Module 10: Investments, Long-Term Debt, Shareholders' Equity Balances, and Completion of The Audit

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Module 10: Investments, long-term debt, shareholders equity balances, and completion of the audit
Overview
This module completes the substantive procedures for major balances in the final cycle the finance and investment cycle. You also learn about the significant issues that need to be addressed in completing the audit contingencies and representations, related-party transactions, subsequent events, evaluation of audit findings, and various communications with the client. When you have completed this module, you should have a good understanding of the substantive procedures for investments, long-term debt, and shareholders equity, as well as the completion of the audit. Scenarios involving an audit manager assigned to audit these accounts and those near-completion situations help you apply what you have learned.
Test your knowledge

Begin your work on this module with a set of test-your-knowledge questions designed to help you gauge the depth of study required.
Learning objectives
10.1 10.2 10.3 Investments Substantive procedures Long-term debt Substantive procedures Shareholders equity Substantive procedures Revenue and expenses Describe the key substantive procedures in the audit of long-term investments. (Level 2) Summarize the key substantive procedures in the audit of long-term debt. (Level 2) Summarize the key substantive procedures in the audit of shareholders equity. (Level 2) Identify the assertions and the type of analysis relevant to revenue and expenses audit, and explain how net income is indirectly audited through the balance sheet approach. (Level 1) Explain audit procedures for identifying and auditing contingencies. (Level 1) Describe the content of an enquiry letter to the clients law firm and the possible outcomes from replies to the letter. (Level 1) Describe the importance of management (client) representations. (Level 2) Explain the significance of auditing related-party transactions. (Level 1) Identify the extent of the auditors responsibilities in relation to subsequent events, explain different types of events and their audit implications, and identify sources of information. (Level 2) Identify the tasks involved in evaluating the results of the audit at the completion stage. (Level 2)
10.4
10.5 10.6
Contingencies Communication with the clients law firm
10.7 10.8 10.9
Management representations Related parties Subsequent events
10.10
Evaluation of audit findings
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10.11 10.12 10.13
Audit findings and independent reviews Audit findings and communication with management Communication with the audit committee Module summary
Describe the main objectives of independent reviews. (Level 2) Summarize current CICA Handbook recommendations regarding communication with management. (Level 2) Describe current CICA Handbook recommendations regarding communication with the audit committee. (Level 2)
Print this module
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10.1 Investments Substantive procedures

Learning objective
Describe the key substantive procedures in the audit of long-term investments. (Level 2)
Required reading
Chapter 14, pages 567570 (starting at Investments and Intangibles up to Application Case Analysis, Audit 14.1), pages 574575 (Audit 14.4), pages 577578 (Investments and Intangibles), and Exhibit 14A-3 on page 588 Forms C-260, C-260C, and C-260S: Investments audit program
LEVEL 2
Pages 567 (starting at Investments and Intangibles) to 570 (to Audit 14.1) provide examples of typical assertions for investments and then describe the various audit procedures that could be performed when auditing these balances. Illustrative audit programs containing substantive tests for investments and intangibles are provided in Exhibit 14A-3 on page 588 and in Form C-260. The procedures include corroborating all material investments.
Knowledge of the business and industry

Accounting for investments can vary depending on whether cost, fair value, equity, or consolidation methods are used. Much depends on managements intentions, which are assessed through enquiry and knowledge of the clients business and industry. Only auditors knowledgeable about the business can determine the economic substance of an acquisition and whether it makes sense from an industry perspective and the businesss strategic plan. Such an assessment requires a high level of professional judgment by the audit partner or manager, in consultation with the clients management. Many big accounting firms have special accounting consultation units advising audit staff on how to best account for and disclose complex investment transactions. The auditors job is to verify the appropriateness of the accounting policies and methods used. Auditors have to be especially concerned with non-arms-length (related party) transactions with affiliated companies or acquaintances of management. Here again, knowledge of the business and industry can help the auditor identify such transactions. Related-party transactions are explained in more detail in Topic 10.8. In the audit of investments, analysis is most useful when applied to an investee company to assess, for example, whether the purchase price is justified by excess earnings or rates of return. In the case of accounting for an investment that results in control or significant influence, an estimate of goodwill must be made and justified on the basis of expected above-average performances. Read Audit 14.4 on pages 574 to 575 for an example of the difficulties that can arise in the audit of long-term investments. Pages 577 and 578 describe the risks of management fraud associated with the investment accounts.
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10.2 Long-term debt Substantive procedures

Learning objective
Summarize the key substantive procedures in the audit of long-term debt. (Level 2)
Required reading
Chapter 14, pages 566567 (from Long-term Liabilities and Related Accounts up to Investments and Intangibles), 573574 (Audit 14.3), 575577, and Exhibit 14A-2 on page 587 Forms C-340, C-340C, and C-340S: Long-term debt audit program
LEVEL 2
Key assertions for long-term debt

As the text explains on page 566 with respect to long-term debt, the auditor is primarily concerned with omission or understatement of debt (that is, the completeness assertion) as well as omissions of disclosure, especially if the loans are secured by a lien on assets. The focus in repeat engagements is on changes to accounts, such as new debt issues, or changes in terms, such as changes in interest rates. Audit programs with detailed substantive procedures for long-term debt are found in Exhibit 14A-2 on page 587 and Form C-340 above. Another area of concern in auditing liabilities is off-balance-sheet financing: commitments, guarantees, and other potential obligations not recorded on the balance sheet. Exhibit 14-4 on page 567 lists some procedures for auditing commitments. Because of the evolving, complex nature of accounting standards for high-level financing transactions, auditors need to be especially alert when auditing such situations. Audit 14.3 on pages 573 and 574 exemplifies the pervasive impact that off-balance-sheet financing can have in misstating a companys financial results. This scenario also demonstrates the importance of knowledge of the business in being able to assess the economic substance of transactions as well as the importance of identifying related-party transactions.
Potential for fraud

Scenario 10.2-1: Audit management
Stan, CGA and audit manager, meets on a regular basis with his team. In one of the meetings, he says to his staff, Generally auditors are justified in performing extensive substantive procedures for long-term debt transactions and financing arrangements that are initiated and managed by high-level management. Why would Stan make this statement? Solution Pages 575 to 577 explain how long-term debt transactions can be used by top management to perpetrate massive frauds and reinforce the need for good corporate governance structure as part of the control environment.
Jane, CGA and audit manager, is auditing notes payable and long-term debt. She will use analytical review procedures to help her identify
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significant differences the auditor may want to investigate possible problems in recorded interest expense or related debt, and indicators for any problems with recorded interest expense, recorded obligations, or accrued interest.
What are the typical analytical review procedures that Jane could use? Solution
10.3 Shareholders equity Substantive procedures

Learning objective
Summarize the key substantive procedures in the audit of shareholders equity. (Level 2)
Required reading

Chapter 14, pages 565566, 579 (summary), and Exhibit 14A-1 on page 587 Forms C-390, C-390C, and C-390S: Retained earnings and other shareholders equity accounts (corporations) audit program
LEVEL 2
Owners equity or shareholders equity may include preferred and common shares and retained earnings from which dividends are paid. Contributed surplus arising from the issue of common shares may appear in owners equity in some financial statements, but generally, it no longer exists for companies incorporated in most jurisdictions in Canada. Assertions and audit procedures for shares are explained on pages 565 to 566. Transactions in retained earnings normally consist of net income or loss, and dividends, but they may also include adjustments to opening retained earnings arising from changes in accounting principles or their application, error corrections, and quasi-reorganizations. Of particular concern is the propriety of such entries. In addition, the auditor must check that the opening retained earnings includes prior years adjusting journal entries. As is common for the rest of the accounts in the finance and investment cycles, the focus of substantive tests is on the changes in the owners equity accounts, such as new stock issues, dividend payments, and dividend declarations. The primary concern in auditing retained earnings disclosures is ensuring the appropriate disclosure of any restrictions on dividends. Form C-390 and Exhibit 14A-1 on page 587 list basic audit procedures in the substantive testing of owners equity. Analysis of the minutes of board of directors meetings plays a key role in verifying the authorization of share issues, share repurchases, and dividend declarations. Because changes in the owners equity accounts are the focus of the audit of these balances, normally all material changes need to be verified. Audit 14.1 on page 571 illustrates some of the problems that arise in the audit of sales of ownership interests and the important role regulatory authorities can play (another aspect of knowledge of the business).
Activity 10.3-1
Which is the most difficult number to audit in the shareholders equity section of the financial statements? Is it retained earnings or earnings per share? Solution
Review
In conclusion, read the summary on page 579. Following is a list of key issues in the finance and investment cycle covered in the text and in the course modules:
The main concern for debt is omission or understatement (that is, the completeness assertion). The focus of the audit is on changes to accounts. 100% examination is common due to the materiality of accounts and transactions.
The primary concern in auditing the clients disclosure regarding retained earnings is appropriate disclosure of restrictions on dividends. Earnings per share (EPS) is probably the most difficult, yet important, number to audit in this cycle. Controls and accounting for financial investments, especially derivatives and off-balance-sheet financing, are creating new challenges for the profession.
10.4 Revenue and expenses

Learning objective
Identify the assertions and the type of analysis relevant to revenue and expenses audit, and explain how net income is indirectly audited through the balance sheet approach. (Level 1)
Required reading
Chapter 15, pages 591596
LEVEL 1
Key assertions for revenue and expenses

Pages 591 to 593 describe specific assertions for revenue and expense accounts and the relationships between balance sheet and income statement accounts. Generally speaking, the crucial assertions are that the transactions giving rise to revenue and expenses have occurred , are all recorded (that is, completeness ), and have been properly measured . These assertions would normally be supported through the detailed audit of related balance sheet accounts. The major revenue and expense accounts will have been audited in connection with related balance sheet accounts. For example, the details of repairs and maintenance expenses would be audited while looking for unrecorded capital expenditures, which is part of the audit procedures for capital assets. Finally, the auditor needs to consider the appropriateness of revenue and expenses from an ethical and/or legal standpoint, especially with respect to expenses. In Module 4, you learned that materiality is considered in quantitative as well as qualitative terms. The text describes instances where expenses, such as travel, entertainment, and advertising, are subject to certain abuses. This is an example of qualitative materiality, because in most cases, the amounts for individual accounts will not be quantitatively significant. Yet, there are risks to the company if abuses go unchecked. The text refers to situations where there may be problems with income tax audits, but there may also be risks from shareholders suing the directors and auditors over failure to stop and/or report improper spending of shareholder resources. The following exhibit summarizes the audit procedures and how the audit of the income statement integrates with GAAS.
Exhibit 10.4-1: Audit procedures and GAAS integration
First examination standard of GAAS
As part of obtaining knowledge of the entitys business, the auditor would obtain relevant information relating to overall operations and for specific assertions embodied in various income statement accounts (such as revenue, cost of goods sold, and expenses), in order to assess inherent risk and determine materiality for engagement planning.
Second examination standard of GAAS
Obtain an understanding of the internal controls covering the major accounting cycles for assessing combined inherent and control risk for transaction classes and related income statement account balances covered by each cycle. For example, for the revenue and collection cycle, the auditor would obtain an understanding of internal control policies and procedures, together with relevant control environment factors for specific assertions, such as measurement, occurrence, and completeness for assessing control risk on a preliminary basis. Perform tests of controls (or dual-purpose procedures) when using a combined approach to determine the effectiveness of internal control policies and procedures identified with respect to assertions relating to sales transactions, for example. Finalize combined inherent and control risk assessments (and in light of tolerable materiality), and determine the nature, timing, and extent of substantive procedures for auditing assertions at the account balance level or transaction class level covered by the cycle. If dual-purpose procedures were performed, then the resulting income statement account balances would have been audited with respect to the financial statement assertions such as measurement, occurrence, and completeness. Extend audit procedures as necessary in light of combined inherent and control risk. For example, the auditor may extend procedures around the year end for validating completeness assertions relating to sales, receipts, and receivable transactions. Apply analysis appropriately for determining the overall reasonableness of the sales account balance. Validate assertions such as existence and valuation relating to other account balances covered by the cycle, for example, accounts receivable and cash. Audit specific items where the risk of misstatements occurring is considered as relatively high, such as interest expense, expenses relating to professional/legal services (this may indicate existence of possible claims/lawsuits), income taxes, and payroll and other allocations to the accounting period. As part of the audit of capital assets, determine that amortization, gains/losses, and write-off of assets have been properly included in the determination of net income. Perform analysis and extend audit procedures where existence of unusual relationships is indicated by unusual changes or shifts in other revenues, in gross profit, in interest expense, in expenses relating to professional services, in repairs and maintenance expenses, in operating expenses, and in earnings per share. Accumulate all identified and projected misstatements, and aggregate with other misstatements (quantitatively and
Third examination standard of GAAS
qualitatively) for evaluating the financial statements according to CAS 320 (CICA Handbook paragraph 5142.19 and AuG-41).1
Near the completion of fieldwork, the major revenue and expense accounts would, for the most part, have been audited through the audit of the related balance sheet accounts. Also, the auditor has obtained assurance on net income when using the balance sheet approach. Therefore, the majority of substantive procedures for revenues and expenses will consist of analysis of regular income statement accounts (for example, sales, interest, and rent) to obtain some evidence that the amounts are reasonable. Pages 594 to 597 describe some important analytical procedures used for auditing revenues and expenses, and Exhibit 15-2 on page 592 provides a sample audit program. For companies with significant unusual transactions, specific additional procedures may be required to ensure that the substance of those transactions is consistent with the occurrence, measurement, and presentation assertions. Pages 595 to 596 describe unusual transactions and provide three examples where unusual transactions give rise to audit issues. Here are some additional comments.
Merger
The first example, merger, describes a company that manipulates the timing of a consolidation to artificially improve its net income. Under accounting methods and rules for consolidation, the purchasing company discloses the post-acquisition earnings of the acquired company as if they were earned by the purchasing company. Therefore, by timing the purchase for the end of the period when the acquired company made profits, the purchasing company avoids including losses that, in substance, should have been part of post-acquisition earnings.
Real estate deal
In the second example, a company recognizes profits on a sale of real estate property when the risks of ownership have not been transferred to BMC because of all the guarantees. In this situation, the $550,000 should be disclosed as a liability (for example, unearned revenue) until such time as the construction of properties is completed and guarantees against losses are removed.
Real estate development, strings attached
The third example describes a similar situation, except that the seller continues to hold benefits and risks of ownership through a joint venture interest in the properties.
T. Shastri and R. Chandra, Independent Audit and Review Services: Theory and Practice (University of Windsor, 1997), pages 222-225
10.5 Contingencies
Learning objective
Explain audit procedures for identifying and auditing contingencies. (Level 1)
No required reading LEVEL 1
The auditor must review the clients records and financial statements for proper disclosure of contingencies. They may be assets in the case of gains, or liabilities in the case of losses. The auditor is more concerned with the latter because management may not wish to disclose them. The auditor is also concerned with contractual obligations (see CICA Handbook, Part II Accounting , section 3290. Note: This is not required reading).
Activity 10.5-1
It is understandable that the auditor would be concerned with contingent losses as management may not wish to disclose them. Why would the auditor be concerned with contingent gains as well? Solution The auditor is concerned that contingent losses are presented in the financial statements in accordance with CICA , section 3290. Handbook, Part II Accounting Paragraph 3290.12 states that a contingent loss should be presented in the financial statements by accruing a charge to income when both of the following conditions are met: a. it is likely that a future event will confirm that an asset had been impaired or a liability incurred at the date of the financial statements; and b. the amount of the loss can be reasonably estimated. Paragraph 3290.18 states that the facts of a contingent loss at the date of the financial statements should be disclosed in the notes to the financial statements when the following circumstances exist: a. the occurrence of the confirming future event is likely but the amount of the loss cannot be reasonably estimated; b. the occurrence of the confirming future event is likely and an accrual has been made but there exists an exposure to loss in excess of the amount accrued; or c. the occurrence of the confirming future event is not determinable
Suppose Jane, CGA and audit manager, notices that the client guaranteed the debt of a company that subsequently went bankrupt before the clients year end. As of the date of completion of field work, no claims had been filed against the client under the guarantee. Should the potential loss be recorded in the clients books? Solution Often, there is no record of contingencies; they may come to light in the audit of the various transaction cycles. A number of general audit procedures that may be useful for discovering contingencies are listed in CAS 501.09 (CICA
Handbook , paragraph 6560.04). The letter of representation (see Topic 10.7) clearly states managements responsibility to disclose contingencies to the auditor.
10.6 Communication with the clients law firm

Learning objective
Describe the content of an enquiry letter to the clients law firm and the possible outcomes from replies to the letter. (Level 1)
Required readings

Chapter 15, pages 595599 CAS 501.9.12 and CAS 501.A17.A25 and Appendix (CICA Handbook, 6560.01.15)
paragraphs
LEVEL 1
Corroborating evidence is necessary to support the estimates and representations made by management with respect to contingencies, especially for claims or possible claims made against the client. If management is determined to underestimate the amount of claims or not disclose them, it can certainly make up a credible and factual story about the amount and likelihood of contingencies. For claims made through litigation, as well as contingencies arising from a dispute over interpretations of the terms of a contract, the client will usually seek advice and representation from one or more law firms. For those cases, the auditor will obtain evidence by requesting the client to send an enquiry letter to its lawyer(s) regarding the nature, status, and possible outcomes of existing and potential claims. Under current assurance recommendations, the auditor needs to have the client prepare and send an enquiry letter to all law firms retained by the client during the period being audited, unless the auditor can ascertain that any possible claims are routine matters and/or are not material. In the majority of cases, however, the auditor will always request that an enquiry letter be sent, so that any claims that the auditor may be unaware of can be identified in the course of the audit. The content of an enquiry letter is described in the Appendix to CAS 501 (CICA Handbook, paragraph 6560.08). It will vary depending on whether or not there are any outstanding or potential claims that management and the auditor have knowledge of. Exhibit 15-3.1 on text page 598 provides an example of such a letter to a lawyer. Law firms responses to enquiry letters from the client are called legal representation letters. They are sent and addressed to the client, and a copy is sent directly to the auditor. The law firms will not normally address the response directly to the auditor.
Scenario 10.6-1: Enquiry letter
Jane, CGA and audit manager, asks the client to prepare and send an enquiry letter to all law firms retained by the client during the period being audited. What are the possible outcomes to this letter? Solution paragraphs 6560.10.14) outline the assurance CAS 501.A21A.25 (CICA Handbook, recommendations regarding the appropriate course of action required for each of these circumstances. Sometimes a law firm will be ambiguous in its response in an effort to protect itself from possible litigation or to protect solicitor-client confidentiality. The box on page 599 provides interesting comments about the interpretation of response letters. In some cases, the law firm may restrict the response letter either by not identifying claims omitted from the enquiry letter or by failing to reply altogether. Remember that inadequate information from either the law firm or management may very well constitute a scope limitation.
Scenario 10.6-2: Claims
Jane, CGA and audit manager, reminds her team, Be sure you understand the difference between an outstanding claim, a claim that has been filed against the client, and a possible or unasserted claim, a claim that may be filed because of some previous event but has not yet been filed. What should auditors do in both types of claims? Solution
10.7 Management representations

Learning objective
Describe the importance of management (client) representations. (Level 2)
Required reading

Chapter 15, pages 600602 CAS 580 (CICA Handbook
, section 5370)
LEVEL 2
Throughout this course, you have read many references to the client representation letter or management representation letter without any specific details regarding the content of the letter. A client representation letter is obtained at the completion stage of the audit, and the letter must be dated as near as practicable to the audit report date. section 5370) contains specific recommendations on the CAS 580 (CICA Handbook, requirement to obtain written representations from management, as part of gathering sufficient appropriate evidence for the audit of financial statements, in accordance with Canadian generally accepted auditing standards. paragraphs 5370.16-17) provide guidance In particular, CAS 580.10.11 (CICA Handbook, for the auditor to obtain managements written confirmation of significant representations provided during the engagement. CAS 580.19 (CICA Handbook, paragraph 5370.29) deals with the impact of managements refusal to provide written representations. Under CAS 580, in situations where management fails to provide written representations, the auditor would re-evaluate the integrity of management and the effect on audit evidence obtained, which would ultimately result in a disclaimer (denial) of opinion. Examples of management representation letters are provided in Appendix 2 of CAS 580 (the Appendix to CICA Handbook, section 5370) and in Exhibit 15-4 on page 602 of the text.
10.8 Related parties

Learning objective
Explain the significance of auditing related-party transactions. (Level 1)
Required reading

Chapter 15, pages 601 and 603604 (from Audit of Related Party Transactions) CAS 550.26 (CICA Handbook , paragraphs 5370.17 (h) and (p))
LEVEL 1
Related-party transactions
Under CAS 550.26 Related Parties (CICA Handbook , section 5370, Management Representations Guidelines), the auditor should obtain managements written confirmation of representation that relates to the completeness of information regarding all related parties and related-party transactions.
Activity 10.8-1
Related-party transactions are transactions that do not occur between two independent parties dealing at arms length. Because of the concentration of business ownership with numerous company cross holdings, related-party transactions constitute a particular concern in Canada. What is the auditors primary task/responsibility regarding related-party transactions? How does the auditor fulfil this responsibility? Solution As the economy becomes more interdependent globally (for example, suppliers are more tightly bound to buyers in EDI systems), the issue of related-party transactions will become even more important internationally.
Activity 10.8-2
In addition to the significance of related-party transactions to auditors, Canada Revenue Agency is also very concerned about the prices some foreign companies charge their Canadian subsidiaries and the prices that the Canadian subsidiaries charge to the foreign parent company (called transfer prices). Why is this so? Solution
10.9 Subsequent events

Learning objective
Identify the extent of the auditors responsibilities in relation to subsequent events, explain different types of events and their audit implications, and identify sources of information. (Level 2)
Required reading

Chapter 15, pages 605608; Exhibit 15-6 on page 608 CAS 560 (CICA Handbook
, section 6550)
LEVEL 2 Scenario 10.9-1: Audit management
Its Monday morning and Jane, CGA and audit manager, has scheduled a meeting with her team. She asks Kerry, one of the auditors, to recap for the teams benefit the extent of auditors responsibilities for subsequent events under current assurance standards. What will Kerry say? Solution Subsequent events fall into two classes:
Type I events: Those that confirm a condition that existed at the date of the financial statements and thus require adjustment of the financial statements. Type II events: Those whose cause and manifestation both occur after the year end, and for which disclosure in the notes to the financial statements is appropriate and no adjustments to the financial statement are necessary.
Activity 10.9-1
Here are two situations. Identify whether they are a Type I or a Type II event and explain why. Situation 1: Dunlop Inc. owes Brettson Ltd. $100,000 at Brettsons year end, December 31. The account appears to be collectible at December 31, but shortly after the year end, Dunlop declares bankruptcy. Situation 2: To continue Situation 1, suppose that Dunlop did not declare bankruptcy but was unable to pay its debt to Brettson because a fire on January 25 of the following year wiped Dunlop out. Solution The audit procedures relating to the auditors review and enquiry for subsequent events are outlined in a sample audit paragraph program in Exhibit 15-6 on page 608 as well as in CAS 560.6.9 (CICA Handbook, 6550.04 ). Some of these procedures are done during the field work (for instance, searching for unrecorded liabilities by reviewing unpaid invoices after the balance sheet date). However, some of the subsequent events procedures should be performed at the completion stage of the audit because the procedures must extend to the date of the audit report.
Activity 10.9-2
What are some sources of information for subsequent events?
Solution Page 607 also addresses the issue of double dating the auditors report to reflect significant events subsequent to field work. A detailed coverage of double dating and the related assurance standards is deferred to Advanced External Auditing [AU2] . How to handle events occurring after the auditors report has been issued is also deferred to AU2 .
10.10 Evaluation of audit findings

Learning objective
Identify the tasks involved in evaluating the results of the audit at the completion stage. (Level 2)
Required reading

Chapter 15, pages 609614 (up to Auditor Communications) CAS 520.6 and CAS 520.A17.A19 (CICA Handbook Form A-320: Possible adjustments sheet Audit engagement Form D-210: Financial statement disclosure review (checklist)
, paragraphs 5301.25.27)
LEVEL 2
Review of audit results

The results of the audit are communicated to the users through an opinion stated in the auditors report. There is only one opinion; therefore, the results of the audit must be integrated into one single conclusion. Evaluating the results includes the following tasks: 1. Evaluating the sufficiency and appropriateness of the evidence collected.
This evaluation involves reviewing all audit programs for completeness to ensure that there are no missing procedures and that all procedures listed in the programs have been performed. For those procedures involving samples, the auditor would want to ensure that there is proper documentation of the sampling process and that steps were taken to obtain samples that are representative. A lack of sufficiency would lead the auditor to either perform additional procedures or qualify the audit opinion (for example, scope limitation). 2. Reviewing the disclosures in the financial statements.
In doing so, the auditor would make sure that the aggregation of accounts into financial statement items is appropriate and consistent with the prior year(s). For example, the auditor would ascertain that the client is not inappropriately aggregating a revenue and expense account into a single net item on the financial statements. A knowledge of accounting recommendations from the Handbook and other sources (GAAP) is necessary to determine if disclosure requirements are being met. Therefore, the auditor needs to know the disclosure rules for each item on the financial statements (for example, leases, CICA Handbook, Part II Accounting section 3065; income taxes, section 3465; capital assets, sections 3061 and 3064 before determining if the financial statement disclosures are appropriate. Most auditors usually complete a standard disclosure checklist as they perform their review. 3. Performing an overall financial statement analysis. In Module 3, you learned about analysis as evidence, and in Module 4, you studied analysis as an attention-directing tool used in planning. Under assurance recommendations (CAS 520; CICA Handbook paragraphs 5301.25.27), analysis must also be used at the evaluation (completion) stage to ensure that the overall financial statement presentation is consistent with the auditors expectations. The analysis would be similar to those done at the planning stage (for example, compare balances to prior year, and calculate and evaluate financial ratios). At this stage, however, auditors can base their expectations not only on a good knowledge of the clients business, but also on a knowledge of issues and errors uncovered throughout the audit. This analysis would also be performed (or reviewed) by the audit manager or partner. 4. Assessing whether the evidence collected supports the conclusions of the auditors report. Assuming the auditor has a sufficient quantity and appropriate quality of evidence, the question becomes What does the evidence say about the assertions contained in the financial statements?
This will depend on the number of errors and misstatements (identified or likely) that have been uncovered during the audit. To determine whether the financial statements are fairly presented in all material respects, the auditor must evaluate the aggregate amount of unadjusted misstatements in relation to materiality. The auditor also needs to consider unadjusted misstatements that have been carried forward from the previous year. If the aggregate of misstatements is large enough so that the evidence does not support a clean opinion, the auditor must request that adjustments be made. Otherwise, the auditors report would be qualified with respect to the misstatements. 5. Reviewing the content of the working paper file. This is done by both the audit manager and the partner. This review is important because it allows senior members of the firm to evaluate the performance of inexperienced personnel who may not be able to exercise appropriate professional judgment. Normally, upon review, the audit manager would have a number of queries regarding the content of the file and the documentation of issues. These queries must be addressed by the audit senior and/or staff before the file can be reviewed by the partner. A review of the working paper file is also done to ensure that the audit conforms to the firms quality standards. (Quality control standards are explained in Module 2.)
Misstatements found during the audit

The auditor must ascertain that the evidence supports the conclusion of the audit report, and this determination largely depends on the misstatements found during the audit. Normally, the auditor would insist on adjustments of single amounts that, by themselves, are found to be material. The adjustment of immaterial amounts depends on how many there are and what they add up to. Some auditors treat all the misstatements as equivalent and request the client to make any adjustment that may be required if the aggregate misstatements exceed materiality. For example, the largest misstatement found would be adjusted first, followed by the next largest misstatement, and so on. This adjustment would be done until the aggregate misstatement is sufficiently below the auditors materiality level and the auditor is satisfied that the financial statements do not contain a material misstatement. Auditors accumulate identified and likely misstatements that have not been adjusted for by the client on a summary sheet called the unadjusted error worksheet, statement of unadjusted differences, unrecorded adjustment list, or possible adjustment sheet. Exhibit 15-7 on page 610 provides an illustrative example of an adjustment sheet. The Possible Adjustments Sheet in Form A320 includes the amounts for Example 4.3-1. At the end of the audit, the auditor would summarize misstatements on the possible adjustments sheet and evaluate the magnitude of these misstatements in relation to materiality. In Form A-320, it is assumed that materiality is set at $45,000, leaving the auditor with $27,767 ($45,000 17,233) for further possible misstatements that have not been detected by the auditor. (Note the treatment of unadjusted misstatements from prior years.) Depending on the circumstances, this may or may not be adequate for an unqualified report, but it is likely to be enough to satisfy the auditor that there are no material misstatements contained in the financial statements.
10.11 Audit findings and independent reviews

Learning objective
Describe the main objectives of independent reviews. (Level 2)
No required reading LEVEL 2 Scenario 10.11-1: Audit management
Close to the completion of the audit engagement, Jane, CGA and audit manager, requests her audit firm to assign an auditor to conduct an independent review of the completed audit. Why would Jane make this request? Solution An independent review may reveal one or more of the following problems:
a number of small adjustments that have been waived should have been aggregated by the auditor, and if materiality was exceeded, an adjustment should have been suggested to management scope too narrow and/or biased in a particular area inadequate disclosure of material items such as contingencies, non-arms-length transactions, or extraordinary items incorrect or inadequately supported conclusions too much reliance on clients estimates inadequate documentation for some sections
The main objectives of the independent review are to ensure the following: 1. The field work provides proper support for the auditors report and no necessary procedures have been omitted or important conclusions overlooked. 2. The working papers
have been prepared in accordance with the policies of the firm contain adequate documentation to substantiate the work performed and the information obtained support the conclusions reached, and provide sufficient evidence of adherence to GAAS.
3. The work has been conducted and the report prepared in accordance with GAAS, the policies of the firm, and statutory, regulatory, or contractual requirements. 4. Important matters have been or are being reported to the client, including
significant defalcations, irregularities, or suspicious circumstances encountered and recommendations on internal control, systems efficiency, accounting methods, or financial and tax planning.
10.12 Audit findings and communication with management

Learning objective
Summarize current CICA Handbook management. (Level 2)
recommendations regarding communication with
Required reading

Chapter 9, pages 348350 (Auditors responsibility to report internal control deficiencies and fraud risks) CAS 260 and CAS 265 (CICA Handbook, sections 5136, 5750, and 5751)
LEVEL 2
Communication with the management

Throughout the conduct of an audit, the auditor will communicate with client management and with those charged with governance. Typically, those charged with governance are the members of the board of directors or a subcommittee of the board such as the audit committee. There are various CAS recommendations which require the auditor to communicate with management and with those charged with governance. These sections include CAS 260, CAS 265, CAS 450, and CAS 240. The auditor must direct certain aspects of his or her communication to management, while other, potentially more serious, issues must be directed to those having oversight responsibility for the financial reporting process normally the board of directors (or its audit committee or equivalent).
Activity 10.12-1
In CAS 260 (and CICA Handbook communication statement? Solution
, sections 5750 and 5751), the term does not refer to the audit report. Do you agree or disagree with this
Under current assurance recommendations, any communication of matters identified during the audit must clearly indicate the derivative nature of the communication, and that the audit would not identify all matters that are of interest to management or those having oversight responsibility for the financial reporting process. The communication must also clearly indicate that it is not intended for third parties. Unless there are good reasons for not doing so, the communication should always be in writing; if not, the substance of oral communication should be properly documented. Significant matters should be communicated to management, either orally or in writing. Current Canadian standards require the auditor to advise management of issues related to

the auditors responsibility to consider fraud (CAS 240, formerly section 5135) misstatements illegal acts (CAS 250, formerly section 5136) internal control in the context of an audit weaknesses in internal control (CAS 265, formerly section 5220).
When no such matters have been identified, there is no requirement to communicate this fact. Nonetheless, it is suggested that the auditor explicitly advise management that there are no issues to communicate, rather than assume management will understand that there are no issues to be considered. A management letter is not required by CICA standards. However, auditors usually communicate matters they believe should be communicated in writing, including the significant matters listed above, through a management letter. A management letter also allows the auditor to make suggestions to management for improving the companys internal control
and operations. The letter may protect the auditor if problems arise later because a suggestion made by the auditor has not been acted on by management.
10.13 Communication with the audit committee

Learning objective
Describe current CICA Handbook audit committee. (Level 2)
recommendations regarding communication with the
Required reading

Chapter 15, pages 614616 CAS 260 (CICA Handbook,
section 5751)
LEVEL 2
Communication with the client refers to reportable matters that were found during the audit and that are of interest to the client (not the users of the financial statements).
Issues to be reported to the audit committee

CAS 260 (CICA Handbook , sections 5750 and 5751) requires the auditor to communicate and advise the board of directors or its audit committee on many matters arising from the audit. A comprehensive list of these matters is included on page 615 and 616 of the text. Some of these matters include the following:

fraud illegal or possibly illegal acts significant weaknesses in internal control identified by the auditor management judgements and accounting estimates (summarized) misstatements, adjusted and unadjusted (summarized) related-party transactions identified by the auditor that are not in the normal course of operations and that involve significant judgments made by management concerning measurement or disclosure
In addition, matters that have a significant effect on the qualitative aspects of accounting principles used in the entitys financial reporting would also be communicated. Such matters would include items that have a significant effect on the understandability, relevance, reliability, and comparability of the financial statements. Further, other matters arising from the audit that, in the judgment of the auditor, are important and relevant to the audit committee, including matters previously agreed with the audit committee to be communicated, should be addressed. Finally, the auditor must communicate relationships that affect independence with the audit committee to help it better understand issues related to independence. The auditor also informs the audit committee (in a letter) of all relationships between the auditor and the auditors related business or practice, and the entity and its related entities that may, in the auditors professional judgment, reasonably be thought to bear on independence. For larger clients, the partner would normally attend an audit committee meeting to present the details of matters communicated in writing, as well as to answer questions from the committee members.
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Module 10 summary
Describe the key substantive procedures in the audit of long-term investments.
The auditor usually obtains a schedule of investments and inspects or confirms the details of the securities with the holder. r The cost of new investments should be verified by referring to the transaction documents. r Disposals should be vouched to supporting documentation and gains/losses verified. r The auditor should also verify related investment income. The auditor must verify the underlying value of the investments held at the date of the balance sheet by referring to market quotations, audited financial statements, or other reliable evidence.
Summarize the key substantive procedures in the audit of long-term debt.
The auditor obtains a schedule of notes payable and long-term debt and confirms the liabilities and terms with the lender. The auditor should verify that interest and other expenses have been correctly accounted for and that the current portion of long-term debt has been calculated accurately. The auditor must also consider if any leases should be capitalized.
Summarize the key substantive procedures in the audit of shareholders equity.
The auditor should obtain a schedule of any transactions affecting shareholders equity. r All transactions should be traced to appropriate authorization, usually by the board of directors. r Shares outstanding should be confirmed with the registrar or, if the company maintains its own registry, agreed with the share certificates and stubs. Stock options, and so on, which might affect earnings per share, should be documented.
Identify the assertions and the type of analysis relevant to revenue and expenses audit, and explain how net income is indirectly audited through the balance sheet approach.
The assertions relevant to revenue and expenses are as follows: r Revenue accounts represent all the valid transactions, recorded correctly in the proper account, amount, and period. r The accounting for consignment and goods sold with rights of return conforms with accounting principles. r Expense accounts represent all the valid expense transactions recorded correctly in the proper account, amount, and period. r Revenues, expenses, cost of goods sold, and extraordinary, unusual, or infrequent transactions are adequately classified and disclosed. Because assets minus liabilities equals equity, establishing the validity of the asset and liability amounts will establish the validity of the ending equity balance. Transactions other than net income that affect equity can be verified relatively easily. This combination serves to prove (albeit indirectly) the net income or loss for the period. In addition, audit work on balance sheet accounts provides the auditor with assurance about the related income statement accounts. Analysis can be used to compare the revenue accounts and amounts to prior-year data and/or to multiple-year trends to attempt to identify any unusual fluctuations. Comparisons can also be made with budgets and forecasts. Management should be asked to explain fluctuations. The auditor should obtain reasonable assurance that the explanations are valid and adequately explain the direction and amount of change.
Explain audit procedures for identifying and auditing contingencies.
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The auditors main sources of evidence concerning contingencies are derived from r correspondence with the clients lawyers r review of the bank confirmation r review of contracts and agreements r review of tax assessments and correspondence r client representation letters
Describe the content of an enquiry letter to the clients law firm and the possible outcomes from replies to the letter.
The enquiry letter should r list all entities to which the enquiry is related r list outstanding claims or possible claims r describe the nature, status, and clients evaluation of the likely outcome of each claim and possible claim The letter should also request that the law firm send a reply directly to the auditor that r advises if the claims and possible claims are properly described r advises if the clients evaluations of the claims and possible claims are reasonable r lists any claims or possible claims omitted from the enquiry letter When there is an omission, the auditor should ask the client to evaluate the likely outcome and obtain the law firms agreement to the evaluation. If the law firm does not agree with any evaluation, a meeting should be held with the client, the law firm, and the auditor to discuss the matter.
Describe the importance of management (client) representations.
The client or management representation letter includes managements acknowledgment of primary responsibility for the financial statements, its confirmation that the auditor has been provided with all financial records and related data, and its confirmation that all minutes have been provided to the auditor. The letter usually also confirms managements belief that the financial statements are accurate and complete and the valuations used are appropriate. In most cases, the representation letter cannot serve as a substitute for adequate audit work by the auditor. In other cases, management representation is the only evidence available (for example, for the companys future plans). CAS 580 (CICA Handbook, section 5370) provides guidance on the use of management representations as audit evidence, the requirement to obtain written confirmation of significant representations, and the implication of managements refusal to provide written representations.
Explain the significance of auditing related-party transactions.
If one party controls another party, or if they are both under common control, they are considered related parties (this includes the companys management and immediate family members). The CICA Handbook includes recommendations for measurement and disclosure of related-party transactions, because these transactions may not reflect what would be done in an arms length transaction.
Identify the extent of the auditors responsibilities in relation to subsequent events, explain different types of events and their audit implications, and identify sources of information.
The extent of the auditors responsibilities for subsequent events can be summarized as follows:
The auditor must perform review and enquiry procedures to ensure that events subsequent to the balance sheet date for which adjustments and disclosures may be required are identified. For identified subsequent events, the auditor must examine evidence to determine if those events have been appropriately reflected in the financial statements. The procedures used to identify subsequent events should extend as close to the date of the auditors report as possible.
Type I events are those in which a pre-existing condition necessitates an adjustment to the financial statements. Type II events are those in which no adjustments to the financial statements are necessary, but additional note disclosures are required. If the auditor identified a Type I event, the auditor must verify that appropriate adjustments were made to the financial statements. If the auditor identifies a Type II event, the auditor must verify that the additional note disclosures are adequate. Sources of information about subsequent events include

enquiries of management correspondence with the clients law firm review of internal financial statements transactions subsequent to the year end minutes of directors meetings held subsequent to the year end
Identify the tasks involved in evaluating the results of the audit at the completion stage.
The tasks include 1. 2. 3. 4. 5. evaluating the sufficiency and appropriateness of the evidence collected reviewing the disclosures in the financial statements performing an overall financial statement analysis assessing whether the evidence collected supports the conclusions of the auditors report reviewing the content of the working paper file
Describe the main objectives of independent reviews.

The main objectives of independent review are to ensure the following: 1. The fieldwork provides proper support for the auditors report and no procedures were omitted or important conclusions overlooked. 2. The working papers have been prepared in accordance with the firms policies, contain adequate documentation of work performed, support the conclusions, and provide evidence of compliance with generally accepted auditing standards. 3. The work has been conducted and the report prepared in accordance with the policies of the firm and all applicable external requirements. 4. Important matters have been or are being reported to the client.
Summarize current CICA Handbook recommendations regarding communication with management.

The CICA Handbook requires that certain matters be communicated to management while other, potentially more serious, matters are to be communicated to those having oversight responsibility for the financial reporting process (usually the audit committee). Section 5750 requires the auditor to advise management of issues related to

fraud and error illegal acts risks of material misstatement, the entity, and its environment procedures in response to assessed risk weaknesses in internal control
Matters are usually communicated with management through a management letter. Any communication of matters identified during the audit must clearly indicate that the communication is derived from work matters that are of interest to done during the audit, but that the audit would not necessarily identify all management or the audit committee.
The communication must indicate that it is not intended for the use of third parties, and should be in writing whenever possible.
Describe current CICA Handbook recommendations regarding communication with the audit committee.
CAS 260 (CICA Handbook, section 5751) requires the auditor to advise the audit committee (or those having oversight responsibility for the financial reporting process) of issues related to

fraud and error illegal acts significant weaknesses in internal control related-party transactions not in the normal course of business items having a significant effect on the understandability, relevance, reliability, and comparability of the financial statements relationships that may impact the auditors independence, and any other important and relevant matters.
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Scenario 10.2-1 solution
Of significant concern when auditing financing transactions is the potential of management overriding the companys controls, if any exist, for these high-level decisions. The auditor needs to establish that any debts incurred during the year were properly authorized (for example, by the board of directors as documented in the minutes of the board of directors meetings). Auditors also need to maintain an attitude of professional skepticism that management may not be acting in good faith. Many of the procedures used in searching for unrecorded trade payables can also be applied to discover understatements or omissions in long-term liabilities.
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Typical analytical review procedures for notes payable and long-term debt include
comparison of balances in notes payable, long-term debt, interest expense, and accrued interest with prior years, which helps identify significant differences the auditor may want to investigate comparison of debt-to-equity ratios and times-interest-earned ratios to industry and to past years to identify possible problems in recorded interest expense or related debt calculation of average debt times average interest rates to approximate interest expense for the period, where significant differences may indicate problems with recorded interest expense, recorded obligations, or accrued interest
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Activity 10.3-1 solution
Earnings per share calculations are probably the most difficult numbers to audit in owners equity. They can also be the most significant analytical procedures used in the audit of owners equity. Earnings per share is a crucial number in the financial statements to investors; hence, comparing it to industry averages, forecasts, and previous years numbers is an important form of analysis, because major differences can indicate fundamental changes in company performances and perhaps errors in earnings, in owners equity, or both.
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The auditors concern with contingent gains is that management has recognized the gain by recording it in the books, which is contrary to the requirements of the CICA Handbook, Part II Accounting . An example of a contingent gain that might be recorded prematurely would be recording the proceeds from a lawsuit the client has anticipated winning before the lawsuit is resolved.
While it could be argued that the client has no liability until a claim is formally made under the guarantee, the client was contingently liable at the year end and the amount of the loss could be estimated. Therefore, the loss should be recorded in the clients books. If the loss is uncertain or if the amount cannot be estimated, the contingency should be disclosed in the notes to the financial statements.
There are four possible outcomes to the clients enquiry letter: 1. The law firms state that there are no outstanding or possible claims of which they have knowledge, or for which their advice has been sought. 2. The law firms agree that the representations regarding the nature, status, and possible outcomes of claims or possible claims made in the enquiry letter are reasonable. 3. The law firms do not agree with one or all the representations regarding the nature, status, and possible outcomes of claims or possible claims. 4. The law firms identify claims or possible claims that were omitted from the enquiry letter.
The auditor must make sure that outstanding claims are provided for in the financial statements and/or disclosed in the notes to the financial statements. The client and the clients lawyers may decide not to disclose a possible claim to the auditor, who has no other way of finding out about it. The auditor needs to make a reasonable attempt to find out about possible claims; sending a letter to the law firm constitutes a reasonable attempt.
The auditors primary task is to ensure that material related-party transactions are disclosed, and to determine how the conditions and values related to these transactions compare to those made at arms length. Related-party transactions are usually detected through enquiries of management, review of the minutes of board of directors meeting, and auditors knowledge of the business and industry. At the completion stage of the audit, the auditor would have to reassess the impact of related-party transactions and ensure that the final disclosures are adequate. A summary of related parties and significant transactions should be documented in the working paper file.
In this way, prices can be set so that the subsidiary shows no profit and therefore generates no tax revenue for Canada. Thus, related-party transactions can have broad social implications for the health of the economy.
The extent of the auditors responsibilities for subsequent events under current assurance standards can be summarized as follows:
The auditor must perform review and enquiry procedures to ensure that events subsequent to the balance sheet date for which adjustments and disclosures may be required are identified. For such subsequent events identified, the auditor must examine evidence to determine if those events have been appropriately reflected in the financial statements. The procedures used to identify subsequent events should extend to the date of the auditors report.
Situation 1: This situation is a Type I event that is, an event in which a pre-existing condition necessitates an adjustment to the financial statements. Brettsons financial statements should be adjusted at December 31 to reflect Dunlops insolvency (subsequent to December 31). Although the fact of Dunlops financial difficulties, brought to light by the bankruptcy, was not known to Brettson until after the year end, the condition leading to the insolvency likely existed at December 31. Situation 2: This situation is a Type II event that is, an event in which no adjustments to the financial statements are necessary, but additional note disclosures are required. The event that made the receivable uncollectible occurred after the year end; therefore, the fact that the receivable is not collectible should be disclosed in the notes to Brettsons financial statements.
Sources of information about subsequent events include enquiries of management, correspondence with the clients law firm, review of internal financial statements, review of transactions subsequent to the year end, minutes of directors meetings held subsequent to the year end, and a letter of representation.
An independent review is performed at the completion of an audit engagement by an individual from within the accounting firm who has had no experience on the engagement and who has not been biased by the ongoing relationship between the regular auditors and the client. Independent reviews are most common and more comprehensive for large complex audits. An independent review is a quality control activity and is important because it helps to minimize the risk of necessary procedures being omitted or improperly performed. A reviewer who has had more experience than the audit team in the field may detect omissions and poor or incorrect decisions. The reviewer can also stand back from the details of the field work and see whether the major audit conclusions make sense.
Agree. Note that in both cases, the term communication does not refer to the audit report, but to reportable matters that were found during the audit and that are of interest to the client (not the users of the financial statements). This is why the Handbook refers to these kinds of communications as derivative communications. It is important to remember that audit procedures are not designed to identify matters that are to be communicated through derivative communications.
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Module 10 self-test
Question 1
Review checkpoint 2, page 594 Solution
Question 2
Question 3
Question 4
Question 5
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Self-test 10 Solution 1
Some of the revenue and expense accounts are not material in relation to the financial statements. Also, most income statement accounts will have been audited as part of the audit of the transaction cycles, and indirectly when various related balance sheet accounts have been audited (balance sheet approach). Therefore, they can be audited through analysis. Such procedures compare the account balance to related balance sheet accounts, to sales, to industry averages, or to a multipleyear trend, to ascertain whether any unusual fluctuations are present. Unusual or unexpected items would have to be investigated and material items vouched to supporting documents.
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In addition to the lawyers letter, other procedures that are used to gather evidence regarding contingencies include

obtaining a standard bank confirmation inquiry of client management reading the minutes of the board of directors meetings vouching to purchase and sales contracts vouching to lease agreements, confirmation with lessor or lessee obtaining a client representation letter
The first type of subsequent event confirms a pre-existing condition and therefore requires an adjustment to the financial statements. The second type of subsequent event consists of those events that provide evidence with respect to conditions that did not exist at the date of the balance sheet being reported on but arose subsequent to that date. These events should not result in an adjustment of the financial statements. However, disclosure may be required to prevent the financial statement from being misleading. In some cases, pro forma financial statements may be required to ensure adequate disclosure.
Recommended adjustments and note disclosures may be written by the auditors, but the client must take primary responsibility for the financial statement numbers and disclosures. The auditors responsibility is for the audit report and not for the financial statements. All adjustments and note disclosures must be approved by the client.
The danger for the auditors when company officials engage in undisclosed related-party transactions is that accounting values may be manipulated in a number of ways and/or disclosure requirements of GAAP may not be met. Related-party transactions may involve the purchase of assets at inflated prices, leases with affiliates, acquisitions of patents for stock given to an inventor or promoter, sales to affiliates and fallacious decisions about amortization. Business history has recorded several cases of non-arms-length transactions with promoters, officers, directors and controlled companies (even dummy companies) designed to drain the companys resources (or overstate its income) and fool the auditors. All transactions with persons closely associated with the company (related parties) should be audited carefully with reference to market values, particularly when a nonmonetary transaction is involved (e.g., stock exchanged for patent rights). Sale and lease-back and straight lease transactions with insiders likewise should be audited carefully. Special efforts should be made to determine whether other parties to major transactions are related parties, even if the relationship has not been disclosed to the auditors by management. section 5370) provides guidance on obtaining written confirmation CAS 580 (CICA Handbook, of significant representations provided to the auditor, such as completeness of information regarding all related parties and related-party transactions, and the measurement and disclosure of transactions with related parties.

Module 10: Investments, Long-Term Debt, Shareholders' Equity Balances, and Completion of The Audit

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file:///F|/Courses/2010-11/CGA/AU1/06course/m10intro.

Test your knowledge

Contingencies Communication with the clients law firm

10.7 10.8 10.9

Management representations Related parties Subsequent events

Evaluation of audit findings

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10.11 10.12 10.13

Print this module

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10.1 Investments Substantive procedures

Knowledge of the business and industry

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10.2 Long-term debt Substantive procedures

Key assertions for long-term debt

Potential for fraud

Scenario 10.2-2: Audit management

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10.3 Shareholders equity Substantive procedures

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10.4 Revenue and expenses

Chapter 15, pages 591596

Key assertions for revenue and expenses

First examination standard of GAAS

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Second examination standard of GAAS

Third examination standard of GAAS

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Explain audit procedures for identifying and auditing contingencies. (Level 1)

No required reading LEVEL 1

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10.6 Communication with the clients law firm

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Scenario 10.6-2: Claims

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10.7 Management representations

Describe the importance of management (client) representations. (Level 2)

Chapter 15, pages 600602 CAS 580 (CICA Handbook

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10.8 Related parties

Explain the significance of auditing related-party transactions. (Level 1)

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10.9 Subsequent events

LEVEL 2 Scenario 10.9-1: Audit management

What are some sources of information for subsequent events?

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10.10 Evaluation of audit findings

Review of audit results

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Misstatements found during the audit

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10.11 Audit findings and independent reviews

Describe the main objectives of independent reviews. (Level 2)