Audit Practice and Procedures II

Audit Practice and Procedures II

• Completing the audit and offering other service is a key focus
• Auditors' primary concern in presentation and disclosure is whether management has disclosed all required information. This is known as the completeness objective for presentation and disclosure.
• Assessing risks related to completeness of presentation and disclosure involves reviewing information gathered during the first three audit phases to identify any undisclosed facts or circumstances.
• Disclosures related to contingent liabilities and subsequent events often pose high risk that all required information might not be completely disclosed in footnotes.
• Tests in earlier audit phases may not provide sufficient evidence on contingent liabilities and subsequent events, requiring specific procedures in each audit to address these matters.

Contingent Liability

• Contingency liability is a potential future obligation to third parties with an unknown amount arising from completed actions.

• Material contingent liabilities must be disclosed in footnotes.

• Three conditions need to be met for a contingent liability to exist:

  • A potential future payment or impairment of an asset arising from an existing condition
  • Uncertainty concerning the amount of future payment or impairment
  • The outcome will be decided by future events.

• Auditing standards hold management accountable for identifying and accounting for contingent liabilities; auditors' role is impractical without management cooperation.

Review for Subsequent Events

• The review for subsequent events forms part of the audit completion.
• Auditors must review transactions and events after the balance sheet date to determine if they affect current period financial statements fairly.
• Auditing procedures to verify these transactions and events are often called the review for subsequent events or post-balance sheet review.
• Auditor responsibility for reviewing subsequent events is typically limited to the period beginning at the balance sheet date to the auditor's report date.
• This review should be performed closely to completion of the audit.

Final Evidence Accumulation

• Final evidence accumulation involves other tasks besides subsequent events review.
• These include:
  • Performing final analytical procedures
  • Assessing the going-concern assumption
  • Obtaining a management representation letter
  • Considering information accompanying financial statements
  • Reviewing other information in the annual report
• These tasks are generally done in the later phases of the audit.

Evaluate Results

• After completing audit procedures and gathering final evidence on all areas, auditors must integrate results to form a comprehensive conclusion about the financial statements' validity.
• Auditors must determine if sufficient appropriate audit evidence warrants a conclusion that financial statements are compliant with accounting standards applied consistently with the prior year.
• This involves documenting all audit procedures for review purposes, ensuring every part of the audit program is done accurately and documented, and that all objectives have been met.

Issue the Audit Report

• The auditor must wait until all audit evidence is gathered and properly evaluated to determine the nature of their audit report.
• The audit report, being the primary output of the audit process, must be accurate to avoid negative consequences.

Communicate Effectively with the Audit Committee and Management

• After the audit, the auditor may send various communications including: communication concerning detected fraud or illegal actions; internal control deficiencies; other communications to the audit committee; or management letters.

• The first three communications are required to ensure the audit committee and senior management understand audit findings. The fourth item, management letters, is often communicated to operating management.

• Auditing standards require the communication of fraud or illegal acts, regardless of materiality, to the audit committee or an appropriate body. The goal is aiding the committee's supervisory role to ensure reliable financial statements.

• Phase IV of Completing the Audit includes the subsequent activities of reviewing contingent liabilities, subsequent periods, accumulating evidence, evaluating results, issuing the report, and communication.