CHAPTER

24
Learning Objectives
Audit Completion

After studying this chapter, you should be able to:

1. Identify the accounts and the classes of transactions in the acquisition and payment
cycle;
2. Describe the business functions and the related documents and records in the
acquisition and payment cycle;
3. Understand internal control, and design and perform tests of controls and substantive
tests of transactions for the acquisition and payment cycle;
4. Describe the methodology for designing tests of details of balances for accounts
payable using the audit risk model;
5. Design and perform analytical procedures for accounts payable;
6. Design and perform tests of details of balances for accounts payable, including out-of-
period liability tests;
7. Distinguish the reliability of vendors’ invoices, vendors’ statements, and confirmations
of accounts payable as audit evidence.
 Four Phases of an Audit

Perform analytical
Plan and design procedures and
Phase I Phase III
an audit approach. tests of details
of balances.

Perform tests of
controls and
Phase II
substantive tests
of transactions.

LO 1
 Financial Statements Cycles

General
cash

Capital acquisition
and repayment cycle

Sales and Acquisition Payroll and

collection and payment personnel
cycle cycle cycle

Inventory and
warehousing
cycle
 Four Phases of an Audit

Perform analytical
Plan and design procedures and
Phase I Phase III
an audit approach. tests of details
of balances.

Perform tests of
Complete the
controls and
Phase II Phase IV audit and issue
substantive tests
an audit report.
of transactions.

LO 1
Phase IV –
Completing the Audit

Accumulate
Perform additional
final evidence
tests for presenta-
tation and disclosure
Evaluate results
Review for
contingent
Issue audit report
liabilities

Communicate with
Review for
audit committee
subsequent events
and management
 Perform additional
tests for presenta-
tation and disclosure

Review for Learning Objective 1

contingent
liabilities

Review for
subsequent events

Accumulate Design and perform audit tests

final evidence
related to presentation and
Evaluate results disclosure audit objectives.

Issue audit report

Communicate with
audit committee
and management
 Learning Objective 1
Presentation and Disclosure Design and perform audit
tests related to
Audit Objectives presentation and disclosure
audit objectives..

Occurrence and rights and obligations:

Disclosed events and transactions have occurred and pertain to the
entity.

Completeness:
All disclosures that should have been included in the financial
statements have been included.
Classification and understandability:
Financial information is appropriately presented and described and
disclosures
are clearly expressed.

Accuracy and valuation:

Financial and other information are disclosed fairly and at appropriate
amounts.

LO 1
 Perform additional
tests for presenta-
tation and disclosure

Review for
Learning Objective 2
contingent
liabilities

Review for
subsequent events

Accumulate
Conduct a review for
final evidence
contingent liabilities and
Evaluate results commitments.
Issue audit report

Communicate with
audit committee
and management
 Learning Objective 2
Contingent Liabilities Conduct a review for
contingent liabilities and
commitments.

A contingent liability is potential future

obligation to an outside party for an
unknown amount resulting from
activities that have already taken place.

LO 2
 Learning Objective 2

Conditions Conduct a review for

contingent liabilities and
commitments.

 There is a potential future payment to an outside

party or the impairment of an asset that resulted
from an existing condition
 There is uncertainty about the amount of the
future payment or impairment
 The outcome will be resolved by some future
event or events

LO 2
 Learning Objective 2

Auditor’s Concerns Conduct a review for

contingent liabilities and
commitments.

 Pending litigation for patent infringement,

product liability, or other actions
 Income tax disputes
 Product warranties
 Notes receivable discounted
 Guarantees of obligations of others
 Unused balances of outstanding letters of credit

LO 2
 Likelihood of Occurrence Learning Objective 2

and Financial Statement Conduct a review for

contingent liabilities and
commitments.
Treatment

Likelihood of Financial Statement

Occurrence of Event Treatment
Remote (slight chance) No disclosure necessary
Reasonably possible Footnote disclosure
Probable Adjust financial statements
OR footnote disclosure

LO 2
 Learning Objective 2
Audit Procedures for Conduct a review for
contingent liabilities and
Finding Contingencies commitments.

Inquire of management (orally and in writing)

about the possibility of unrecorded contingencies.
Review current and previous years’ internal
revenue reports for income tax settlements.
Review the minutes of directors’ and stockholders’
meetings for indications of lawsuits.
Analyze legal expenses and review invoices
and statements from legal counsel.
Obtain a letter from each major attorney of the
client as to the status of pending litigation.
Review audit documentation for any information
that may indicate a potential contingency.
Examine letters of credit in force.
LO 2
 Perform additional
tests for presenta-
tation and disclosure Learning Objective 3
Review for
contingent
liabilities

Review for
subsequent events
Obtain and evaluate letters
Accumulate
from the client’s attorneys.
final evidence

Evaluate results

Issue audit report

Communicate with
audit committee
and management
 Learning Objective 3

Inquiry of Client’s Attorneys Obtain and evaluate letters

from the client’s attorneys.

A list including:
(1) pending threatened litigation and
(2) asserted or unasserted claims or assessments
with which the attorney has had involvement.
A request that the attorney furnish information or
comment about the progress of each item listed.
A request for the identification of any unlisted
pending or threatened legal action or a statement
that the client’s list is complete.
A statement informing the attorney of the attorney’s
responsibility to inform management of legal matters
requiring disclosure in the financial statements and
to respond directly to the auditor.
LO 2
 Perform additional
tests for presenta-
tation and disclosure Learning Objective 4
Review for
contingent
liabilities

Review for
subsequent events
Conduct a post-balance-sheet
Accumulate
review for subsequent events.
final evidence

Evaluate results

Issue audit report

Communicate with
audit committee
and management
 Learning Objective 4
Period Covered by Conduct a post-balance-
Subsequent Events Review sheet review for
subsequent events.

Client’s ending Audit Date client

balance sheet report issues financial
date date statements

12-31-X2 3-11-X3 3-26-X3

Period to which Period for

review for processing
subsequent the financial
events applies statements
LO 4
 Learning Objective 4
Conduct a post-balance-
Types of Subsequent Events sheet review for
subsequent events.

Those that have a direct effect on the

financial statements and require adjustment
Those that have no direct effect on the
financial statements but for which
disclosure is advisable

LO 4
 Learning Objective 4
Conduct a post-balance-
Requiring Adjustment sheet review for
subsequent events.

 Declaration of bankruptcy by a customer with

an accounts receivable balance
 Settlement of a litigation at an amount different
from the amount recorded on the books
 Disposal of equipment not being used in
operations at a price below the current book
value
 Sale of investments at a price below recorded
cost

LO 4
 Learning Objective 4
Conduct a post-balance-
Advisability of Disclosure sheet review for
subsequent events.

 Decline in the market value of securities held

for temporary investment or resale
 Issuance of bonds or equity securities
 Decline in the market value of inventory as
consequence of government action barring
further sale of a product
 Uninsured loss of inventories as a result of fire
 A merger or an acquisition

LO 4
 Learning Objective 4
Conduct a post-balance-
Audit Tests sheet review for
subsequent events.

Two categories of audit procedures

for the subsequent events review:

1. Procedures normally integrated as a part of the

verification of year-end account balances.

2. Procedures performed specifically for the

purpose of discovering events or transactions
that must be recognized as subsequent events.

LO 4
 Learning Objective 4
Conduct a post-balance-
Audit Tests sheet review for
subsequent events.

 Inquiry of management
 Correspond with attorneys
 Review internal statements prepared
subsequent to the balance sheet date
 Review records prepared subsequent to the
balance sheet date
 Examine minutes issued subsequent to the
balance sheet date
 Obtain a letter of representation

LO 4
 Learning Objective 4
Conduct a post-balance-
Dual Dating sheet review for
subsequent events.

The first date is the date for the completion

of field work except for a specific exception.

The second date, which is always later,

deals with the exception.

LO 4
 Perform additional
tests for presenta-
tation and disclosure
Learning Objective 5
Review for
contingent
liabilities

Review for
subsequent events
Design and perform the final steps
in the evidence-accumulation
Accumulate
final evidence segment of the audit.
Evaluate results

Issue audit report

Communicate with
audit committee
and management

Final Evidence Accumulation
Learning Objective 5
Design and perform the
final steps in the evidence-
accumulation segment of
the audit.

1. Perform final analytical procedures.

2. Evaluate the going-concern assumption.
3. Obtain a management representation letter.
4. Consider information accompanying the
basic financial statements.
5. Read other information in the annual report

LO 5
 Learning Objective 5
Management Representation Conduct a post-balance-
sheet review for
Letter subsequent events.

Purposes of the letter:

1. To impress upon management its responsibility
for the assertions in the financial statements.
2. To remind management of potential
misstatements or omissions in the financial
statements.
3. To document the responses from management
to inquiries about various aspects of the audit.

LO 5
 Learning Objective 5
Information Accompanying Conduct a post-balance-
sheet review for
Basic Financial Statements subsequent events.

Balance sheet
Income statement Basic
financial
Statement of statements
cash flows
Footnotes
Standard
auditor’s
report

LO 5
 Learning Objective 5
Information Accompanying Conduct a post-balance-
sheet review for
Basic Financial Statements subsequent events.

Detailed
comparative Information
statements accompanying
basic financial
Statistical data statements
Schedule of
insurance Separate
coverage paragraph –
unqualified,
qualified,
or disclaimer

LO 5
 Perform additional
tests for presenta-
tation and disclosure
Learning Objective 6
Review for
contingent
liabilities

Review for
subsequent events
Integrate the audit evidence
Accumulate
gathered, and evaluate the
final evidence
overall audit results.
Evaluate results

Issue audit report

Communicate with
audit committee
and management
 Learning Objective 6
Evaluate Results Integrate the audit evidence
gathered, and evaluate the
overall audit results.

Sufficiency of evidence
Evidence supports auditor’s opinion
Financial statement disclosures
Audit documentation review
Independent review
Summary of evidence evaluation

LO 6
 Learning Objective 6
Completing the Integrate the audit evidence
gathered, and evaluate the
Engagement Checklist overall audit results.

YES NO
1. Examination of prior year’s audit
documentation
a. Were last year’s audit files examined
for areas of emphasis in the
current-year audit? ___ ___
b. Was the permanent file reviewed for
items that affect the current year? ___ ___

LO 6
 Learning Objective 6
Completing the Integrate the audit evidence
gathered, and evaluate the
Engagement Checklist overall audit results.

YES NO
2. Internal control
a. Has internal control been adequately
understood? ___ ___
b. Is the scope of the audit adequate in
light of the assessed control risk? ___ ___
c. Have all major weaknesses been
included as reportable conditions in
a letter to the audit committee or to
senior management? ___ ___

LO 6
 Learning Objective 6
Completing the Integrate the audit evidence
gathered, and evaluate the
Engagement Checklist overall audit results.

YES NO
3. General documents
a. Where all current-year minutes and
resolutions reviewed, abstracted,
and followed up? ___ ___
b. Has the permanent file been updated? ___ ___
c. Have all major contracts and
agreements been reviewed and
abstracted and copied with all
existing legal requirements? ___ ___

LO 6
 Learning Objective 6
Evaluating Results and Integrate the audit evidence
gathered, and evaluate the
Reaching Conclusions overall audit results.

Actual audit evidence

(by cycle, account, Evaluate results
and objective) (by account and cycle)
Audit procedures Estimated misstatement
Sample size (by account)
Items to select Achieved audit risk
Timing (by account and cycle)

Evaluate overall
financial statements
Issue
Estimated misstatement audit
(overall statements) report
Achieved audit risk
(overall statements)

LO 6
 Learning Objective 6
Integrate the audit evidence
Issue the Audit Report gathered, and evaluate the
overall audit results.

The audit report is the only thing that most users

see in the audit process and the consequences of
issuing an inappropriate report can be severe.

LO 6
 Perform additional
tests for presenta-
tation and disclosure Learning Objective 7
Review for
contingent
liabilities

Review for
subsequent events
Communicate effectively with the
Accumulate
audit committee and
final evidence management.
Evaluate results

Issue audit report

Communicate with
audit committee
and management
 Learning Objective 7
Communicate with the Audit Communicate effectively
Committee and Management with the audit committee
and management

 Communicate fraud and illegal acts

 Communicate internal control
deficiencies
 Other communication with audit
committee
 Management letters

LO 7
 Learning Objective 8

Identify the auditor’s

responsibilities when
facts affecting the audit
report are discovered
after its issuance.
 Learning Objective 8
Period Covered by Identify the auditor’s
Subsequent Events Review responsibilities when facts
affecting the audit report are
discovered after its issuance

Client’s ending Audit Date client

balance sheet report issues financial
date date statements

12-31-X2 3-11-X3 3-26-X3

Period to which Period for Period in which

review for processing subsequent
subsequent the financial discovery of
events applies statements facts is made
LO 8
End of Chapter 24