Completing the Audit / Postaudit Responsibilities
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19-1. The three categories of activities in completing the audit are (a) completing field work, (b) evaluating the findings, and (c) communicating with the client.
The activities involved in completing the field work are (a) making subsequent events review, (b) reading minutes of meetings, (c) obtaining evidence concerning litigation, claims, and assessments, (d) obtaining client representation letter, and (e) performing analytical procedures.
Subsequent events are events that occur between the balance sheet date and the issuance date of the auditor's report (which is not the same as the date of the report) that may affect the financial statements on which the report is rendered. The subsequent events period extends from the balance sheet date to the end of field work on the engagement.
The types are:
• Type 1 consists of those events that provide additional evidence with respect to conditions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements.
• Type 2 consists of those events that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. • Type 1 events require adjustment of the financial statements. Type 2 events require disclosure, and in very material cases, by attaching pro-form data to the financial statements.
The auditor is required by GAAS to search for and to evaluate subsequent events up to the date of the auditor's report, which should be as of the end of field work. This responsibility is discharged by (1) being alert for subsequent events in performing year-end substantive tests after the balance sheet date, and (2) performing specific procedures at or near the completion of field work.
Regarding litigation, claims, and assessments (LCA), the auditor should obtain evidential matter on • The existence of a condition, situation, or set of circumstances indicating an uncertainty as to the possible loss to an entity arising from the LCA. • The period in which the underlying cause for legal action occurred. • The degree of probability of an unfavorable outcome. • The amount or range of potential loss.
A letter of audit inquiry is a letter sent by management to the company's outside legal counsel requesting the lawyer to send specified information directly to the auditor about LCA against the company. The letter is the auditor's primary means of obtaining evidence about LCA.
When the lawyer fails to respond, the auditor has a scope limitation. Depending on materiality, the auditor will express either a qualified opinion or a disclaimer of opinion.
The objectives of a "rep" letter are: (1) confirm oral representations given to the auditor, (2) document the continuing appropriateness of such representations, and (3) reduce the possibility of misunderstandings concerning management's representations.
When the auditor is unable to obtain a rep letter or support a management representation that is material to the financial statements by other audit procedures, there is a scope limitation. Depending on materiality, the auditor will express either a qualified opinion or a disclaimer of opinion
The objectives of an overall review are to assist the auditor in (1) assessing conclusions reached in the audit and (2) evaluating the financial statement presentation taken as a whole.
The review should be made by an individual having comprehensive knowledge of the client's business and industry. Normally, either the partner in charge of the audit or the top manager on the engagement makes the review.
Analytical procedures performed during...
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