ACCT 4335 - Chapter 11

Necessary Competencies

• Complete substantive procedures 

• Roll forward procedures

• Attorney letters

• Written representations, which should be dated the date of the audit report. 

  • No date results in qualified or disclaimer of opinions

• Going concern assessment, which requires a 12 month period after completion of the audit 

• Adjusting journal entries 

• Audit documentation review 

• Subsequent events and facts - time period is through the period until the financial statements are drafted and finalized and reviewed by the auditors 

• Required communications with those in charge of governance

Roll forward procedures

Roll forward procedures extend work from the interim period to the date of the financial statements. 

• Include both tests of controls and substantive procedures

• Performed following the date of the financial statements 

• The idea is to obtain evidence through the date of financial statements

• Evaluate any going concern issues

• Required testing of transactions during the roll forward period 

• Any changes in personnel, controls, procedures, or IT systems

Analytical procedures

Analytical procedures is the study of relationships among financial and nonfinancial data. 

• Can be used in planning, substantive testing, and near the end of the audit 

• Near the end of an audit, analytical procedures identify unusual relationships not previously identified. 

• Required by GAAS

We should review accounts for

We should review accounts for miscellaneous, other, or clearing accounts

Accounting estimates

include future cash flows in evaluating asset impairments, allowance for doubtful accounts for receivables, and depreciation lives for fixed assets. These estimates are reviewed for reasonableness. 

Timeline for Audit and Subsequent Events

• BOY: Interim testing which involves test of controls and begin substantive procedures

• EOY: Complete substantive procedures, attorney letters, going concern, AJE’s, audit documentation review, and subsequent events

• Date of Auditor Report: Subsequently discovered facts

• Audit Report Release Date: Subsequently discovered facts, omitted audit procedures, management letter, communications to those in charge with governance

Procedures for Litigation, Claims, and Assessments: 

• Inquiry of client personnel 

• Review minutes of meetings with stockholders, directors, and committees 

• Review contracts, loan agreements, and correspondence from taxing and govt agencies 

• Obtain info concerning guarantees from bank confirmations 

• Send out attorney letters

Flow of Correspondence Related to Attorney Letter:

• Auditor requests client to prepare attorney letter

• The letter is sent by the auditor and received by the attorney 

• The attorney sends a responding attorney letter back to the auditor

Management Hiding Litigation and Claims in an Attorney Letter: 

If the client/management omits litigation and claims in the attorney letter, then the attorney has a legal and professional obligation to inform the client to include it. If the client/management still refuses to include the omitted litigation and claims, then the attorney is forced to resign. This is comparable to a high stakes poker game

Confirmation of Legal Counsel Considerations: 

• A lawyer’s refusal to respond is an audit scope limitation

• Letter of inquiry to the client’s legal counsel is the primary means of communication 

• Management is responsible for all significant legal actions, claims, etc in legal confirmations. 

• Lawyer is responsible to assess whether all appropriate items have been included and to respond to management

GAAP Considerations need to be reported based

GAAP Considerations need to be reported based on remote, possible, plausible

• Remote: no action required 

• Possible: disclosure of matter in your notes to financial statements including range/estimate of damages 

• Probable: disclosure of matter in your notes to financial statements including range/estimates of damages and recording of related accrued liability

Written Representations:

• Provided by management to the auditor

• Dated using date of auditors’ report

• Also required to obtain a BOD Meeting Representation Letter

• Serve the broad purpose of impressing upon management its primary responsibility and establishes auditors’ defense if a question about inquiries arise 

• They use the date of the auditors’ report 

• Qualify or disclaim an opinion or resign

What is in a written representation?

• Information related to the financial statement 

• Information provided to auditors by management 

• Internal control over financial reporting

Ability to continue as going-concern:

• Auditors are required to question evidence 

• One year period is evaluated from the release of the CY financial statements 

• If concerns exists, evaluate management’s plans to mitigate 

  • If concerts don’t remain then there is no effect on the auditors report or financial statement

  • If concerns remain, ensure proper use of going concern basis and modify the auditors’ report

Audit Documentation Review

Audit supervisor, audit manager and partner, and then to the reviewing partner

Adjusting Entries

• accumulate dollar effects of identified misstatements

• evaluate materiality

• recommend adjustments

• carry uncorrected misstatements forward

• communicate all adjustments and misstatements to the audit committee