11. Completing the Audit, Audit Report, Quality Assurance Flashcards
What are Contingent Liabilities
…potential future obligation to an outside party for an unknown amountresulting from activities that have already taken place.
Auditors are especially concerned about: pending litigation for patent infringement, income tax disputes,
product warranties, notes receivable discounted, guarantees of obligations of others, unused balances of outstanding letters of credit
Common audit procedures to search for contingent liabilities…..
Inquire of management
Review current and previous year’s internal revenue agent reports for income tax
settlements
Review the minutes of director’s and stockholders’ meetings for indications of
lawsuits or other contingencies
Analyze legal expense and review invoices and statements from legal counsel,
especially for indications of lawsuits and pending tax assessments
Obtain a letter from each major attorney performing legal services for the client as
to the status of pending litigation or other contingent liabilities
Review audit documentation of any information that may indicate a potential
contingency (e.g., bank confirmations)
Examine letters of credit in force as of the balance sheet date and obtain
confirmation of the used and unused balances
Potential treatment of Contingent liabilities
Likelihoof of Occurence LoO = REMOTE then: No disclosure is necessary
LoO: REASONABLY POSSIBLE then: Footnote disclosure is necessary
LoO: PROBABLE then:
• If the amount can be reasonably estimated, financial statement accounts are adjusted
• If the amount cannot be reasonably estimated, footnote disclosure is necessary
The standard inquiry to the client’s attorney should include:
- A list including (1) pending threatened litigation and (2) asserted or unasserted claims or assessments with which the attorney has had significant involvement
- A request that the attorney furnish information or comment about the progress of each item listed
- A request of the law firm to identify any unlisted pending or threatened legal actions or a statement that the client’s list is complete
- A statement informing the attorney of the attorney’s responsibility to inform management of legal matters requiring disclosure in the financial statements and to respond directly to the auditor
benefit of a longer subsequent event period
More time to assess and clarify contingent liabilities
Audit completion phase consist of:
- Assess going concern
- Indicate possible misstatements
GOING CONCERN: management and auditor responsibility:
Management responsibility
• Assess the entity’s ability to continue as a going concern and related financial statement disclosures
Auditor responsibility
• Obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements
• Obtain sufficient appropriate audit evidence to conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern
(obtain sufficient appropriate evidences to assess likelihood of management’s assessment of going concern)
Three purposes of the client letter of representation
if mgmt refuses to write it auditors won’t finish the audit report
To impress upon management its responsibility for the
assertions in the financial statements
To remind management of potential misstatements or omissions in the financial statements
To document the responses from management to inquiries about various aspects of the audit
To do for evaluating results:
• The auditor must integrate the results into one overall conclusion about the financial statements
– Review of summary of misstatements found in the audit
– Auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material
– Auditors must make a final evaluation of whether the disclosures in the financial statements satisfy all presentation and disclosure objectives
• Audit documentation review
– Evaluate the performance of inexperienced personnel
– Make sure that the audit meets the firm’s standard of performance
– Counteract the bias that often enters into the auditor’s judgment
– Ensure four-eyes principle to minimize audit risk
• Discussion of findings in the closing meeting
principles in both oral and written reporting:
– Reporting must be adjusted to recipient’s needs (organizational position, vested interest)
– Material findings should be reported in writing (preservation of evidence)
– Findings that are included in a written report should be discussed with management before issuing the audit report
– Written and oral reports should be aligned and complement each other
Types of reports (distingues between different type of audit)
• Statutory audit (Art. 728b CO)
– The auditor provides the board of directors with a comprehensive report with conclusions on the financial reporting, the internal system of control as well as the conduct and the result of the audit
– The auditor provides the general meeting with a summary report in writing on the result of the audit
– In addition to these legally required reports a supplementary report for management is prepared (management letter)
• Limited audit (Art. 729b CO)
– The auditor provides the general meeting with a summary report in writing on the result of the audit
Components of the audit report
– Title
– Addressee (as required by the circumstances of the engagement)
– Introductory paragraph (identifies the financial statement audit)
– Description of the responsibility of management for the preparation of the financial statement
– Description of the auditor’s responsibility to express an opinion on the financial statements and the scope of the audit
– An opinion paragraph containing an expression of opinion on the financial statements and a reference to the applicable financial reporting framework used to prepare the financial statements
– The auditor’s signature
– The date of the auditor’s report
– The auditor’s address
An unqualified opinion is issued when…
The standard unqualified audit report is issued when the following conditions have been met:
– All statements (balance sheet, income statement, statement of changes in stockholders’ equity, and statement of cash flows) are included in the
financial statements
– Sufficient appropriate evidence has been accumulated, and the auditor has conducted the engagement in a manner that enables him or her to
conclude that the audit was performed in accordance with auditing standards
– The financial statements are presented in accordance with an accepted accounting framework
– There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report
Standard Unqualified Report according to
the Swiss Code of Obligations (CO)
If the financial statements are prepared according to the Swiss Code of Obligations (CO), an unqualified report by the auditor requires that:
– The financial statement follows the recognized accounting principles, so they present the economic position in such a manner that a reliable assessment can be made (art. 957, 958 CO)
– The financial statements complies with the regulations regarding the minimum structure (art. 959, 959a, 959b CO)
– The notes (art. 959c CO) are complete and fairly represented
– The valuation has been made in accordance with legal requirements (art. 960 et seq. CO)
Unqualified Audit Report with Emphasis-of-matter
Explanatory Paragraph or Modified Wording
• The unqualified audit report with emphasis-of-matter explanatory paragraph or modified wording meets the criteria of a complete audit with satisfactory results and financial statements that are fairly presented, but the auditor believes it is important or is required to
provide additional information
• The most important CAUSES are:
Lack of consistent application of generally accepted accounting principles
Substantial doubt about going concern
Auditor agrees with a departure from promulgated accounting principles
Emphasis of other matters
Reports involving other auditors
