Ch. 17 - Ross Fuerman

Chapter 17
Completing the
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
LO# 1
Review for Contingent Liabilities
A contingent liability is defined as an existing
condition, situation, or set of circumstances
involving uncertainty as to possible loss to an entity
that will ultimately be resolved when some future
event occurs or fails to occur.
• Pending or threatened litigation
• Actual or possible claims and
• Income tax disputes
• Product warranties or defects
• Guarantees of obligations to
Probable: The future event is likely to occur.
Reasonably Possible: The chances of the
future event occurring is more than remote
but less than probable.
Remote: The chance of the future event
occurring is slight.
LO# 2
Audit Procedures for Identifying
Contingent Liabilities
Read minutes of meetings
of the board of directors,
committees of the board,
and stockholders.
Review contracts, loan
agreements, leases, and
correspondence from
government agencies.
Review tax returns, IRS
reports, and schedules
supporting the client’s
income tax liability.
Confirm or otherwise
document guarantees and
letters of credit.
Inspect other documents for
possible guarantees or
other similar arrangements.
LO# 2
Audit Procedures for Identifying
Contingent Liabilities
Specific Audit Procedures Conducted Near
Completion of Audit
Inquire and discuss with
management about its policies and
procedures for identifying,
evaluating, and accounting for
contingent liabilities.
Examine documents in the entity’s
records such as correspondence
and invoices from attorneys for
pending or threatened lawsuits.
Obtain a legal letter that describes
and evaluates any litigation, claims,
or assessments.
Obtain written representation from
management that all litigation,
asserted and unasserted claims,
and assessments have been
disclosed in accordance with FASB
ASC Topic 450.
LO# 3
Legal Letters
A letter of audit inquiry (legal letter) sent to the
client’s attorneys is the primary means of
obtaining or corroborating information about
litigation, claims, and assessments.
LO# 3
Example of Legal Letter
LO# 4
Long-term contracts to purchase
raw materials or sell their
products at a fixed price
To obtain a favorable
pricing arrangement
To secure the
availability of raw
Long-term commitments are usually identified through inquiry of client
personnel during the audit of the revenue and purchasing processes.
In most cases, such commitments are disclosed in a footnote to the
financial statements.
LO# 5
Review for Subsequent Events for
Audit of Financial Statements
Sheet Date
Type I Event
Type II Event
Conditions existed
before the balance
sheet date and affect
estimates that are part
of financial statements
Conditions did not
exist at the balance
sheet date and do not
affect the accuracy of
the financial statements
Require adjustment of
the financial
Require disclosure and
possibly pro forma
financial statements
Review of Subsequent Events
for Audit of Financial Statements
LO# 5
Figure 17-1
LO# 6
Dual Dating
When a subsequent event is recorded or disclosed
in the financial statements after sufficient,
appropriate audit evidence has been obtained
but before the issuance of the financial
statements, the auditor considers the following
options for dating of the auditor’s report:
(1) “Dual date” the report (original date of report
plus date of subsequent event—limits liability so
almost always this is what the CPA firm does)
(2) Change the date of the auditor’s report to the
date of the subsequent event—extends liability
LO# 7
Audit Procedures to Look for
Subsequent Events
Inquire of
Read Minutes
of Meetings
Examples of audit
Read Interim
Inquire of
Legal Counsel
Examine the
Books of
Original Entry
LO# 7
Review of Subsequent Events for Audit of
Internal Control over Financial Reporting
Auditors of public companies with $75,000,000
market cap must report on any changes in
internal control that might affect financial
reporting between the end of the reporting
period and the date of the auditor’s report.
Internal audit
auditor reports
of reportable
agency reports
obtained from
audit of ICFR
Final Evidential
Evaluation Processes
LO# 8
Perform final analytical
Obtain a
representation letter.
Review working
Assess final audit
Evaluate financial
statement presentation
and disclosure.
Obtain an independent
review of the
Evaluate entity’s
ability to continue as a
going concern.
The AICPA’s requirement is
SQCS 10.38
The PCAOB’s requirement is
AS No. 7
LO# 8
Estimating Likely Misstatements
LO# 8
Archiving and Retention
Sarbanes-Oxley Act and PCAOB’s Documentation Standard (note
that SAS 103 is similar but a bit less stringent):
• Require audit firms to archive their public-company audit files for
retention within 45 days following the time the auditor grants permission
to use the auditor’s report in connection with the issuance of the
company’s financial statements.
• Require audit firms to retain audit documentation for 7 years (5 years if a
privately held company and thus governed by SAS 103) from the date of
completion of the engagement, as indicated by the date of the
auditor’s report, unless a longer period of time is required by law.
• Require audit firms to retain all documents that “form the basis of the
audit or review.”
• Require audit firms to include in the audit file for significant matters any
document created, sent, or received, including documents that are
inconsistent with a final conclusion. Significant changes in audit plans or
conclusions must also be documented.
LO# 9
Going Concern Considerations
LO# 9
Going Concern Considerations
LO# 10
Communications to the Audit Committee
Communications to the Audit Committee (cont.)
In addition to the communications noted on the previous
slide, some re internal control are required
If public company with $75,000,000 market cap, as we
noted in Ch. 7, AS 7 says significant deficiencies must be
communicated to the audit committee
If private (or small public) company, the auditor does not
have to look for IC problems (other than for the purpose of
performing an effective audit of the financials). However,
SAS 115 says the auditor, if he learns of them, must
communicate both material weaknesses and significant
deficiencies to the audit committee (if there is no audit
committee, then to others “charged with governance).”
Also, auditor must communicate all this to management.
LO# 11
Subsequent Discovery of Facts Existing
at the Date of the Auditor’s Report
Notify the company that the
auditor’s report must no
longer be associated with
the financial statements.
If a private company, notify
persons known to the
auditor to be relying on the
financial statements (e.g.
banks, other creditors).
If a public company, make
sure the SEC is notified that
the auditor’s report and the
financial statements can no
longer be relied upon.
End of Chapter 17

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