Audit Practice and Procedures II PDF

AUDIT PRACTICE AND PROCEDURES II COMPLETING THE AUDIT AND OFFERING OTHER SERVICE COMPLETING THE AUDIT AND OFFERING OTHER SERVICE One of the auditor’s primary concerns related to presentation and disclosure related objectives is determining whether management has disclosed all required...

AUDIT PRACTICE AND PROCEDURES II COMPLETING THE AUDIT AND OFFERING OTHER SERVICE COMPLETING THE AUDIT AND OFFERING OTHER SERVICE One of the auditor’s primary concerns related to presentation and disclosure related objectives is determining whether management has disclosed all required information (completeness objective for presentation and disclosure). COMPLETING THE AUDIT AND OFFERING OTHER SERVICE To assess risks that the completeness objective for presentation and disclosure is not satisfied, auditors consider information obtained during the first three phases of audit testing to determine if they are aware of facts and circumstances that should be disclosed. COMPLETING THE AUDIT AND OFFERING OTHER SERVICE Due to the unique nature of disclosures related to contingent liabilities and subsequent events, auditors often assess the risks as high that all required information may not be completely disclosed in the footnotes. COMPLETING THE AUDIT AND OFFERING OTHER SERVICE Audit tests performed in earlier audit phases often do not provide sufficient appropriate evidence about contingent liabilities and subsequent events. Therefore, auditors design and perform procedures in every audit to review for contingent liabilities and subsequent events. CONTINGENT LIABLITY A contingent liability 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: CONTINGENT LIABLITY 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. CONTINGENT LIABLITY Auditing standards make it clear that management, not the auditor, is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities. In many audits, it is impractical for auditors to uncover contingencies without management’s cooperation.  REVIEW FOR SUBSEQUENT EVENTS The third part of completing the audit included in the sidebar is the review for subsequent events. The auditor must review transactions and events that occurred after the balance sheet date to determine whether any of these transactions or events affect the fair presentation or disclosure of the current period statements.  REVIEW FOR SUBSEQUENT EVENTS The auditing procedures required by auditing standards to verify these transactions and events are commonly called the review for subsequent events or post- balance-sheet review.  REVIEW FOR SUBSEQUENT EVENTS The auditor’s responsibility for reviewing subsequent events is normally limited to the period beginning with the balance sheet date and ending with the date of the auditor’s report.  REVIEW FOR SUBSEQUENT EVENTS Because the date of the auditor’s report corresponds to the completion of the important auditing procedures in the client’s office, the subsequent events review should be completed near the end of the audit.  FINAL EVIDENCE ACCUMULATION In addition to the review for subsequent events, the auditor has several final evidence accumulation responsibilities that apply to all cycles. Five types of final evidence accumulation are discussed in this section:  Perform final analytical procedures,  Evaluate the going-concern assumption,  Obtain a management representation letter,  Consider information accompanying the basic financial statements,  Read other information in the annual report. Each of these is done late in the audit.  EVALUATE RESULTS After performing all audit procedures in each audit area, including the review for contingencies and subsequent events and accumulating final evidence, the auditor must integrate the results into one overall conclusion about the financial statements.  EVALUATE RESULTS The auditor must ultimately decide whether sufficient appropriate audit evidence has been accumulated to warrant the conclusion that the financial statements are stated in accordance with accounting standards applied on a basis consistent with those of the preceding year.  EVALUATE RESULTS Similarly, when issuing a report on internal control, auditors must also arrive at an overall conclusion about the effectiveness of internal control over financial reporting. The five main aspects of evaluating the results are discussed next.  EVALUATE RESULTS To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor reviews the audit documentation for the entire audit to determine whether all material classes of transactions, accounts and disclosures have been adequately tested, considering all circumstances of the audit.  EVALUATE RESULTS An important part the review is to make sure that all parts of the audit program have been accurately completed and documented, and that all audit objectives have been met. ISSUE THE AUDIT REPORT The auditor should wait to decide the appropriate audit report to issue until all evidence has been accumulated and evaluated, including all steps of completing the audit discussed so far. ISSUE THE AUDIT REPORT Because the audit report is the only thing that most users see in the audit process, and the consequences of issuing an inappropriate report can be severe, it is critical that the report be correct. ISSUE THE AUDIT REPORT In most audits, the auditor issues an unqualified report with standard wording. An important part the review is to make sure that all parts of the audit program have been accurately completed and documented, and that all audit objectives have been met.  COMMUNICATE EFFECTIVELY WITH THE AUDIT COMMITTEE AND MANAGEMENT After the audit is completed, several potential communications from the auditor may be sent to the audit committee or others charged with governance, including communication of detected fraud and illegal acts, internal control deficiencies, other communications with the audit committee, and management letters.  COMMUNICATE EFFECTIVELY WITH THE AUDIT COMMITTEE AND MANAGEMENT The first three of these communications are required by auditing standards to make certain that those charged with governance, which is often the audit committee and senior management, are informed of audit findings and auditor recommendations. The fourth item, management letters, is often communicated to operating management.  COMMUNICATE EFFECTIVELY WITH THE AUDIT COMMITTEE AND MANAGEMENT Auditing standards require the auditor to communicate all fraud and illegal acts to the audit committee or similarly designated group, regardless of materiality. The purpose is to assist the audit committee in performing its supervisory role for reliable financial statements. COMMUNICATE EFFECTIVELY WITH THE AUDIT COMMITTEE AND MANAGEMENT