CHAPTER 12: COMPLETING THE AUDIT

POST AUDIT RESPONSIBILITIES

MANAHAN, MARTIN, RANGEL
BSA42
Completion of audit fieldwork

Review working papers and compare with internal control

questionnaire and audit program
Wrap-up procedures
Related party
Subsequent events
Letters of inquiry
Going concern assumption
Management representations
Analytical procedures
Evaluation of findings
Related party transactions

DETERMINE EXAMINE AUDIT

EXISTENCE TRANSACTIONS DOCUMENTATION

IDENTIFY INVOLVED CONSIDER AUDIT

TRANSACTIONS DISCLOSURES
Related Party Relationships

Related Party refers to persons or entities that may have

dealings with pne another in which one party has the ability to
exercise significant influence or control over the party.

The auditor should inquire of management regarding:

1. The identity of the entitys related parties.
2. The nature of the relationships between the entity and
related parties.
3. Whether the entity entered into any transactions with
these related parties.
The auditor may perform the following procedures in
order to identify related party transactions:

Performing detailed tests of trqansactions and balances.

Reviewing minutes of meetings and shareholders and directors.
Reviewing accounting records for large or unusualt ransacions or
balances.
Reviewing confirmations of loans receivable and payable and
confirmation from banks to identify the existence of guarantee
and other related-party transactions.
AUDIT PROCEDURES

The auditor should obtain sufficient appropriate evidence as to

whether these transactions have been properly recorded and
disclosed.

The auditor carries out procedures to identify transactions with

related parties.
Disclosure requirement

Written representation from management (completeness)

Identification of related parties
Adequacy of disclosures
 Subsequent Events Review
(PSA560) (SFAS/IAS 10)

The auditor is responsible ONLY with those events that occur

subsequent to the date of the financial statements but
before the date of the auditors report.
Procedures to identify subsequent events

Obtaining an understanding of any procedures management has estab-

lished to ensure that subsequent events are identified.
Inquiring of management as to whether any subsequent events have
occurred which might affect the financial statements.
Reading the minutes of board of directors and stockholders meetings that
have been held after the date of the financial statements.
Inquiring of the entitys lawyers concerning litigation, claims and
assessments.
Transactions which have abnormal terms of trade.
EVENTS OCCURRING UP TO THE DATE OF THE
AUDITORS REPORT

The auditor performs as near as practicable to the date of the

auditors report, procedures to identify events that may require
adjustment of, or disclosure in the financial statements.

When the auditor becomes aware of events which materially

affect the FS, the auditor should consider whether such events are
properly accounted for and adequately disclosed in the FS.
EVENTS SUBSEQUENT TO DATE OF REPORT

No responsibility to seek audit evidence to identify such events

If the events have have a material effect, discussion must be done
Amended financial report
Auditors report dated not earlier than the date the amended
financial statements are signed
No amendment adverse report
Review for Contingent Liabilities

POTENTIAL CONTINGENT LIABILITIES

arise from guarantee of indebtedness, accommodation,
endorsement, threat of expropriation of assets, standby letters of
credit and risks due to hazards

consider certain contingent liabilities that are of significant

concern such as product warranties, pending litigation, product
liabilities
Some of the procedures specifically designed to detect
contingencies liabilities include the following:

1. Inquire of management about the possibility of unrecorded

contingencies.
2. Read minutes of board of directors and shareholders meetings
for indication of lawsuits and other contingencies.
3. Read contracts, loan agreements, lease agreements and similar
documents.
4. Review reports prepared by agents of the Bureau of Internal
Revenue and other taxing authorities.
5. Analyze legal expenses for the period under audit year and
examine documents from attorneys that may suggest litigation in
pending or in progress.
6. Obtain a letter from each major attorney performing legal
services for the client as to the status of peding litigation or other
contingent liabilities.
7. Review current year working papers for indications of potential
contingencies.
8. Examine letters of credit in force as of balance sheet date and
obtain confirmation of the used and unused balance.
9. Review estimates related to identified contingencies in
accordance with the appropriate auditing standards.
AUDIT INQUIRY LETTER TO CLIENTS LAWYER

Letter of inquiry (or audit letter of inquiry)

Sent by the auditor to clients lawyer to obtain information that
would facilitate auditors understanding of clients contingencies,
the major sources of which are pending litigation, claims and
assessments, and unasserted claims.
Going Concern Evaluation

1. Consider evidence indicating going concern problems

2. Evaluate management plans of mitigation
3. Determine the adequacy of managements plan
Going Concern Evaluation

Net liability position

Substantial operating losses
Arrears or discontinuance of dividends
Inability to pay creditors on time
Difficulty in complying with loan agreements
Excessive reliance on short-term borrowings to finance long-term assets
Change from credit to COD transactions with suppliers
Inability to obtain financing for essential investments
Audit Procedures

The auditor obtains sufficient appropriate evidence that the

managements plans are feasible and that the outcome of these plans will
improve the situation. Relevant procedures in this regard include:
1. Analyzing and discussing cash flow, profit and other relevant forecasts
and the entitys last available interim financial statements with
management.
2. Reviewing the terms of debenture and loan agreements to determine
any breach; and the events after period end to determine whether
they mitigate of affect entitys ability to continue as going concern.
3. Reading minutes of meetings of shareholders, directors and committes
for references to any financial difficulties.
4. Inquiring of the entitys lawyer regarding the existence of
litigations and claims and reasonableness of the managements
assessments of their outcome and estimate of their financial
implications.

5. Confirming the existence, legality and enforceability of

arrangements to provide or maintain financial support withr elated
and third parties and assessing the financial ability of such parties
to avoid additional funds.
MANAGEMENT REPRESENTATIONS

PSA580 requires an auditor to obtain sufficient appropriate audit

evidence that the entitys management
- Has acknowledged that it has fulfilled its responsibility for the
preparation and presentation of fair financial statements;and
- Has approved the FS.
MANAGEMENT REPRESENTATIONS

Form and Content of Written Representation

It shall be in form of a representation letter from management. This
letter shall include:
Management has fulfilled its responsibility for the preparation and
presentation of the FS.
FS are prepared and presented in accordance with the applicable
financial reporting framework
Management has provided the auditor with all relevant info. agreed in
the terms of engagement, and that all transactions have been recorded
and reflected in the FS.
Description of mngt. responsibilities as described in the terms of the
engagement.
Other representations required by other PSAs.
DOCUMENTATION OF REPRESENTATION BY
MANAGEMENT

Management representation letter letter drafted and given to

management to sign. It formalizes management responses to inquiries
made by the auditor during the audit and clarifies the responsibilities
Specific purposes
1. minimization of misunderstandings
2. commitment to writing of representations previously made verbally
3. provision of corroborative evidence
Subsequent events and going concern assumption
Basic Elements of Management
Representation Letter
A management representation letter is a form letter written by an
auditors, which is signed by clients company. The letter attests to the
accuracy of the financial statements that the company has submitted to the
auditors for their analysis.

The representation letter should be addressed to the auditor.

The representation letter would ordinarily be dated the same date as the
auditors report.
The representation letter shall be dated as near as practicable to, the date of
the auditors report.
The representation letter should be signed by the members of management who
have primarily responsibility for the entity and its financial statements.
Doubt as to the Reliability of Written Representations or
Written Representations Not Provided

The auditor shall disclaim an opinion on the financial statements if:

1. The auditor concludes that there is sufficient doubt about the
integrity of managaement such that written representations not
reliable.

2. Management does not provide the auditor with the required

written representation.
ANALYTICAL PROCEDURES

Analysis of significant ratios and trends including the resulting

investigations and relationships that are inconsistent with other
relevant info. Or which deviate from predicted amounts.

In the planning stage of the audit, the application of analytical

procedures helps the auditor assess the risk of material
misstatements in the FS.
ANALYTICAL PROCEDURES

STEPS IN APPLYING ANALYTICAL PROCEDURES

STEP 1: Develop expectations regarding FS using:
Prior yearsFS
Anticipated results (forecast or budgets)
Industry averages
Non-financial information
Typical relationships among FS account balances
ANALYTICAL PROCEDURES

STEP 2: COMPARE THE EXPECTATIONS WITH THE FS UNDER AUDIT.

STEP 3: INVESTIGATE SIGNIFICANT UNEXPECTED DIFFERENCES TO
DETERMINE WHETHER FS CONTAIN MATERIAL MISSTATEMENTS.

Uses of Analytical Procedures

PLANNING TOOL
SUBSTANTIVE TEST
OVERALL REVIEW
ANALYTICAL PROCEDURES

Stage of Audit Objective

1. Planning Stage To understand clients bus.
To identify areas that may represent
specific risks

2. Substantive Test To obtain evidence to confirm (or refute)

individual acct. bal

3. Overall review To identify unusual fluctuations that were

not identified in planning stage.
To confirm conclusion reached with respect
to the fairness of the FS.
UPON COMPLETION OF AUDIT WORK

Final assessment of materiality and audit risk

Evaluation of results and evidence
Adequacy of disclosures and conformity
Review of evidence supporting auditors opinion
Drafting audit report
FINAL ASSESSMENT OF MATERIALITY AND RISK

The auditors assessment of materiality and risk may change

Makes best estimate of misstatements based on his projection of
misstatements detected during sampling
Considers numerous events and conditions that could increase
audit risk
Evaluating the Results
The audit partner in charge of engagement performs the final working paper
review. Focuses on:
Overall scope of the examination
Ascertains that the scope of the audit examination covers completely the terms
enumerated in the engagement.
Adequacy of the audit program
Accuracy and completeness of the work of the audit staff
Reasonableness of the judgement
The areas with high risk of misstatements or fraud

It is necessary to integrate the results into one overall conclusion: that financial
statements are fairly presented in accordance with generally accepted accounting
priniciples.
Sufficiency and Adequacy of Evidence

The auditor applies professional judgement to determine whether

the audit procedures chosen will result in satisfactory evidence both
in quality and quantity.

The auditor considers materiality and relative risk in determining

whether quality of evidence accumulated is competent or
persuasive and whether the quantity of evidence gathered is
sufficient or satisfactory.

If the auditor concludes that sufficient evidence has not been

obtained, he can either obtain additional evidence or issue either a
qualified opinion or disclaimer of opinion.
Adequacy of Disclosure and Conformity with
Statutory and Regulatory Requirements

Informative disclosures required in the FS, if not properly

included, must be disclosed and included in the audit report.
EVIDENCE SUPPORTING AUDITORS OPINION

If no misstatement or error was detected, the evidence gathered

supports auditoss expression of an unqualified opinion
If the examination reveals misstatements or errors, adjustments in
the financial statements would be necessary. Unqualified opinion
may be issued when the client has revised the financial
statements to the auditors satisfaction
If there were restrictions, the auditor renders a qualified opinion
or a disclaimer of opinion.
Drafting the Audit Report and Other
Deliverables to Clients
In an audit enegagement, the senior accountant takes charge of the
fieldwork and assumes the responsibility for the completion of the audit.

The audit manger reviews the working papers and drafts the audit report.

After ascertaining that the audit work has been performed in accordance
with generally accepted auditing standards and in terms of the
management and that the results of the audit are fair representations, a
partner signs the audit report.

On or before the date agreed upon, the auditor submits to the client the
audit report and the accompanying set of financial statements.
Post-Audit Responsibilities

SUBSEQUENT DISCOVERY OF FACTS

- When he becomes aware of a material fact,
- which existed at the date of the auditors report;and
- which, if known at that date, may have caused the auditor to
modify the report.
SUBSEQUENT DISCOVERY OF OMITTED PROCEDURES
- Assess the importance of the omitted procedures to the auditors
ability to support his opinion.