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Lecture 11

Lecture 11 - Audit Completion and Reporting.docx

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LECTURE 11 – AUDIT COMPLETION AND REPORTING Audit Timelines  Audit engagements have a deadline for completion:  Disclosing entity – S319 Corporations Act requires lodgement with ASIC of audited financial report within three months of balance date Audit Overview  1 July 2009 – beginning of financial year o Initial planning o Interim audit –  Gain understanding of internal controls  Assess control risk  Tests controls & transactions  Develop audit program  Update working papers  30 June 2010 – end of financial year o Final Audit  Complete tests of controls & transactions  Analytical procedures  Update audit program (?)  Tests of balances  Update working papers  Complete audit  Issue audit opinion  14 Sept. – Sign Director’s Declaration  15 Sept. - Sign independent Auditor’s Report o Date of report:  Should be dated/signed no earlier than Director’s Declaration  Establishes last date of auditor’s responsibility for knowledge of events that should be reflected in financial report.  30 Sept. – Management distributes financial report  31 Oct. – AGM to consider: o Financial report for the year o Director’s report for the year o Auditor’s report for the year Assessing the Quality of the Audit  Analytical review of the audit (Required by ASA 520) o Do company results make sense in relation to industry and economic trends?  Concurring partner review o Independent review by an experienced auditor who is not part of the audit team o Necessary for businesses in Australia that need to report in the US requires by Sarbanes-Oxley Act  Partner rotation o New audit engagement and concurring review partner every 5 years Other Considerations in the Final Review of the Audit 1. Review for contingencies/unusual liabilities o Contingent losses/liabilities that are both probable and reasonably estimated should be accrued and disclosed. o Contingent losses/liabilities that are reasonably possible and remote contingencies should be disclosed in the notes to the financial statements. o Contingencies include:  Collectability of receivables and loans  Product warranty liability  Litigation and claims  Threat of expropriation of assets in a foreign country  Guarantees of debts of others  Purchase and sale commitments  Agreements to repurchase receivables that have been sold  Obligations of banks under standby letters of credit. Contingent Liabilities  Responsibilities o Management is responsible for identifying, evaluating and accounting for contingencies. o The auditor is responsible for determining client has properly identified, accounted for and disclosed material contingencies.  Sources of evidence o Primary sources include management and client’s lawyers. o Additional sources include corporate minutes, contracts, correspondence from government agencies and bank confirmations. Solicitor’s Representation Letter  Primary source of corroborative evidence concerning litigation, claims and assessments is the client’s lawyers.  The representation or letter of inquiry should include o Management’s description and evaluation of its contingencies o A request that the lawyer furnish the auditor with a comment on the completeness of management’s list and evaluations and, for each contingency:  A description of the matter, progress to date and action the client intends to take  An evaluation of the likelihood of an unfavourable outcome and estimate of potential loss  Any limitations on the lawyer’s response.  The letter of inquiry is good for establishing completeness of potential liabilities and providing factual information about contingencies. o However, because audit working papers are not privileged, lawyer responses will be less than forthcoming about the likelihood of unfavourable outcomes and the estimated amount of any potential losses. o A lawyer’s refusal to provide the requested information is a scope limitation sufficient to preclude issuing an unqualified opinion. 2. Adequacy of Disclosures  ‘Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.’  The auditor must be sure that: o Disclosed events and transactions occurred and pertain to the client o All disclosures that should be included are included o Disclosures are understandable to users o Disclosures are accurate. 3. Management Representations  Management representation letter o Reminds management of its responsibility for financial statements  Confirms significant oral responses made by management o Reduces possibility of misunderstandings between management and auditor  Management certification of financial statements o Australian businesses reporting in US must meet the SOX Act requirement that the CEO and CFO certify financial statements are fairly presented in accordance with GAAP. o The auditor should review management’s processes for certification. 4. Communications of Audit Matters with those Charged with Governance  Auditors notice things that may make the client more profitable.  Many of these observations are related to control deficiencies or operational matters.  Observations are included in a management comment letter with the audit report.  Management letter is not required, but does add value to the audit. 5. Evaluating the Going Concern Assumption  The auditor is required to evaluate client’s ability to remain a going concern for a period not to exceed one year from the balance sheet date.  Indicators of potential going concern problems: o Negative trends in key financial areas such as cash flow, sales, profits o Internal matters, such as loss of key personnel and outdated facilities and/or products o External matters, such as new legislation, loss of significant customer, uninsured casualty loss o Other matters, such as loan default, inability to pay dividends, attempted debt restructuring.  If substantial doubt about ability of client to remain a going concern, the auditor should: o Discuss the situation with management o Assess management’s plans to overcome problems o Consider the effects on the financial statements.  Evaluate the adequacy of financial statement disclosure.  Including the cause of going concern doubt and management’s plan to overcome the problem.  Consider the effects on the audit report: o Add explanatory paragraph to unqualified report o Disclaim opinion o Issue qualified opinion if disclosure is not adequate. 6. Review of Significant Estimates  Management estimates provide opportunities for the entity to ‘manage’ or even manipulate earnings. The auditor provides reasonable assurance that: o Management has information system to develop estimates material to the financial statements. o Estimates are reasonable and are presented per accounting standard requirements.  In evaluating management estimates, the auditor concentrates on key factors and assumptions that are o Significant to the accounting estimate o Susceptible to misstatement o Sensitive to variations o Inconsistent with current economic o Deviations from historical patterns trends. 7. Communicating with the Audit Committee  Items the auditor should discuss with the audit committee include: o Auditor’s responsibility under auditing o Difficulties encountered in performing standards the audit o Management judgements and o Copies of significant communications accounting estimates between auditor and management o Audit adjustments o Management’s discussion with other o Uncorrected misstatements accounting firms o Accounting policies and alternative o Significant fraud or illegal acts treatments o Significant deficiencies in internal o Major accounting and reporting control disagreements with management o Any independence issues o Any other significant matters. Subsequent Events  Subsequent events occur after the balance sheet date (AASB110)  Audit procedures used to identify subsequent events include: o Reading minutes of meetings of the BOD, shareholders and other groups held after year-end o Reading interim financial statement and investigating significant changes o Inquiring of management about:  Significant changes noted in interim statements  Significant contingent liabilities  Significant changes in working capital, debt or owners’ equity  Status of any tentative items  Unusual accounting adjustments made after the balance sheet date. o Inquiring of management and lawyer about subsequent events o Obtaining a management representation letter.  How an auditor handles a subsequent event depends on two things: o Whether the subsequent event provides evidence about conditions that existed at balance date (type I), or conditions arising after balance date (type II) o When the subsequent event occurred:  During fieldwork  After fieldwork, but before the audit report has been issued  After the audit report has been issued  After financial report has been issued. Type I Event  Type I events provide evidence about conditions that existed at balance date.  The financial statement numbers should be adjusted to reflect this information; footnote disclosure may also be necessary.  Examples of type I subsequent events: o A major customer, whose deteriorating financial condition existed prior to the balance date, files for bankruptcy during subsequent period o Lawsuit settled for different amount from accrual o Bonus share issue/share split in subsequent period
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