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17-1
COMPLETING THE AUDIT
AND REPORTING RESPONSIBILITIES
R&D : The Society of Accounting Education
Email: [email protected] Website: www.soae.edu.pk
All rights reserved.
© 2002 McGraw-Hill Ryerson Limited.
17-2
TOPICS COVERED
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Review for contingent liabilities.
Commitments.
Review for subsequent events.
Finalizing the audit.
Communications with the audit committee and
management.
Subsequent discovery of facts existing at the date
of the auditor's report.
© 2002 McGraw-Hill Ryerson Limited.
17-3
REVIEW FOR CONTINGENT
LIABILITIES
Contingent liabilities are 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.
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© 2002 McGraw-Hill Ryerson Limited.
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CICA 3290, CONTINGENCIES
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Likely. The chance of occurrence (or nonoccurrence) of the future event(s) is high;
Unlikely. The chance of occurrence (or nonoccurrence) of future event(s) is slight;
Not determinable. The chance of occurrence (or
non-occurrence) of the future event(s) cannot be
determined.
© 2002 McGraw-Hill Ryerson Limited.
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EXAMPLES OF CONTINGENT
LIABILITIES
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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.
© 2002 McGraw-Hill Ryerson Limited.
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NORMAL AUDIT PROCEDURES FOR
IDENTIFYING CONTINGENT
LIABILITIES
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Reading the minutes of board of directors and other
committees of the board, and shareholders.
Reviewing contracts (e.g., loan agreements and leases).
Reviewing income tax liability, tax returns, and CCRA
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.
© 2002 McGraw-Hill Ryerson Limited.
17-7
SPECIFIC AUDIT PROCEDURES FOR
IDENTIFYING CONTINGENT
LIABILITIES
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Inquiry of and discussions with management about
policies and procedures for identifying, evaluating,
and accounting for contingent liabilities.
Examination of documents in the entity's records such
as correspondence and invoices from lawyers for
pending or threatened lawsuits.
Obtaining a legal letter.
Obtaining a representation letter.
© 2002 McGraw-Hill Ryerson Limited.
17-8
ENQUIRY LETTERS
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A letter (referred to as an enquiry letter) sent to the
client's lawyers is the primary means of obtaining or
corroborating information about litigation, claims, and
assessments.
An enquiry letter should be obtained from the entity's
inside counsel if such a position exists.
© 2002 McGraw-Hill Ryerson Limited.
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TYPES OF LITIGATION
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Breach of contract
Patent infringement
Product liability
© 2002 McGraw-Hill Ryerson Limited.
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TYPES OF LITIGATION
(cont.)
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Violations of legislation including:
 Securities laws.
 Anti-discrimination statues based on race, sex, age,
and other characteristics.
 Anti-trust laws.
 Income tax regulations.
 Environmental protection laws.
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© 2002 McGraw-Hill Ryerson Limited.
17-11
COMMITMENTS
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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.
Purchase
Contract
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© 2002 McGraw-Hill Ryerson Limited.
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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.
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© 2002 McGraw-Hill Ryerson Limited.
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TYPES OF SUBSEQUENT EVENTS
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Events that provide additional evidence about
conditions that existed at the date of the balance sheet
(Type I event).
Events that provide evidence about conditions that
did not exist at the date of the balance sheet but arose
subsequent to that date (Type II event).
© 2002 McGraw-Hill Ryerson Limited.
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EXAMPLES OF THE
FIRST TYPE OF EVENT
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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.
© 2002 McGraw-Hill Ryerson Limited.
17-15
EXAMPLES OF THE
SECOND TYPE OF EVENT
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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.
© 2002 McGraw-Hill Ryerson Limited.
17-16
DUAL DATING
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For example, …February 25, 2002, except for Note 10,
which is March 1, 2002.
Limit auditor’s responsibility.
© 2002 McGraw-Hill Ryerson Limited.
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AUDIT PROCEDURES FOR
SUBSEQUENT EVENTS
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Read any interim financial statements that are available
for the period after year end.
Examine the books of original entry for the subsequent
events period.
Ask management about subsequent events.
Read the available minutes of meetings of board of
directors and other committees.
© 2002 McGraw-Hill Ryerson Limited.
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AUDIT PROCEDURES FOR
SUBSEQUENT EVENTS (cont.)
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Enquiry of client’s lawyers regarding claims and
assessments.
Obtain a representation letter from management.
© 2002 McGraw-Hill Ryerson Limited.
17-19
FINALIZING THE AUDIT
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Perform final analytical procedures.
Evaluate the entity's ability to continue as a going
concern.
Obtain a representation letter.
Review working papers.
Make final assessment of audit results.
Evaluate financial statement presentation and
disclosure.
Obtain independent review of the engagement.
© 2002 McGraw-Hill Ryerson Limited.
17-20
COMMUNICATIONS WITH THE
AUDIT COMMITTEE
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The communication should address the following matters:
 The auditor's responsibility under GAAS.
 Significant accounting policies.
 Management judgments and accounting estimates.
 Significant audit adjustments.
 Disagreements with management.
 Consultation with other accountants.
 Major issues discussed with management before the
auditor was retained.
 Difficulties encountered during the audit.
 Fraud involving senior management and fraud that
causes material misstatements in the financial
statements.
© 2002 McGraw-Hill Ryerson Limited.
17-21
MANAGEMENT LETTER
It is normal practice for the auditor to prepare what is
referred to as a management letter. The general intent of
a management letter is to make recommendations to the
client based on observations made during the audit and
may include areas such as organizational structure and
efficiency issues.
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© 2002 McGraw-Hill Ryerson Limited.
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SUBSEQUENT DISCOVERY OF FACTS
EXISTING AT THE DATE OF THE
AUDITOR'S REPORT
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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.
© 2002 McGraw-Hill Ryerson Limited.
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SUBSEQUENT DISCOVERY
OF FACTS
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If the 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 any regulatory agencies having jurisdiction over
the client that the auditor report can no longer be
relied upon.
 Seek legal advice.
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© 2002 McGraw-Hill Ryerson Limited.
17-24
Thank you
Research and Development of The Society of Accounting
Education , Email: [email protected], Website:
www.soae.edu.pk
 Overall supervised by Dr. Ansar Ali Noor
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All rights reserved.
© 2002 McGraw-Hill Ryerson Limited.