ADVANCE AUDITING

Additional Issues
 ADDITIONAL ISSUES
Before determining the appropriate audit report, the auditor evaluates
the results of audit tests and considers a number of possible
additional issues that could impact the entity’s internal control over
financial reporting and its financial statements which are:
•  Review for contingent liabilities
•  Review for commitments
•  Review for subsequent events
•  Final evaluation of audit evidence
•  Communications with the audit committee and management
•   Subsequent  discovery  of  relevant  facts  existing  at  the  date 
of  the  auditor’s report
 CONTINGENCIES
“Contingencies,” states that when a contingent liability exists, the
likelihood that the future event will result in a loss is to be assessed
using three categories:
1. Probable: The future event is likely to occur. (Loss is accrued)
2. Reasonably possible: The chance of the future event occurring is
more than remote but less than likely. (Disclosure of contingency
in financial statements)
3. Remote: The chance of the future event occurring is slight.
(neither accrued, nor disclosed)
 CONTINGENCIES
Examples of contingent liabilities include the following:
• pending or threatened litigation.
• actual or possible claims and assessments.
• income tax disputes.
• product warranties or defects.
• guarantees of obligations to others.
• agreements to repurchase receivables that have been sold.
 CONTINGENCIES
Examples of procedures that can help the auditor identify contingent
liabilities include
1. Reading the minutes of meetings of the board of directors,
committees of the board, and stockholders.
2. Reviewing contracts, loan agreements, leases, and
correspondence from government agencies.
3. Reviewing tax returns, IRS reports, and schedules supporting the
entity’s income tax liability.
4. Confirming or otherwise documenting guarantees and letters of
credit obtained from financial institutions or other lending
agencies.
5. Inspecting other documents for possible guarantees or other
similar arrangements.
 CONTINGENCIES
Near the completion of the engagement the auditor takes specific
additional steps to identify contingent liabilities. Such procedures
include:
1. Inquiry of and discussion with management regarding the entity’s
policies and procedures for identifying, evaluating, and
accounting for contingent liabilities.
2. Examining documents in the entity’s records such as
correspondence and invoices from attorneys for pending or
threatened lawsuits
3. Obtaining a legal letter that describes and evaluates any
litigation, claims, or assess
4. Obtaining a written representation from management that all
litigation, asserted and unasserted claims, and assessments have
been disclosed in accordance with the Standards.
 CONTINGENCIES
Near the completion of the engagement the auditor takes specific
additional steps to identify contingent liabilities. Such procedures
include:
1. Inquiry of and discussion with management regarding the entity’s
policies and procedures for identifying, evaluating, and
accounting for contingent liabilities.
2. Examining documents in the entity’s records such as
correspondence and invoices from attorneys for pending or
threatened lawsuits
3. Obtaining a legal letter that describes and evaluates any
litigation, claims, or assess
4. Obtaining a written representation from management that all
litigation, asserted and unasserted claims, and assessments have
been disclosed in accordance with the Standards.
 SUBSEQUENT EVENTS
Events or transactions that occur after the balance sheet date but
before the issuance of the financial statements materially affect the
financial statements. These events or transactions are referred to as
subsequent events and require recognition or disclosure in the
financial statements.
Two types of subsequent events require consideration by
management and evaluation by the auditor:
1. Type I (Recognized Events): Events that provide additional
evidence about conditions that existed at the date of the balance
sheet and that affect the amounts or estimates involved in the
financial statement preparation process. Type I events require
adjustment of the numbers in the financial statements.
 SUBSEQUENT EVENTS
Example of Type I : The settlement of a lawsuit after the balance
sheet date but prior to issuance of the financial statements for an
amount different from the amount recorded in the year-end financial
statements as a contingent liability.
2. Type II (Unrecognized Events): Events that provide evidence about
conditions that did not exist at the date of the balance sheet but that
arose subsequent to that date. Type II events usually require
disclosure in the notes to the financial statements. In some instances
where the effect of the Type II event or transaction is very significant,
pro forma financial statements may be required in order to prevent the
financial statements from being misleading.
Examples of Type II events: Purchase or disposal of a business by
the entity after the balance sheet date but prior to issuance of the
financial statements
 AUDIT PROCEDURES FOR
SUBSEQUENT EVENTS
• Enquiring from management;
• Reading any interim financial statements that are available for the
period after yearend
• Reading the available minutes of meetings of stockholders,
directors, or other committees for the subsequent-events period
• Asking legal counsel about any developments relating to litigation,
claims, or assessments against the company
• Review of relevant internal audit reports (or similar functions, such
as loan review in a financial institution) issued during the
subsequent period
• Regulatory agency reports on the company’s internal control over
financial reporting, if any
 FINAL STEPS AND EVIDENCE
EVALUATION
In addition to the search for unrecorded contingent liabilities and the
review for subsequent events, the auditor conducts a number of audit
steps before deciding on the appropriate audit report for the entity.
These include the following:
• Performance of final analytical procedures
• Obtaining a management representation letter
• Review of working papers
• Final evaluation of audit results
• Evaluation of financial statement presentation and disclosure
• Obtaining an independent review of the engagement
• Evaluation of the entity’s ability to continue as a going concern
 GOVERNANCE AND
MANAGEMENT
Communications with Those Charged with Governance and
Management:
Auditing standards require that the auditor communicate certain
matters related to the conduct of the audit to those individuals
responsible for oversight of the entity’s strategic direction and its
financial reporting process, sometimes referred to as “those charged
with governance typically refer to the board of directors, and the audit
committee in particular.
The objectives of communication with the audit committee are to:
1. communicate the auditor’s responsibilities and establish an
understanding of the terms of the audit engagement with the audit
committee;
2. obtain information from the audit committee that is relevant to the
audit;
 GOVERNANCE AND
MANAGEMENT
3. communicate an overview of the overall audit strategy and timing;
and
4. provide timely observations arising from the audit that are
significant to the financial reporting process.
 GOVERNANCE AND
MANAGEMENT
Communications Regarding the Audit of Internal Control over
Financial Reporting:
• The auditor also has a number of communication responsibilities
with respect to the audit of internal control over financial reporting
(AS5).
• The auditor must communicate in writing to management and the
audit committee all significant deficiencies and material
weaknesses identified during the audit.
• The written communication should be made prior to the issuance
of the auditor’s report on internal control over financial reporting.
The auditor also issue management letter to make recommendations
to the entity based on observations during the audit; the letter may
include suggested improvements in various areas, such as
organizational structure and efficiency issues.
SUBSEQUENT DISCOVERY OF
FACTS
Facts may come to the auditor’s attention after issuance of the audit
report and financial statements that might have affected the report.
When facts are encountered that may affect the auditor’s previously
issued report, the auditor should:
• consult with his or her attorney because legal implications may be
involved and actions taken by the auditor may involve confidential
entity–auditor communications.
• determine whether the facts are reliable and whether they existed
at the date of the audit report.
• discuss the matter with an appropriate level of management and,
when appropriate, those charged with governance.
• determine whether the financial statements need revision and, if
so, inquire how management intends to address the matter.
SUBSEQUENT DISCOVERY OF
FACTS
If the entity refuses to cooperate and make the necessary
disclosures, the auditor should notify the board of directors and take
the following steps, if possible:
1. Notify the entity that the auditor’s report must no longer be
associated with the financial statements.
2. Notify any regulatory agencies having jurisdiction over the entity
that the auditor’s report can no longer be relied upon.
3. Notify each person known to the auditor to be relying on the
financial statements. (Notifying a regulatory agency such as the
SECP is often the only practical way of providing appropriate
disclosure.) , if so, inquire how management intends to address
the matter.
The practical outcome of these procedures is that the auditor has
withdrawn his or her report on the previously issued financial
statements.