Completing the Audit - Module 1 part 2.ppt
- 1. Learning Objectives 1. Recall the concepts in Identifying and Assessing the Risk of Material Misstatement 2. Recall the audit procedures performed at the Completion stage of audit 3. Recall the different types of audit opinions issued and appropriate audit report 11-1
- 2. UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
- 3. UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT The standard requires that auditor should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement. The standard provides guidance on the following: • Risk assessment procedures and sources of information about the entity and its environment including its internal control. • Assessing the risk of material misstatement. • Communicating with governance and management. • Documentation.
- 4. Risk Assessment Procedures and Sources of Information The auditor should perform the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal controls. • Inquiries of management and others within the entity; • Analytical procedures • Observation and inspection.
- 5. • The auditor is not required to apply all the risk assessment procedures for each aspect of the understanding required. • The auditor may obtain information by making inquiries of the entity’s legal direction or of valuation experts that the entity has used. • Reviewing information obtained from external sources such as reports by analysts, banks, or rating agencies, trade and economic journals or regulatory or financial publications may also be useful in obtaining information about the entity.
- 6. Inquiries The auditor obtains information from management and those responsible for financial reporting. However, useful information can be obtained from others within the entity like production staff, internal audit personnel and other employees. • Inquiries with governance may help the auditor understand the environment in which the financial statements are prepared. • Inquiries directed towards internal audit personnel may relate to their activities concerning the monitoring of the entity’s internal control. • Inquiries of employees involved in initiating, processing or recording complex or unusual transactions. • Inquiries directed towards in-house legal counsel. • Inquiries directed towards marketing or sales personnel.
- 7. Analytical Procedures These include ratio analysis, trend analysis, and common size analysis of financial as well as non financial information. • These procedures enable auditor to identify situation where significant fluctuations exist. • Observation and Inspection • Observation of entity activities and operations • Inspection of documents • Reading reports • Visits to the entity’s plant facilities.
- 8. Discussion among the Audit Team • The members of the engagement team should discuss the weakness of the entity’s financial statements to materials misstatements. • Such discussion would sharing of knowledge and exchange of information.
- 9. Understanding the Entity and Its Environment • Industry, regulatory, and other external factors, including the applicable financial reporting framework • Nature of the entity, including the entity’s selection and application of accounting policies. • Objectives and strategies and the related business risks. • Measurement and review of the entity’s financial performance. • Internal control.
- 10. Examples of matters Industry conditions • The market and competition, including demand, capacity, and price competition. • Cyclical or seasonal activity • Product technology relating to the entity’s products • Energy supply and cost
- 11. Regulatory environment • Accounting principles and industry specific practices • Regulatory framework, for a regulated industry (like; baking sector) • regulation that significantly affect the entity’s operations
- 12. Other external factors currently affecting the entity’s business. • General level of economic activity (for example, recession, growth) • Interest rates and availability of financing • Inflation currency revaluation.
- 13. Nature of the Entity • The entity’s operations, its ownership and governance, the types of investments that it is making and plans to make, the way that the entity is structured and how it is financed. • It enables the auditor to understand the classes of transactions, account balances, and disclosures to be expected in the financial statements.
- 14. Examples of matters Business Operations Nature of Business • Products or services and markets • Conduct of operations • Joint ventures and outsourcing activities • Key customers. • Employment • Research and development • Transactions
- 15. Investments • Acquisitions, mergers • Investments and dispositions of securities and loans. • Capital investment activities
- 16. Financing • Group structure • Debt structure • Leasing of property, plant or equipment • Beneficial owners • Related parties • Use of derivative financial instruments.
- 17. Financial Reporting • Accounting principles and industry specific practices. • Revenue recognition practices. • Accounting for fair values. • Inventories • Foreign currency assets, liabilities and transactions • Industry-specific significant categories • Financial statement presentation
- 19. Timeline for Major Activities in Audit Date of the auditors’ report (audit completion date) Beginning of year Year-End Date (date of the financial statements) Audit report release date Interim testing (tests of controls and some substantive procedures) • Complete substantive procedures • Attorney’s letters • Written representations • Going-concern assessment • Adjusting journal entries • Audit documentation review • Subsequent events Subsequently discovered facts • Subsequently discovered facts • Omitted audit procedures • Management letter • Communications with those charged with governance 11-
- 20. Procedures Prior to the Audit Report Release Date • Completing substantive procedures • Attorney’s letters • Written representations • Going-concern assessment • Adjusting entries • Audit documentation review • Subsequent events • Subsequently discovered facts 11-
- 21. Completing Substantive Procedures Roll-forward procedures: Extend work from interim period to date of the financial statements • Include both tests of controls and substantive procedures • Performed following date of the financial statements • Idea is to obtain evidence through the date of the financial statements 11-
- 22. Completing Substantive Procedures • Analytical procedures: Study of relationships among financial and nonfinancial data Can be used in planning (required), substantive testing, and near the end of the audit (required) Near the end of the audit, analytical procedures identify unusual or unexpected relationships not previously identified • Review accounts for “miscellaneous”, “other,” and “clearing” accounts (may relate to earnings management) 11-
- 23. Completing Substantive Procedures Accounting estimates: • Examples include future cash flows in evaluating asset impairments, allowance for doubtful accounts for receivables, and depreciation lives for fixed assets • Review management’s process for developing estimates • Review estimates for reasonableness 11-
- 24. Procedures Prior to the Audit Report Release Date • Completing substantive procedures • Attorney’s letters • Written representations • Going-concern assessment • Adjusting entries • Audit documentation review • Subsequent events • Subsequently discovered facts 11-
- 25. Procedures for Litigation, Claims, and Assessments • Inquiry of clients • Review minutes of meetings of stockholders, directors, and committees • Review contracts, loan agreements, and correspondence from taxing and governmental agencies • Obtain information concerning guarantees from bank confirmations • Review documentation related to legal services • Attorney’s letters 11-25
- 26. Attorney’s Letters Attorney Letter (with response) Attorney Letter Auditors Request Client to Prepare Attorney Letter 2 3 1 CLIENT ATTORNEY AUDITORS Sent by Auditors 11-26
- 27. Attorney’s Letters: Responsibilities • Auditors Initiate request for attorney letter Send letter to attorney including information related to litigation, claims, and assessments • Client Prepare listing, description, and evaluation of litigation, claims, and assessments for letter • Attorney Respond to auditors directly regarding client’s description of litigation, claims, and assessments contained in attorney letter 11-27
- 28. Attorney’s Letters: Contents • Listing of pending litigation, claims, and assessments • Description of each item or case included in the listing • Evaluation of the likelihood of an unfavorable outcome – PAS 37 • Estimate of the range of potential loss • Understanding regarding unasserted claims 11-28
- 29. Procedures Prior to the Audit Report Release Date • Completing substantive procedures • Attorney’s letters • Written representations • Going-concern assessment • Adjusting entries • Audit documentation review • Subsequent events • Subsequently discovered facts 11-29
- 30. Written Representations or Management Representation Letter • Provided by management to auditors • Dated using date of auditors’ reports (audit completion date) • Broad purpose Impress upon management its primary responsibility for the financial statements May establish auditors’ defense if a question related to inquiries subsequently arises • Qualify or disclaim an opinion if not provided by the client 11-30
- 31. Contents of Written Representations • Information related to financial statements Management’s responsibility for F/S and internal control over financial reporting Appropriate disclosure, presentation, and reasonableness of items Statement that uncorrected misstatements are immaterial • Information provided to auditors by management • Internal control over financial reporting (for public entities) 11-31
- 32. Procedures Prior to the Audit Report Release Date • Completing substantive procedures • Attorney’s letters • Written representations • Going-concern assessment • Adjusting entries • Audit documentation review • Subsequent events • Subsequently discovered facts 11-32
- 33. Going-Concern Assessment • Auditors required to consider whether evidence obtained during audit raises questions about ability to continue as a going concern • If concerns exist, evaluate management’s plans to mitigate If concerns do not remain: No effect on report or financial statements If concerns remain: Disclose in F/S and modify auditors’ report 11-33
- 34. Adjusting Entries • Accumulate dollar effects of identified misstatements • Evaluate materiality Rollover method considers the current period income effect(s) of misstatements Iron curtain method considers the aggregate effect of the adjustments on the entity’s balance sheet Philippine Standards on Auditing requires adjustments to be proposed if material under either approach • Recommend adjustment of all misstatements identified • Carry any uncorrected misstatements forward for consideration in future audits • Communicate all adjustments and misstatements to audit committee or individuals charged with governance 11-34
- 35. Audit Documentation Review • Audit supervisor Have all steps in audit plan been performed? Is referencing among documentation clear? Are explanations understandable? • Audit manager and partner Is the overall scope of the audit adequate? Do overall conclusions support the opinion? • Reviewing partner Is the quality of audit work and reporting consistent with quality standards of the firm? Engagement quality review 11-35
- 36. Procedures Prior to the Audit Report Release Date • Completing substantive procedures • Attorney’s letters • Written representations • Going-concern assessment • Adjusting entries • Audit documentation review • Subsequent events • Subsequently discovered facts 11-36
- 37. Timeline and Terms • Subsequent events occur between the date of the financial statements and date of the auditors’ report • Subsequently discovered facts become known after the date of the auditors’ report Date of the auditors’ report (Audit completion date) Beginning of year Year-End Date (Date of the Financial Statements) Audit report release date Subsequent Events Subsequently Discovered Facts 11-37
- 38. Procedures to Identify Subsequent Events • Obtain understanding of procedures management performs to identify subsequent events • Inquire of management and those charged with governance • Read minutes of meetings of owners, management, and those charged with governance • Review entity’s interim financial statements 11-38
- 39. Types of Subsequent Events • Provide new information about conditions existing at date of the financial statements Adjust financial statements to reflect new information • Involve events that arose following the date of the financial statements Disclose in financial statements 11-39
- 40. Subsequently Discovered Facts • If discovered prior to audit report release date, perform procedures related to items Revise date of auditors’ reports to reflect new completion date Dual date auditors’ reports • Following audit report release date: If facts would result in revision of auditors’ report or F/S and individuals are relying on F/S Notify individuals relying on F/S Issue revised F/S which provide disclosure of facts 11-40
- 41. Procedures Following Audit Report Release Date • Subsequently discovered facts • Omitted procedures • Communication with those charged with governance • Management letters 11-41
- 42. Omitted Procedures • Perform procedures if: Omitted procedures are important Individuals are currently relying on financial statements and auditors’ reports • If previous opinion can be supported, no further action necessary • If previous opinion cannot be supported Withdraw the original report Issue revised reports Inform persons currently relying on the financial statements 11-42
- 43. Communication with Individuals Charged with Governance • Auditors’ responsibility under GAAS • Overview of planned scope and timing of audit • Judgment about quality of accounting policies, estimates, and disclosures • Significant difficulties encountered during audit • Uncorrected misstatements • Disagreements with management • Material, uncorrected misstatements • Representations requested from management • Management consultations with other auditors • Significant issues discussed with management • Other findings or issues significant and relevant to those charged with governance 11-43
- 44. Summary of Audit Communications Type From To Timing Method Engagement letter Auditors Client Before engagement Written Acceptance letter Client Auditors Before engagement Written Attorney letter response Attorney Auditors Near date of auditors’ report Written Written representation s Client Auditors Date of auditors’ report Written 11-44
- 45. Summary of Audit Communications (Continued) Type From To Timing Method Internal control deficiencies Auditors Individuals charged with governance For public entities, prior to audit report release date Written Communicatio n with those charged with governance Auditors Individuals charged with governance After audit Oral or written* Management letter Auditors Client After audit Oral or written 11-45 *If oral communication, document in audit documentation.