11_Audit Completion, Audit Report, Quality Assurance.pdf Flashcards
what are Contingent Liabilities
…potential future obligation to an outside party for an unknown amount resulting 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
- Potential treatment options
– no disclosure
– disclosure in a footnote
– adjustment of financial statements accounts
- Depends on likelihood of occurrence
Likelihood of Occurrence of Event Financial Statement Treatment
Remote (slight chance) ——————–>No disclosure is necessary
Reasonably possible————————->Footnote disclosure is necessary
(more than remote, but less than probable)
Probable (likely to occur)
————-> If the amount can be reasonably estimated, financial statement accounts are adjusted
————-> If the amount cannot be reasonably estimated, footnote disclosure is necessary
Inquiry of the Client’s Attorneys, and what it should include
- Inquiry of the client’s attorneys is a major procedure auditors rely on for evaluating known litigation or other claims against the client and identifying additional ones
- 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
Audit completion phase consist of:
- Assess going concern
- Indicate possible misstatements
- It is the auditor’s objective to design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity
- The conclusions drawn from the results of analytical procedures are intended to corroborate conclusions formed during the audit of individual components or elements of the financial statements. This assists the auditor to draw reasonable conclusions on which to base the auditor’s opinion
Steps in Applying Materiality
Step 1: Set materiality for the financial statements as a whole
Step 2: Determine performance materiality
Step 3: Estimate total misstatement in segment
Step 4: Estimate the combined misstatement
Step 5: Compare combined estimate with preliminary or revised judgment about materiality
The first two steps are conducted in the planning phase of the audit process. Step 3 is conducted during the entire audit process and the last two steps are performed during the completion phase of the audit process.
Evaluate Going Concern Assumption
management and auditor responsibility:
Going Concern Assumption
- Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future
- Financial statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so
- Assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business
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
- However, the auditor cannot predict future events or conditions. Accordingly, the absence of any reference to going concern uncertainty in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern
Letter of Representation
- 3 purposes
- Document of management’s most important oral representations
- Three purposes of the client letter of representation
- To impress upon management its responsibility for the assertions in the financial statements
It is easy for management to forget that they are responsible, not the auditor, for the fair presentation of financial statements, especially in smaller companies that lack of personnel with expertise in accounting
* To **remind management of potential misstatements or omissions** in the financial statements
If the letter of representation includes a reference to pledged assets and contingent liabilities, honest management may be reminded of its unintentional failure to disclose the information adequately
* To **document the responses from management** to inquiries about various aspects of the audit
This provides written documentation of client representations in the event of disagreement or a lawsuit between the auditor and client
Evaluate 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 Issuing Audit Report
- Consider the following 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
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
Forming an Opinion and Reporting on Financial Statements (ISA 700)
–> coponents of an audit report
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
Four Categories of Audit Reports
- Standard Unqualified
- Unqualified with Emphasis-of-matter Explanatory paragraph or Modified wording
- Qualified
- Adverse or Disclaimer
Standard Unqualified Report
conditions for issuing it
- An unqualified opinion is issued, when the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework
- 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)
Elements of Quality Control (1/2)
