information and the financial statements. 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. Wrap-up procedures include: supervisory review, final analytical procedures, working paper review, evaluating audit findings for material misstatements, client approval of adjusting entries, review of laws and regulation, and evaluation of the company as a going concern.

The auditor is particularly concerned with whether management has disclosed all required information (completeness objective for presentation and disclosure). Auditors often use a disclosure checklist to determine that all required disclosures are completely presented and disclosed in the financial statements and accompanying This helps the auditor obtain sufficient appropriate evidence about the completeness objective for the presentation and disclosure-related audit objective.

A contingency is a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. Material contingent liabilities must be disclosed in the footnotes. Three conditions are required for a contingent liability to exist:

  1. There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition
  2. There is uncertainty about the amount of the future payment or impairment
  3. The outcome will be resolved by some future event or events

The first type of subsequent event is one that has a direct effect on the financial statements and requires adjustment. Examples of this type of subsequent event are as follows:

  • Declaration of bankruptcy by a customer with an outstanding accounts receivable balance due to the deteriorating financial condition
  • Settlement of a lawsuit for an amount different from the amount recorded on the books
  • Disposal of equipment not being used in operations at a price below the current book value
  • Sale of raw material as scrap in the period subsequent to the balance sheet date

The second type of subsequent event is one that has no direct effect on the financial statements but for which disclosure is advisable. Examples include the following:

  • Issuance of bonds or equity securities
  • Decline in the market value of inventory as a consequence of government action barring further sale of a product
  • Uninsured loss of inventories as a result of fire

A client letter of representation is a written communication from the client to the auditor formalizing statements that the client has made about matters pertinent to the audit. The purposes of the letter of representation are to:

  • Impress upon management its responsibility for the financial statements
  • Remind management of potential misstatements or omissions in the financial statements
  • Document responses from management to inquiries about various aspects of the audit

Auditing standards suggest four categories of items that should be included in the letter. Below are those four items with examples in each category (refer students to auditing standards for a comprehensive list):

  1. Financial statements
  • Management’s acknowledgment of its responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles
  • Management’s belief that the financial statements are fairly presented in conformity with generally accepted accounting principles
  1. Completeness of information
  • Availability of all financial records and related data
  • Completeness and availability of all minutes or meetings of stockholders, directors, and committees of directors
  • Absence of unrecorded transactions
  1. Recognition, measurement, and disclosure
  • Management’s belief that the effects of any uncorrected financial statement misstatements are immaterial to the financial statements (a summary of these items should be included in or attached to the letter)
  • Information concerning fraud involving (1) management, (2) employees who have significant roles in internal control, or (3) others where the fraud could have a material effect on the financial statements
  • Information concerning related party transactions and amounts receivable from or payable to related parties
  • Unasserted claims or assessments that the entity’s lawyer has advised are probable of assertion and must be disclosed in accordance with accounting standards