Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
23
Good Review Requires
More Than Looking
At Working Papers
PART V
(chapter 23)
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Objective 23 - 1
Conduct a review for contingent
liabilities and commitments.
LEARNING OBJECTIVES
Objective 23 - 2
Obtain and evaluate letters form the
client’s attorneys..
Conduct a post-balance sheet
review for subsequent event.
Objective 23 - 4
Design and perform the final steps in
the evidence accumulation segment
of the audit.
Objective 23 - 5
Integrate the audit evidence gathered,
and evaluate the overall audit results.
Objective 23 - 6
Communicate effectively with
the audit committee and management.
Objective 23 - 7
Identify the auditor’s responsibilities
when facts affecting the audit report
are discovered after its issuance.
Objective 23 - 3
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
A Contingent Liabilities
A contingent liability is potential future
obligation to an outside party for an unknown
amount resulting from activities that have
already taken place.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Certain contingent liabilities are of
considerable concern to the auditor:
Pending litigation for patent infringement,
product liability,or other actions
Income tax disputes
Product warranties
Notes receivable discounted
Guarantees of obligations of others
Unused balances of outstanding letters of credit
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Audit Procedures
for Finding Contingencies
Inquire of management (orally and in writing)
about the possibility of unrecorded contingencies.
Review current and previous years’ internal
revenue agent reports for income tax settlements.
Review the minutes of directors’ and stockholders’
meetings for indications of lawsuits or other contingencies.
continued
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Analyze legal expense for the period under audit and
review invoices and statements from legal counsel,
Obtain a letter for each major attorney performing
legal services.
Review working papers for any information that may
indicate a potential contingency.
Examine letters of credit in force as of the balance sheet
date and obtain a confirmation of the used and unused balance.
Audit Procedures
for Finding Contingencies
continued
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Typical
Inquire
of
Attorney
FIGURE 23-2
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
DISTINCTION
BETWEEN REVIEW
FOR SUBSEQUENT
EVENTS AND
SUBSEQUENT
DISCOVERY OF
FACTS AFTER
THE BALANCE
SHEET DATE
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Types of Who When
Review Does Done Purpose
In-charge review
Audit partner
review
Independent review
Peer review
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Perform Final Analytical Procedures
Evaluate Going Concern Assumption
Obtain Management Representation Letter
Read Other Information in the Annual Report
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
FIGURE 23-4
1,Examination of prior year’s working papers
a,Where last year’s working paper and review notes examined for areas
of emphasis in the current-year audit?
b,Was the permanent file reviewed for items that affect the current year?
2,Internal control
a,Has internal control been adequately understood?
b,Is the scope of the audit adequate in light of the assessed control risk?
c,Have all major weaknesses been included as reportable conditions in
a letter to the audit committee or to senior management?
3,General documents
a,Where all current-year minutes and resolutions reviewed,abstracted,
and followed up?
b,Has the permanent file been updated?
c,Have all major contracts and agreements been reviewed and abstracted
and copied with all existing legal requirements?
Completing the Engagement Checklist
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Types Subsequent Events
Those that have a Direct Effect on the
Financial statements and Require
Adjustment
Declaration of bankruptcy by an outstanding accounts receivable
balance because of deteriorating financial condition.
Settlement of a litigation at an amount different from the amount
recorded on the books.
Disposal of equipment not being used in operations at a price below
the current book value.
Sale of investments at a price below recorded cost.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Period covered by Subsequent Events
Review
FIGURE 23-3
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Those that have a Direct Effect on the
Financial Statements but Which
Disclosure is Advisable
Decline in the market value of securities held for temporary
investment or resale
Issuance of bonds or equity securities
Decline in the market value of inventory as a consequences of
government action barring further sale of a product
Uninsured loss of inventories as a result of fire
A merger or an acquisition
Types Subsequent Events
continued
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Inquire of Management
Correspond with Attorneys
Review Internal statements Prepared Subsequent to the
Balance Sheet Date
Review Records Prepared Subsequent to the Balance Sheet Date
Examine Minuets Issued Subsequent to the Balance Sheet Date
Obtain a Letter of Representation
Audit Tests
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Dual-dated audit report means
that the audit report includes two dates.
1,The first date is the date for the completion
of field work except for a specific exception.
2,The second date,which is always later,
deals with the exception.
Dual Dating
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
FIGURE 23 - 7
Evaluating Results and Reaching Conclusions
on the Basis of Evidence
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Communicate With the Audit
Committee and Management
Fraud and Illegal Acts
Reportable Conditions
Other Communication
with Audit Committee
Management Letters
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
FIGURE 23 - 8
Review for Subsequent Events and
Subsequent Discovery of Facts
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Commitments
Completing the engagement checklist
Contingent liability
Dual-dated audit report
financial statement disclosure checklist
Independent review
Inquiry of the client’s attorneys
Letter of representation
Management letter
Other information included in annual report
Review for subsequent events
Review of working papers
Subsequent events
Unadjusted misstatement worksheet
Unasserted claim
2000 by Prentice Hall,Inc.
23
Good Review Requires
More Than Looking
At Working Papers
PART V
(chapter 23)
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Objective 23 - 1
Conduct a review for contingent
liabilities and commitments.
LEARNING OBJECTIVES
Objective 23 - 2
Obtain and evaluate letters form the
client’s attorneys..
Conduct a post-balance sheet
review for subsequent event.
Objective 23 - 4
Design and perform the final steps in
the evidence accumulation segment
of the audit.
Objective 23 - 5
Integrate the audit evidence gathered,
and evaluate the overall audit results.
Objective 23 - 6
Communicate effectively with
the audit committee and management.
Objective 23 - 7
Identify the auditor’s responsibilities
when facts affecting the audit report
are discovered after its issuance.
Objective 23 - 3
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
A Contingent Liabilities
A contingent liability is potential future
obligation to an outside party for an unknown
amount resulting from activities that have
already taken place.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Certain contingent liabilities are of
considerable concern to the auditor:
Pending litigation for patent infringement,
product liability,or other actions
Income tax disputes
Product warranties
Notes receivable discounted
Guarantees of obligations of others
Unused balances of outstanding letters of credit
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Audit Procedures
for Finding Contingencies
Inquire of management (orally and in writing)
about the possibility of unrecorded contingencies.
Review current and previous years’ internal
revenue agent reports for income tax settlements.
Review the minutes of directors’ and stockholders’
meetings for indications of lawsuits or other contingencies.
continued
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Analyze legal expense for the period under audit and
review invoices and statements from legal counsel,
Obtain a letter for each major attorney performing
legal services.
Review working papers for any information that may
indicate a potential contingency.
Examine letters of credit in force as of the balance sheet
date and obtain a confirmation of the used and unused balance.
Audit Procedures
for Finding Contingencies
continued
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Typical
Inquire
of
Attorney
FIGURE 23-2
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
DISTINCTION
BETWEEN REVIEW
FOR SUBSEQUENT
EVENTS AND
SUBSEQUENT
DISCOVERY OF
FACTS AFTER
THE BALANCE
SHEET DATE
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Types of Who When
Review Does Done Purpose
In-charge review
Audit partner
review
Independent review
Peer review
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Perform Final Analytical Procedures
Evaluate Going Concern Assumption
Obtain Management Representation Letter
Read Other Information in the Annual Report
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
FIGURE 23-4
1,Examination of prior year’s working papers
a,Where last year’s working paper and review notes examined for areas
of emphasis in the current-year audit?
b,Was the permanent file reviewed for items that affect the current year?
2,Internal control
a,Has internal control been adequately understood?
b,Is the scope of the audit adequate in light of the assessed control risk?
c,Have all major weaknesses been included as reportable conditions in
a letter to the audit committee or to senior management?
3,General documents
a,Where all current-year minutes and resolutions reviewed,abstracted,
and followed up?
b,Has the permanent file been updated?
c,Have all major contracts and agreements been reviewed and abstracted
and copied with all existing legal requirements?
Completing the Engagement Checklist
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Types Subsequent Events
Those that have a Direct Effect on the
Financial statements and Require
Adjustment
Declaration of bankruptcy by an outstanding accounts receivable
balance because of deteriorating financial condition.
Settlement of a litigation at an amount different from the amount
recorded on the books.
Disposal of equipment not being used in operations at a price below
the current book value.
Sale of investments at a price below recorded cost.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Period covered by Subsequent Events
Review
FIGURE 23-3
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Those that have a Direct Effect on the
Financial Statements but Which
Disclosure is Advisable
Decline in the market value of securities held for temporary
investment or resale
Issuance of bonds or equity securities
Decline in the market value of inventory as a consequences of
government action barring further sale of a product
Uninsured loss of inventories as a result of fire
A merger or an acquisition
Types Subsequent Events
continued
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Inquire of Management
Correspond with Attorneys
Review Internal statements Prepared Subsequent to the
Balance Sheet Date
Review Records Prepared Subsequent to the Balance Sheet Date
Examine Minuets Issued Subsequent to the Balance Sheet Date
Obtain a Letter of Representation
Audit Tests
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Dual-dated audit report means
that the audit report includes two dates.
1,The first date is the date for the completion
of field work except for a specific exception.
2,The second date,which is always later,
deals with the exception.
Dual Dating
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
FIGURE 23 - 7
Evaluating Results and Reaching Conclusions
on the Basis of Evidence
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Communicate With the Audit
Committee and Management
Fraud and Illegal Acts
Reportable Conditions
Other Communication
with Audit Committee
Management Letters
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
FIGURE 23 - 8
Review for Subsequent Events and
Subsequent Discovery of Facts
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Commitments
Completing the engagement checklist
Contingent liability
Dual-dated audit report
financial statement disclosure checklist
Independent review
Inquiry of the client’s attorneys
Letter of representation
Management letter
Other information included in annual report
Review for subsequent events
Review of working papers
Subsequent events
Unadjusted misstatement worksheet
Unasserted claim
