Good Review RequiresGood Review RequiresMore Than LookingMore Than LookingAt Working Papers At Working Papers

Good Review RequiresGood Review RequiresMore Than LookingMore Than LookingAt Working Papers At Working Papers

PHASE IV : WRAP-UP ACTIVITIES

• CONTINGENCIES

• SUBSEQUENT EVENTS

• FINAL ANALYTICAL REVIEW

• EVALUATE GOING CONCERN

• CLIENT REP. LETTER

• EVALUATE RESULTS

• OTHER INFORMATION IN ANNUAL REPORTS

• COMMUNICATION WITH AUDIT COMMITTEE

• MANAGEMENT LETTER

REQUIRED COMMUNICATION WITH

AUDIT COMMITTEE

• Irregularities and illegal acts• Significant control weaknesses• Other matters:

– Financial statement adjustments– Disagreements with management– Difficulties encountered in the audit

Types ofTypes of Who Who WhenWhenReviewReview Does Does DoneDone PurposePurpose

In-charge reviewIn-charge review

Audit partnerAudit partnerreviewreview

Independent reviewIndependent review

Peer reviewPeer review

Final Evidence

Final Evidence

Accumulation

Accumulation

Perform Final Analytical ProceduresPerform Final Analytical Procedures

Evaluate Going Concern AssumptionEvaluate Going Concern Assumption

Obtain Management Representation LetterObtain Management Representation Letter

Read Other Information in the Annual ReportRead Other Information in the Annual Report

1.1. Examination of prior year’s working papersExamination of prior year’s working papers

a. a. Were last year’s working paper and review notes examined for areasof emphasis in the current-year audit?

b. b. Was the permanent file reviewed for items that affect the current year? 2. Internal controlInternal control a. Has internal control been adequately understood? b. Is the scope of the audit adequate in light of the assessed control risk? c. Have all major weaknesses been included as reportable conditions in

a letter to the audit committee or to senior management?3. General documents3. General documents a. Were all current-year minutes and resolutions reviewed, abstracted,

and followed up? b. Has the permanent file been updated? c. Have all major contracts and agreements been reviewed and abstracted

and copied with all existing legal requirements?

Completing the Engagement ChecklistCompleting the Engagement ChecklistCompleting the Engagement ChecklistCompleting the Engagement Checklist

Evaluating Results and Reaching ConclusionsEvaluating Results and Reaching Conclusionson the Basis of Evidence in the CYCLE, ACCOUNT,on the Basis of Evidence in the CYCLE, ACCOUNT,

AND THE OVERALL FS PRESENTATIONAND THE OVERALL FS PRESENTATION

Evaluating Results and Reaching ConclusionsEvaluating Results and Reaching Conclusionson the Basis of Evidence in the CYCLE, ACCOUNT,on the Basis of Evidence in the CYCLE, ACCOUNT,

AND THE OVERALL FS PRESENTATIONAND THE OVERALL FS PRESENTATION

A Contingent LiabilitiesA Contingent Liabilities

A contingent liability is potential future A contingent liability is potential future obligation to an outside party for an unknownobligation to an outside party for an unknownamount resulting from activities that haveamount resulting from activities that havealready taken place.already taken place.

What if it’s probable & reasonably est?What if it’s probable & reasonably est?

A contingent liability is potential future A contingent liability is potential future obligation to an outside party for an unknownobligation to an outside party for an unknownamount resulting from activities that haveamount resulting from activities that havealready taken place.already taken place.

What if it’s probable & reasonably est?What if it’s probable & reasonably est?

Certain contingent liabilities are ofCertain contingent liabilities are ofconsiderable concern to the auditor:considerable concern to the auditor:Certain contingent liabilities are ofCertain contingent liabilities are ofconsiderable concern to the auditor:considerable concern to the auditor:

• Pending litigation for patent infringement,Pending litigation for patent infringement,product liability, or other actionsproduct liability, or other actions

• Income tax disputesIncome tax disputes• Product warrantiesProduct warranties• Notes receivable discountedNotes receivable discounted• Guarantees of obligations of othersGuarantees of obligations of others• Unused balances of outstanding letters of creditUnused balances of outstanding letters of credit

• Pending litigation for patent infringement,Pending litigation for patent infringement,product liability, or other actionsproduct liability, or other actions

• Income tax disputesIncome tax disputes• Product warrantiesProduct warranties• Notes receivable discountedNotes receivable discounted• Guarantees of obligations of othersGuarantees of obligations of others• Unused balances of outstanding letters of creditUnused balances of outstanding letters of credit

Audit Procedures Audit Procedures for Finding Contingenciesfor Finding Contingencies

Inquire of management (orally and in writing)Inquire of management (orally and in writing)about the possibility of unrecorded contingencies.about the possibility of unrecorded contingencies.

Review current and previous years’ internalReview current and previous years’ internalrevenue agent reports for income tax settlements.revenue agent reports for income tax settlements.

Review the minutes of directors’ and stockholders’Review the minutes of directors’ and stockholders’meetings for indications of lawsuits or other contingencies.meetings for indications of lawsuits or other contingencies.

Inquire of management (orally and in writing)Inquire of management (orally and in writing)about the possibility of unrecorded contingencies.about the possibility of unrecorded contingencies.

Review current and previous years’ internalReview current and previous years’ internalrevenue agent reports for income tax settlements.revenue agent reports for income tax settlements.

Review the minutes of directors’ and stockholders’Review the minutes of directors’ and stockholders’meetings for indications of lawsuits or other contingencies.meetings for indications of lawsuits or other contingencies.

continuedcontinuedcontinuedcontinued

Analyze legal expense for the period under audit andAnalyze legal expense for the period under audit andreview invoices and statements from legal counsel. review invoices and statements from legal counsel.

Obtain a letter for each major attorney performingObtain a letter for each major attorney performinglegal services.legal services.

Review working papers for any information that mayReview working papers for any information that mayindicate a potential contingency.indicate a potential contingency.

Examine letters of credit in force as of the balance sheetExamine letters of credit in force as of the balance sheetdate and obtain a confirmation of the used and unused balance.date and obtain a confirmation of the used and unused balance.

Analyze legal expense for the period under audit andAnalyze legal expense for the period under audit andreview invoices and statements from legal counsel. review invoices and statements from legal counsel.

Obtain a letter for each major attorney performingObtain a letter for each major attorney performinglegal services.legal services.

Review working papers for any information that mayReview working papers for any information that mayindicate a potential contingency.indicate a potential contingency.

Examine letters of credit in force as of the balance sheetExamine letters of credit in force as of the balance sheetdate and obtain a confirmation of the used and unused balance.date and obtain a confirmation of the used and unused balance.

Audit Procedures Audit Procedures for Finding Contingenciesfor Finding Contingencies

Typical Typical InquireInquire

of of AttorneyAttorney

Typical Typical InquireInquire

of of AttorneyAttorney

DISTINCTIONDISTINCTIONBETWEEN REVIEWBETWEEN REVIEWFOR SUBSEQUENTFOR SUBSEQUENTEVENTS AND EVENTS AND SUBSEQUENTSUBSEQUENTDISCOVERY OFDISCOVERY OFFACTS AFTER FACTS AFTER THE BALANCETHE BALANCESHEET DATESHEET DATE

DISTINCTIONDISTINCTIONBETWEEN REVIEWBETWEEN REVIEWFOR SUBSEQUENTFOR SUBSEQUENTEVENTS AND EVENTS AND SUBSEQUENTSUBSEQUENTDISCOVERY OFDISCOVERY OFFACTS AFTER FACTS AFTER THE BALANCETHE BALANCESHEET DATESHEET DATE

Period covered by Subsequent Period covered by Subsequent Events ReviewEvents Review

Period covered by Subsequent Period covered by Subsequent Events ReviewEvents Review

Review for Subsequent Events andReview for Subsequent Events andSubsequent Discovery of FactsSubsequent Discovery of Facts

Review for Subsequent Events andReview for Subsequent Events andSubsequent Discovery of FactsSubsequent Discovery of Facts

Type I Subsequent EventsType I Subsequent Events Type I Subsequent EventsType I Subsequent Events

Those that have a Direct Effect on the Those that have a Direct Effect on the Financial statements and Require Financial statements and Require

AdjustmentAdjustment

Those that have a Direct Effect on the Those that have a Direct Effect on the Financial statements and Require Financial statements and Require

AdjustmentAdjustment

• Declaration of bankruptcy by a customer because of a Declaration of bankruptcy by a customer because of a deteriorating financial condition (deteriorating w/in the BS date).deteriorating financial condition (deteriorating w/in the BS date).• Settlement of a litigation that existed at the BS date.Settlement of a litigation that existed at the BS date.• Litigation claim based on events covered by the BS date.Litigation claim based on events covered by the BS date.

• Declaration of bankruptcy by a customer because of a Declaration of bankruptcy by a customer because of a deteriorating financial condition (deteriorating w/in the BS date).deteriorating financial condition (deteriorating w/in the BS date).• Settlement of a litigation that existed at the BS date.Settlement of a litigation that existed at the BS date.• Litigation claim based on events covered by the BS date.Litigation claim based on events covered by the BS date.

Type I Subsequent EventsType I Subsequent Events

• If it is material and the client won’t adjust the FS’s:

1. EXPLANATORY Paragraph

2. W/hold report

3. W/draw from Engagement

• (EWW!)

Those that have NO Direct Effect on Those that have NO Direct Effect on the Financial Statements but Which the Financial Statements but Which

Disclosure is AdvisableDisclosure is Advisable(Interpretation/usefulness of FS’s (Interpretation/usefulness of FS’s

affected)affected)

Those that have NO Direct Effect on Those that have NO Direct Effect on the Financial Statements but Which the Financial Statements but Which

Disclosure is AdvisableDisclosure is Advisable(Interpretation/usefulness of FS’s (Interpretation/usefulness of FS’s

affected)affected)

• Decline in the market value of securitiesDecline in the market value of securities• Issuance of bonds or equity securitiesIssuance of bonds or equity securities•Uninsured loss of PPE or inventories as a result of fire, etc.Uninsured loss of PPE or inventories as a result of fire, etc.• A merger or an acquisition/ purchase of a businessA merger or an acquisition/ purchase of a business•Losses of AR d/t issues arising subsequent to the BS dateLosses of AR d/t issues arising subsequent to the BS date•Settlement of litigation, where the issue causing litigation took place Settlement of litigation, where the issue causing litigation took place

s/t the BS dates/t the BS date

• Decline in the market value of securitiesDecline in the market value of securities• Issuance of bonds or equity securitiesIssuance of bonds or equity securities•Uninsured loss of PPE or inventories as a result of fire, etc.Uninsured loss of PPE or inventories as a result of fire, etc.• A merger or an acquisition/ purchase of a businessA merger or an acquisition/ purchase of a business•Losses of AR d/t issues arising subsequent to the BS dateLosses of AR d/t issues arising subsequent to the BS date•Settlement of litigation, where the issue causing litigation took place Settlement of litigation, where the issue causing litigation took place

s/t the BS dates/t the BS date

Type II Subsequent EventsType II Subsequent Events Type II Subsequent EventsType II Subsequent Eventscontinuedcontinuedcontinuedcontinued

Inquire of ManagementCorrespond with AttorneysReview Internal statements Prepared Subsequent to the

Balance Sheet DateReview Records Prepared Subsequent to the Balance Sheet DateExamine Minutes Issued Subsequent to the Balance Sheet DateObtain a Letter of Representation

• basically READ and REVIEW - SOUNDS LIKE COR(II)A

Inquire of ManagementCorrespond with AttorneysReview Internal statements Prepared Subsequent to the

Balance Sheet DateReview Records Prepared Subsequent to the Balance Sheet DateExamine Minutes Issued Subsequent to the Balance Sheet DateObtain a Letter of Representation

• basically READ and REVIEW - SOUNDS LIKE COR(II)A

Audit Audit TestsTests

Dual-dated audit report meansDual-dated audit report meansthat the audit report includes two dates.that the audit report includes two dates.

1. The first date is the date for the completionof field work except for a specific exception.

2. The second date, which is always later,deals with the exception.

Dual-dated audit report meansDual-dated audit report meansthat the audit report includes two dates.that the audit report includes two dates.

1. The first date is the date for the completionof field work except for a specific exception.

2. The second date, which is always later,deals with the exception.

Dual DatingDual DatingDual DatingDual Dating

Review for Subsequent Events andReview for Subsequent Events andSubsequent Discovery of FactsSubsequent Discovery of Facts

Review for Subsequent Events andReview for Subsequent Events andSubsequent Discovery of FactsSubsequent Discovery of Facts

Subsequent Discovery of Subsequent Discovery of FactsFacts

• Once the report is issued, the auditor has no further obligation to perform additional procedures

• UNLESS…new material information comes to our attention (don’t have to go looking)

• Are people attaching importance to the info, likely to rely on the info?

Subsequent Discovery of Subsequent Discovery of FactsFacts

• If it is a material issue, then the auditor must PREVENT further reliance in the report

• 3 D’s: The auditor can advise the client to disclose the new info: 1. Draft new FS’s/revoke old, 2. Disclose in imminent report (e.g., Qrtly), OR 3. Press Release “DON’T RELY!)

Subsequent Discovery of Subsequent Discovery of FactsFacts

• If the client won’t disclose the new info, then

1. Notify the CLIENT and BOD’s – report can no longer be associated w/ the FS’s

2. Notify REGULATORY AGENCIES – “audit report unreliable!”

3. Notify each PERSON known to be relying - “audit report unreliable!”

Omitted Procedures detected after report date

• A necessary audit procedure wasn’t performed (perhaps discovered in internal or external peer review)

1. Ask the Q: is the report still reliable?

2. IF NO, or uncertain, DO the procedure

3. Ask again: is the report still reliable?

4. If NO, do the 3 “D’s”