17-1

Chapter Seventeen

Completing the Audit

Engagement

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Contingency
A contingency is a liability that is uncertain
because the possible outflow of resources from
the entity will ultimately be resolved when some
future event occurs or fails to occur.
Examples
Pending or threatened litigation
Actual or possible claims and
assessments
Income tax disputes
Product warranties or defect;
Guarantees of obligations to
others
Agreements to repurchase
receivables that have been sold

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Probable: The future event is more

likely than not to occur.
Neither probable nor remote: The
chance of the future event is less
likely than not to occur but the
chance is more than slight.
Remote: The chance of the future
event occurring is slight.

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Audit Procedures for Identifying

Contingencies
Read minutes of meetings
of those charged with
governance, e.g. the board
of directors.

Review contracts, loan

agreements, leases and
correspondence from
government bodies.

Review tax returns, tax

liability and tax authorities
reports.

Confirm or otherwise
document guarantees and
letters of credit.

Inspect other documents for

possible guarantees.

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Audit Procedures for Identifying

Contingencies
Specific Audit Procedures Conducted
Near Completion of Audit
Inquiry and discussion with
management about its policies
and procedures for identifying,
evaluating and accounting for
contingencies.

Examine documents in the entitys

records such as correspondence
and invoices from lawyers for
pending or threatened lawsuits.

Obtain a legal letter that

describes and evaluates any
litigation, claims or
assessments.

Obtain written representation from

management that all litigation,
asserted and unasserted claims,
and assessments have been
disclosed in accordance with the
applicable financial reporting
framework.

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Legal Letters
A letter of audit inquiry (a legal letter) sent to
the clients lawyers is the primary means of
obtaining or corroborating information about
litigation, claims and assessments.

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Example of Legal Letter

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17-4

Commitments
Long-term contracts to
purchase raw materials or
sell their products at a fixed
price.

To obtain a
favourable
pricing
arrangement.

To secure the
availability of raw
materials.

Long-term commitments are usually identified through inquiry of

client personnel during the audit of the revenue and purchasing
processes. In most cases, such commitments are disclosed in a note
to the financial statements.
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Review for Subsequent Events

Balance
Sheet Date

Type I Event

Type II Event

Conditions existed at
the balance sheet date
and affect estimates
that are part of
financial statements

Conditions did not exist

at the balance sheet
date and do not affect
the accuracy of the
financial statements

Require adjustment of
the financial
statements.

Require financial
statement disclosure.

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Auditors Responsibilities Regarding

Subsequent Events

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Subsequent Events after the Date of the

Audit Report
The auditor is not responsible for making any
inquiries or conducting any audit
procedures after the date of the audit
report.
However, facts may come to the auditors
attention after the date of the audit report that
might have affected the audit report had the
auditor known about them.
Auditing standards (ISA 560) provide
guidance to auditors in this exceptional
circumstance.

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Audit Procedures to Look for Subsequent

Events
Examples of audit
procedures

Inquire of
Management

Read Minutes
of Meetings

Read Interim
Financial
Statements

Inquire of
Legal
Counsel

Examine the
Books of
Original Entry

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Final Evidence Evaluation Processes

Perform final
analytical
procedures.

Evaluate entitys
ability to continue
as a going concern.

Obtain a
representation
letter.

Review working
papers.

Evaluate final of
audit results.

Evaluation of
financial statement
presentation and
disclosure.

Obtain a quality
control review of
the engagement.

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Going-Concern Considerations

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Going-Concern Considerations

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17-8

Representation Letter

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Representation Letter (continued)

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17-9

Proposed Adjusting Entries

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Other Final Evidence Evaluation Processes

Evaluating Financial Statement Presentation and Disclosure
The auditor reviews the financial statements to ensure compliance
with the applicable financial reporting framework, proper
presentation of accounts, and inclusion of all necessary disclosures.

Engagement Quality Control Review

An engagement quality control reviewer objectively evaluates the
significant judgements that the engagement team made and the
conclusions it reached in formulating the auditors report.
Archiving and Retention
ISQC1 requires audit documentation to be retained
ordinarily for minimum five years from
the date of the auditors report.
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Communication with those Charged with

Governance and Management

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End of Chapter 17

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