COMPLETING THE AUDIT AND POST AUDIT RESPONSIBILITIES

Various issues that the auditor considers in completing audit examination:

1. Related party transactions

2. Subsequent events review
3. Litigations, claims, and assessment
4. Management representation
5. Wrap-up Procedures

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.

Related party – refers to persons or entities that may have dealings with one
another in which one party has the ability to exercise significant influence or
control over the other party in making financial and operating decisions.
– this would include entity’s parent, subsidiaries, associates, affiliates,
principal owners, directors, officers including their immediate families.

Management’s responsibility. Management is responsible for the identification

and disclosure of related parties and transactions with such parties.

Auditor’s responsibility. The auditor should obtain and review information provided
by the directors and management identifying the names of all known related
parties and related party transactions, Moreover, the auditor is required to perform
the following procedures to determine the completeness of such information:

1. Review prior year’s working papers for names of known related parties.
2. Review the entity’s identification of related parties.
3. Inquire as to the affiliation of those charged with governance and officers
with other entities.
4. Review shareholder records to determine the names of principal
shareholders and those charged with governance and other relevant
statutory records such as the register of directors’ interests.
5. Inquire of other auditors currently involved in the audit, or predecessor
auditors, as to their knowledge of additional related parties.
6. Review the entity’s income tax returns and other information supplied to
regulatory agencies.
During the course of the audit, the auditor may perform the following procedures
which may identify the existence of transactions with related parties:

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 particular attention to transactions recognized at or near
the end of the reporting period.
4. Reviewing confirmation of loans receivable and payable and confirmation
from banks. Such a review may indicate guarantor relationship and other
related party transactions.
5. Reviewing investment transactions, for example, purchase or sale of an
equity interest in a joint venture or other entity.

The following suggest related party transactions:

1. Transactions which have abnormal terms of trade, such as unusual prices,

interest rates, guarantees, and repayment terms.
2. Transactions which lack an apparent logical business reason for their
occurrence.
3. Transactions in which substance differs from form.
4. Transactions processed in an unusual manner.
5. High volume or significant transactions with certain customers or suppliers
as compared with others.
6. Unrecorded transactions such as the receipt or provision of management
services at no charge.

PSA 550 states that in examining the identified related party transactions, the
auditor, the auditor should obtain sufficient appropriate audit evidence as to
whether these transactions have been properly recorded and disclosed.

SUBSEQUENT EVENTS REVIEW

PSA 560, “Subsequent Events” establishes standards and provides guidance on

the auditor’s responsibility regarding subsequent events. In this standard, the term
“subsequent events” is used to refer to both events occurring between period end
and the date of the auditor’s report.

Subsequent events may be classified as:

1. Requiring Adjustment – those that provide further evidence of conditions

that existed at the balance sheet date such as:
a. Settlement of litigation in excess of the recorded liability
b. Loss on uncollectible receivables as a result of customer’s
deteriorating financial condition.
 2. Requiring Disclosure – those that are indicative of conditions that arose
subsequent to the balance sheet date.
a. Sale of bond or capital stock issue
b. Purchase of a business
c. Loss of plant or inventories as a result of fire or flood

Procedures to Identify Subsequent Events

According to PSA 560, “The auditor should perform procedures designed to obtain
sufficient appropriate evidence that all events up to the date of the auditor’s
report that may require adjustments of, or disclosure in the financial statements
have been identified.” These procedures would ordinarily include:
1. Inquiring of management about any subsequent events.
2. Reviewing procedures management has established to identify
subsequent events.
3. Reviewing the minutes of board of directors and stockholders’ meetings.
4. Reading the latest available interim financial statements as well as
management reports such as budgets and forecasts.
5. Inquiring of the entity’s lawyers concerning litigation, claims, and
assessments.

If the auditor becomes aware of an event occurring after the date of the report
but before the issuance of the financial statements, the auditor should take the
necessary actions to ascertain whether such event has been properly accounted
for and disclosed I the notes to financial statements.

Failure on the part of the client to make appropriate amendments to the financial
statements, where the auditor believes they need to be amended, will cause the
auditor to issue either qualified or adverse opinion.

During the period from the date of the auditor’s report to the date the financial
statements are issued, the responsibility to inform the auditor of facts which may
affect the financial statements rests with the management.

If a subsequent requiring disclosures occurs after the date of the auditor’s report
but before the issuance of the financial statements, the auditor should consider
the adequacy of disclosure and should date the report either:

1. As of the date of the subsequent event; or

2. Dual date the report (limited to specific events referred to in the note)
LITIGATIONS, CLAIMS, AND ASSESSMENT

PSA 501 requires the auditor to carry out procedures in order to become aware of
any litigation and claims involving the entity which may have a material effect on
the financial statements.

Management is the primary source of information about litigation, claims, and

assessment. The auditor corroborates the information obtained from
management by asking the client to send letters of audit inquiry to lawyers with
whom the client has consulted concerning these matters. The letter, which should
be prepared by the manager and sent by the auditor, should request the lawyer
to communicate directly to the auditor to assist the auditor in obtaining sufficient
appropriate audit evidence about material litigations and claims.

If the management refuses to give the auditor permission to communicate with

the entity’s lawyer refuses to reply, this would be considered a scope limitation
that would require the auditor to issue wither qualified or disclaimer of opinion. If
the lawyer is unable to estimate the likelihood of an unfavorable outcome
including the amount of or range of potential loss on one or more items, the
auditor should consider adding an emphasis of a matter paragraph to an
unmodified report to draw the attention of the readers of financial statements to
this uncertainty.

MANAGEMENT REPRESENTATION

PSA 580, “Management Representation” establishes standards and provide

guidance on the use of management representations as audit evidence, the
procedures to be applied in evaluating and documenting management
representations and the action to be taken if management refuses to provide
appropriate representations.

The auditor is required to obtain sufficient appropriate audit evidence that the
entity’s management

 Has acknowledged that it has fulfilled its responsibility for the preparation
and presentation of fair financial statements; and
 Has approved the financial statements

A written representation is better audit evidence than an oral representation and

can take the form of:

a. a representation letter from management;

b. a letter from the auditor outlining the auditor's understanding of
management's representations, duly acknowledged and confirmed by
management; or
 c. relevant minutes of meetings of the board of directors or similar body or a
signed copy of the financial statements.

Basic Elements of a Written Management Representation

1. The written representation should be addressed to the auditor.

2. The date of the written representations shall be as near as practicable to,
but not after, the date of the auditor’s report.
3. A management representation letter would ordinarily be signed by the
members of management who have primary responsibility for the entity
and its financial aspects (ordinarily the senior executive officer and the
senior financial officer) based on the best of their knowledge and belief. In
certain circumstances, the auditor may wish to obtain representation letters
from other members of management.

If management refuses to provide a representation that the auditor considers

necessary, this constitutes a scope limitation and the auditor should express a
qualified opinion or a disclaimer of opinion

WRAP-UP PROCEDURES

Wrap-up procedures are those procedures done at the end of the audit that
generally cannot be performed before the other audit work is complete. These
include:

1. Final analytical procedures

2. Evaluation of going concern assumption
3. Evaluating audit findings and obtaining client’s approval for the proposed
adjusting entries.

Final Analytical Procedures

PSA 520 states that the auditor should apply analytical procedures at or near the
end of the audit when forming an overall conclusion as to whether the financial
statements as a whole are consistent with the auditor’s knowledge of the business.
Analytical procedures applied in the completion phase of the audit should focus
on
 Identifying unusual fluctuations that were not previously identified.
 Assessing the validity of the conclusion reached and evaluating the overall
financial statement presentation.

Evaluation of going concern assumption

PSA 570, “Going Concern” establishes the standards and provides guidance on
the auditor’s responsibility in the audit of financial statements with respect to the
going concern assumption used in the financial statements including considering
management’s assessment of the entity’s ability to continue as a going concern.

Management’s Responsibility. Management is required to make an assessment of

an entity’s ability to continue as a going concern.

Auditor’s Responsibility. The auditor must consider the appropriateness of

management’s use of the going concern assumption in the preparation of the
financial statements, and consider whether there are material uncertainties about
the entity’s ability to continue as a going concern that need to be disclosed in the
financial statements.

The auditor typically performs the following procedures to identify conditions and
events that may cast significant doubt about an entity’s ability to continue as a
going concern:

1. Analytical procedures
2. Subsequent events review
3. Review of compliance with debt and loan agreements
4. Reading minutes if meetings
5. Inquiry of legal counsel
6. Confirmation with related and third parties of arrangements for financial
support.

Examples of events or conditions, which individually or collectively, may cast

significant doubt about the going concern assumption are set out below. This
listing is not all-inclusive nor does the existence of one or more of the items always
signify that a material uncertainty exists.

Financial

• Net liability or net current liability position.

• Fixed-term borrowings approaching maturity without realistic prospects of
renewal or repayment; or excessive reliance on short-term borrowings to finance
long-term assets.
• Indications of withdrawal of financial support by debtors and other creditors.
• Negative operating cash flows indicated by historical or prospective financial
statements.
• Adverse key financial ratios.
• Substantial operating losses or significant deterioration in the value of assets used
to generate cash flows.
• Arrears or discontinuance of dividends.
• Inability to pay creditors on due dates.
• Inability to comply with the terms of loan agreements.
• Change from credit to cash-on-delivery transactions with suppliers.
• Inability to obtain financing for essential new product development or other
essential investments.
Operating

• Loss of key management without replacement.

• Loss of a major market, franchise, license, or principal supplier.
• Labor difficulties or shortages of important supplies.

Other

• Non-compliance with capital or other statutory requirements.

• Pending legal or regulatory proceedings against the entity that may, if
successful, result in claims that are unlikely to be satisfied.
• Changes in legislation or government policy expected to adversely affect the
entity.

Evaluating audit findings and obtaining client’s approval for the proposed
adjusting entries

After evaluating the evidence obtained, the auditor should decide whether to
accept the financial statements as fairly stated or to request management to
revise the statements. Material misstatements discovered during must be
corrected by recommending appropriate adjusting entries.

If management accepts all the adjusting entries proposed by the auditor, an

unmodified report is issued on the financial statements. On the other hand, if
management refuses to correct the financial statements for these material
misstatements, the auditor should issue a qualified or an adverse opinion.

POST AUDIT RESPONSIBILITIES

Subsequent Discovery of Facts

The auditor has no responsibility to make any inquiry regarding previously issued
financial statements unless he becomes aware of a material fact,
 which existed at the date of the auditor’s report; and
 which, if known at that date may have caused the auditor to modify the
report.

When the auditor becomes aware of this type of information, he should:

1. Discuss the matter with the appropriate level of management and consider
whether the financial statements need revision.
2. Advise management to take the necessary steps to ensure that the users
of the previously issued financial statements are informed of the situation.
If the management makes the appropriate revisions and disclosures to the users
of the financial statements, the auditor should issue a new audit report that
includes an emphasis of a matter paragraph to highlight the reason for the revision
of the previously issued financial statements.

In the event that management refuses to revise the financial statements or to

inform the users about the newly discovered information, the auditor should notify
those persons ultimately responsible for the direction of the entity about the
management’s refusal and about his intent to prevent users from relying on the
audit report.

Subsequent discovery of omitted procedures

Guidelines:
1. Assess the importance of the omitted procedures to the auditor’s ability to
support his opinion.
Results of other audit procedures that were applied may compensate for
or make the omitted procedures less important. Evaluating such results may
involve:
a. Reviewing the working papers
b. Discussing the circumstances with the engagement personnel
c. Reevaluating the scope of the audit

2. Undertake to apply the omitted procedures or the corresponding

alternative procedures.

If the auditor determines that the omission of the procedures impairs his
current ability to support his opinion, and the auditor believes that there are
persons currently relying, or likely to rely on the report, the auditor should
promptly apply the omitted procedures or the corresponding alternative
procedures.

If, after applying the omitted procedures, the auditor determines that the
financial statements are materially misstated and that the auditor’s report
is inappropriate, the auditor should discuss the matter with the
management and takes steps to prevent future reliance on the report.