Acctg 163 Auditing Theory Review 5 tmhsp

ACCTG 163 – AUDITING THEORY (AT-5)

5.0 Completing the Audit/ Post-Audit Responsibilities
5.1 Completing the audit and audit report preparation
5.1.1 Analytical procedures for overall review
5.1.2 Related party transactions
5.1.3 Subsequent events review
5.1.4 Assessment of going concern assumption
5.1.5 Obtaining client's representation letter
5.1.6 Evaluating findings, formulating an opinion and drafting the audit report
5.2 Post-audit responsibilities
5.2.1 Subsequent discovery of facts
5.2.2 Subsequent discovery of omitted procedures
______________________________________________________________________________________________
Completing The Audit/ Post-Audit Responsibilities
Issues To Consider:
1. Analytical Procedures for Overall Review
2. Related Party Transactions
3. Subsequent Events Review
4. Assessment of Going Concern Assumption
5. Obtaining Client's Representation Letter
6. Evaluating Findings, Formulating an Opinion And Drafting The Audit Report

ANALYTICAL PROCEDURES
When performing analytical procedures as substantive tests, the auditor should consider:
 Objectives of the analytical procedures and the extent to which their results can be relied upon
 Nature of the entity and the degree to which information can be disaggregated
 Availability of information, both financial and non-financial
 Reliability of information available
 Relevance of information available
 Source of information available
 Comparability of the information available
 Knowledge gained during previous audits

Analytical Procedures in the Overall Review at the end of the audit

 Should be applied at, or near the end of audit, when forming overall conclusion as to whether the FS as a whole are
consistent with the auditor’s knowledge of the entity.
 Evidence from analytical procedures are intended to corroborate conclusions formed during the audit of individual
components or elements of the FS

Extent on Reliance on Analytical Procedures

 Reliance on the results of analytical procedures will depend on the auditor’s assessment of risk that the analytical
procedures may identify relationships as expected, when in fact, a material misstatement exists
 It is usually the audit partner who does the analytical procedures during the final review of working papers and FS

Audit Procedures
1. Compare FS subtotals and totals with corresponding prior periods amounts and current year budget data
2. Calculate relevant ratios and compare with
3. Prior year and current year budgeted ratios
4. Current year ratios of major competitors or composite industry data
5. Compare common size statements to similar statements of prior years

RELATED PARTY TRANSACTIONS

PSA 550 “ Related Parties” – establishes standards and provides guidance on the auditor’s responsibilities and audit procedures
regarding related parties and transactions with such parties
a. Increases the risk of misstatement beyond that which would be ordinarily expected
b. Indicates that a material misstatement regarding related parties has occurred

Related Party
a)Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities
b) Significant influence (which may be gained by share ownership, statute or agreement) is the power to participate in the financial
and operating policy decisions of an entity, but has no control over those policies

Related Party Transactions

a) Direct or indirect equity holdings or other financial interests in the entity
b) The entity’s holding of direct or indirect equity or other financial interests in other entities
c) Being part of those charged with governance or key management (i.e. Those members of management who have authority and
responsibility for planning, directing, and controlling the activities of the entity
d) Being a close family member of any person referred to in c)
e) Having significant business relationship with any person referred to in c)

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RELATED PARTY TRANSACTIONS

a) The financial reporting framework may require disclosure in the FS of certain related party relationships and transactions
b) The existence of related parties or related party transactions may affect the FS.
Ex. The entity’s tax liability and expense may be affected by the tax laws in various jurisdictions, which require special consideration
when related parties exist
c) The source of audit evidence affects the auditor’s assessment of its reliability. A greater degree of reliance may be placed on
audit evidence that is obtained from or created by unrelated third parties and
d) A related party transaction may be motivated by other than ordinary business considerations. Ex. Profit sharing or fraud

Audit Procedures:
1. Performing detailed tests of transactions and balances
2. Reviewing minutes of meetings of shareholders and directors
3. Reviewing accounting records for large or unusual transactions or balances, paying close attention to transactions
recognized at or near the end of the reporting period
4. Reviewing confirmations of loans receivable and payable and confirmations from banks. Such a review may indicate
guarantor relationship and other related party transactions
5. Reviewing investment transactions, ex. Purchase or sale of an equity interest in a joint venture or other entity
6. Review prior year working papers for names of known related parties
7. Review the entity’s procedures for identification of related parties
8. Inquire as to the affiliation of directors, and officers with other entities
9. Review shareholder records to determine the names of principal shareholders, or obtain a listing of principal shareholders
from the share register
10. Review minutes of meetings of shareholders and the BOD and other relevant statutory records such as register of
director’s interests
11. Inquire of other auditors currently involved in the audit, or predecessor auditor, as to their knowledge of additional related
parties
12. Review the entity’s income tax returns and other information supplied to regulatory agencies
13. Confirming the terms and amount of transactions with related party
14. Inspecting evidence in possession of related party
15. Confirming or discussing information with persons associated with the transaction, such as banks, lawyers, guarantors
and agents

Indications of transactions with related parties

 Transactions with abnormal terms of trade, such as unusual prices, interest rates, guarantees and repayment terms
 Transactions which lack apparent logical business reasons for their occurrence
 Transactions in which substance differs from form
 High volume or significant transactions with certain customer or suppliers as compared with others
 Unrecorded transactions such as receipt or provision of management services at no charge

Management representations
a) They have disclosed to the auditor the identity of the entity’s related parties and all the related party relationships and
transactions of which they are aware and
b) They have appropriately accounted for and disclosed such relationships and transactions in accordance with the requirements
of the accounting framework

No disclosure is required for the ff:

a. In consolidated FS in respect of intra-group transactions
b. In parent FS when they are made available or published with the consolidated FS
c. In FS of wholly-owned subsidiary if its parent is incorporated in the same country and provides consolidated FS in that
country and
d. In FS of state-controlled enterprises of transactions with state-controlled enterprises

Note: If the auditor is unable to obtain sufficient appropriate evidence concerning related parties and related party transactions, or
if the auditor concludes that their disclosure in the FS is not adequate, the auditor should modify the audit report appropriately

SUBSEQUENT EVENTS REVIEW

PSA 560 “Subsequent Events” establishes standards and provides guidance on the auditor’s responsibility regarding subsequent
events.
Subsequent Events – occurring between period end and date of the auditor’s report, and facts discovered after the date of the
auditor’s report
Auditor is responsible in reviewing transactions between the period end and date of auditor’s report

2 types of Subsequent Events

1. Those that provide further evidence of conditions that existed at period end (FS should be adjusted)
2. Those that are indicative of conditions that arose subsequent to period end (Events should be disclosed in the FS)

Examples of Subsequent Event Type 1

 Loss on receivables resulting from bankruptcy of a major customer that was in a deteriorating condition at year-end
 Settlement of litigation for an amount different from an estimate at year-end

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 Disposal of an investment or of obsolete or scrapped inventory at price below book value

 Disposal of a segment that has been incurring operating losses at a disposal price below book value

Examples of Subsequent Event Type 2

 Sale of bond or capital stock issue
 Purchase or disposal of a business
 Settlement of litigation when the event giving rise to the claim occurred subsequent to the date of statement of financial
position
 Loss of plant or inventories as a result of flood or fire and not fully covered by insurance
 Loss on receivables resulting from conditions such as casualty arising subsequent to the date of statement of financial
condition

Audit Procedures
a) Obtaining an understanding of any procedures management has established to ensure that subsequent events are identified
b) Inquiring of management and BOD as to whether the subsequent events might affect the FS
c) Reading minutes of meetings of the entity’s owners and management and BOD held after the date of the FS, and inquiries about
matters discussed at any such meetings for which minutes are not yet available
d) Reading the entity’s latest subsequent interim FS
e) When, as a result of procedures performed, the auditor identifies events that require adjustment of or disclosure in the FS, the
auditor shall determine whether such event is appropriately reflected in the FS

Facts Discovered After the Date of the Auditors report, before the date of issuance of FS
1. If such facts/events will cause the auditor to amend his report had he known before the date of the audit report:
a. Discuss the matter with management and BOD
b. Determine whether the FS needs amendment, if so
c. Inquire how management intends to address the matter in the FS (amend or not to amend)

2. If management amends the FS, the auditor will:

a. Carry out the audit procedures necessary in the circumstances of amendment
b. Extend the audit procedures to the date of the new auditor’s report
c. Provide a new auditor’s report on the amended FS. The new auditor’s report shall not be dated earlier than the date of approval
of the amended FS

3. If management does not amend their FS:

The auditor should express a qualified opinion or adverse opinion

Facts Discovered After the FS have been issued:

After the FS has been issued, the auditor has no obligation to make inquiry regarding such FS

1. If such facts/events will cause the auditor to amend his report had he known before the date of the audit report:
a. Consider whether the FS needs revision
b. Discuss the matter with management and BOD
c. Inquire how management intends to address the matter in the FS (revise or not to revise)

2. If management revises the FS, the auditor will:

a. Carry out the audit procedures necessary in the circumstances of amendment
b. Ensure that anyone who received the previously issued FS and auditor’s report is informed of the situation
c. Issue a new auditor’s report on the revised FS. The new auditor’s report includes paragraph referring to a note in the FS
explaining the reason for revision. The new auditor’s report shall not be dated earlier than the date of approval of the revised FS

3. If management does inform those who have received the previously issued FS, and does not revise the FS when auditor believes
they should be revised:
> Auditor will notify management and BOD that the auditor will seek to prevent future reliance on the auditor’s report

REVIEW OF CONTINGENT LIABILITIES

PAS 37 Contingent Liability - should not be recognized, but should be disclosed
a) Possible obligation arising from past events, and will be confirmed by the occurrence or non-occurrence of an uncertain future
event
b) Present obligation arising from past events but is not recognized because
i. It is not probable that an outflow of resources will be required to settle the obligation
ii. The amount of the obligation cannot be measured reliably

Examples:
 Pending or threatened litigation for patent infringement, product warranties or product defects
 Guarantee of indebtedness or third party obligations
 Accommodation endorsement
 Threat of expropriation of assets
 Standy /Unused balance in letters of credit
 Risks due to hazards

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 Income tax disputes

 Discounted Notes receivable or factored accounts receivable
 Losses on purchase commitments
 Compensated absences (e.g. vacation or sick leave)
 Line of credit commitment to third parties

Note: Contingent losses that are remote- neither recognized nor disclosed

Audit Procedures
1. Inquire of management (orally and in writing) regarding the possibility of unrecorded contingencies
2. Review current and previous year’s BIR reports for income tax settlement
3. Review the minutes of director’s and stockholder’s meetings for indications of lawsuits or other contingencies
4. Analyze legal expense for the period and review invoices and statements from legal counsel
5. Obtain confirmation from all major attorneys performing legal services for the client as to the status of pending litigation or other
contingent liabilities
6. Review existing working papers for any information that may indicate potential contingency
7. Obtain letters of credit in force as of the date of the statement of financial position and obtain information of the used and unused
balance
8. Read contracts, loan agreements, lease agreements, and similar documents
9. Review estimates related to identified contingencies in accordance with the appropriate auditing standards.

EVALUATING GOING CONCERN STATUS

PSA 570 “Going Concern” deals with the auditor’s responsibility in the audit of financial statements with respect to management’s
use of the going concern assumption in the preparation and presentation of the financial statements.
Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. General purpose
financial statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease
operations, or has no realistic alternative but to do so.

Planning considerations
1. Auditor should remain alert for evidence or conditions which may cast doubt as to the entity’s ability to continue as a going
concern throughout the audit.
2. If such conditions are identified, the auditor should consider whether they affect the assessments of the components of audit
risk

Financial Indications
Recurring operating losses
Working Capital Deficiencies
Negative cash flows from Operating Activities
Adverse Key financial ratios
Operating Indications
Work Stoppages or labor difficulties
Loss of key management without replacement
Loss of principal customer or supplier
Other
Pending legal or regulatory proceedings that may result in claims that are unlikely to be satisfied

Auditor’s Responsibility
1. Consider appropriateness of management’s use of going concern assumption
2. Consider whether there are material uncertainties about the entity’s ability to continue as a going concern that needs to be
disclosed in the FS

Evaluating Management’s Assessment

1. Auditor should consider management’s assessment of the entity’s ability to continue as a going concern
2. Auditor should consider the same period used by management in making the assessment.
If management assess that the entity will only continue as a going concern for less than 12 month from the FS date, auditor will
ask management to extend it to 12 months from date of FS

Period beyond management’s assessment

1. Auditor should inquire of management as to its knowledge of events or conditions beyond the period of assessment, that may
cast doubt as to the going concern of the entity
2. Auditor should be alert to the possibility that there may be known events/conditions that will occur beyond the period of
assessment

Audit Procedures
Analytical procedures
Review of subsequent events
Review of compliance with terms of debt and loan agreements
Reading of minutes of meetings

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Inquiry of legal counsel about litigation, claims and assessments

Confirmation with related and third parties of the details of arrangements to provide or maintain financial support

When Going concern assumption is appropriate but a material uncertainty exists:

Auditor will add a paragraph that highlights the existence of material uncertainty relating to the event/condition that may cast
significant doubt as to the entity’s ability to continue as a going concern
In extreme situations involving multiple material uncertainties that are significant to the FS, the auditor may consider it appropriate
to express a disclaimer of opinion, instead of adding an emphasis paragraph

When Going concern assumption is NOT appropriate:

If the FS have been prepared on a going concern basis, when the auditor judges that the entity will not be able to continue as a
going concern, the auditor should express an adverse opinion
If the FS are revised and prepared on an alternative authoritative basis and is found to be appropriate, the auditor can issue an
unqualified report if there is adequate disclosure but should add an emphasis paragraph.

MANAGEMENT REPRESENTATIONS
PSA 580 “Management Representation” establishes standards and provides guidance for the use of management representations
as audit evidence, the procedures to be applied in evaluating and documenting management representations and the actions to
be taken if management refuses to provide appropriate representation

Obtaining management representation – is also a subsequent events procedure

If management representations relate to matters which are material to the FS, the auditor will:
1. Seek corroborative audit evidence from sources inside or outside the entity
2. Evaluate whether the representation made by management appear reasonable and consistent with other audit evidence
obtained, including other representations
3. Consider whether the individuals making the representations can be expected to be well informed on the particular matters

Written representations may take the ff. form:

1. Representation Letter from management
2. Letter from the auditor outlining the auditor’s understanding of management’s representations, duly acknowledged and confirmed
by management or
3. Relevant minutes of meetings of the BOD or similar copy or a signed copy of the FS

Contents of Client Representation Letter:

1. Management acknowledgement of its responsibility for the fair presentation of the FS
2. Availability of all financial records and related data
3. The completeness and availability of all minutes of meetings of stockholders, directors, and committees of directors
4. Non existence of errors or unrecorded transactions in the FS
5. Information concerning:
a. Subsequent events
b. Noncompliance with contracts that may affect FS
c. Losses from sales commitments
d. Obligations to repurchase assets that were previously sold
e. Related party transactions
f. The reduction of excess or obsolete inventories to net realizable value
6. Irregularities involving client’s management or employees
7. Communications that client received from regulatory agencies relating to noncompliance with, or deficiencies in, financial
reporting practices
8. The client’s plans or intentions that may affect the carrying value or classification of assets and liabilities
9. The disclosure of line-of-credit or similar arrangements
10. The losses from purchase commitments for inventory quantities in excess of requirements or at prices in excess of market
11. Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the FS or as a basis
for recording a loss contingency
12. Other liabilities and gain or loss contingencies that are required to be accrued or disclosed
13. Unaudited replacement cost information and interim financial information included in audited FS
14. Other matters

EVALUATING FINDINGS, FORMULATING AND OPINION AND DRAFTING THE AUDIT REPORT
Making a final assessment of Materiality and Audit Risk
 When completing the audit, the auditor must reconsider materiality and determine a material amount to be used in
evaluating the estimated misstatement in the FS. Audit risk must also be reconsidered
 The auditor should aggregate any uncorrected misstatements to be able to consider them in relation to the FS as a whole.
 The aggregation should include known and likely misstatements. Known misstatements are those individual
misstatements identified by the auditor. Likely misstatement are the best estimate of misstatement based on projection of
misstatements during sampling
 If audit risk increases, due to events and conditions during and towards the end of the audit, the auditor should evaluate
whether additional substantive procedures need to be performed.
 Auditor then determines whether the accumulated evidence indicates that the level of risk is appropriately low to enable
to auditor to render an opinion.

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Working Paper Review

The work of staff auditors are reviewed by senior auditors or by audit managers
Review by senior auditor :
Review the working papers on an account-by-account basis
Evaluate the procedures performed, evidence gathered and conclusions reached
Ensure that all steps in the audit program have been “signed off”
Check that the references from one working paper to another is appropriate

Review by Audit Manager or Partner:

Focuses on overall scope of the audit examination
Review completeness of audit examination in accordance with terms of engagement
Review compliance with auditing standards during the examination
Review the working papers as to conclusion as to the fair presentation of each account examined

Review by Audit Partner:

Adequacy of the audit program
Accuracy and completeness of subordinates’ work
Reasonableness of subordinates’ judgement
Consistency among working paper evidence, FS and auditor’s opinion
Areas wherein there is high risk of material misstatement including fraud
Resolution of significant accounting, auditing and reporting questions raised during the audit

Evaluating the Results

- Integrate the results into one overall conclusion
-If auditor concludes that evidence is not sufficient, then
a) Obtain additional evidence or
b) Issue either qualified or disclaimer of opinion

Evidence supporting Auditor’s Opinion

If the auditor believes that he has sufficient evidence, but it does not warrant a conclusion of fairly presented FS, the auditor may:
a. Require the client to revise the FS to the auditor’s satisfaction (client should correct errors or take up adjusting/reclassifying
entries)
b. Issue a qualified or adverse opinion

Post Audit Responsibilities

1. Subsequent discovery of facts
2. Subsequent discovery of omitted procedures

Consideration of Omitted Procedures After Report Date

Once the auditor has reported on the FS, he has no responsibility to carry out retrospective review of his work.
However, reports and working papers relating to particular engagement may be subjected to post issuance review in connection
with the firm’s internal inspection program, peer review or others.
The omission of a necessary auditing procedure may be revealed. If such omitted auditing procedure is identified, the auditor
should assess the importance of the effect of the omitted procedure on the previously issued opinion

Steps:
1. Assess importance of omitted procedure to support previously expressed opinion.
2. If omission impairs present ability to support report, and persons are relying on it, action is necessary
3. Perform omitted procedure or alternative procedures, (if unable, consult lawyer)
a. If evidence supports previously issued opinion, auditor has no responsibility
b. If evidence would have affected the previously issued opinion, follow procedures to prevent further reliance on report

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