Learning Objectives

Review Checklist

Client Closing Date		Yes	No	Comments
I. General Questions
1	Have you reviewed work paper files?
2	Are you satisfied that: The judgments and conclusions reached are supported by documented evidence? The work paper files contain no unresolved statements that are prejudicial to the interests of the firm? Appropriate changes in the next examination, if any, have been summarized?
3	Do the work papers include adequate documentation as to: Changes in accounting policies? Conformity with generally accepted accounting principles or another comprehensive basis of accounting, if appropriate? Appropriate changes in the next examination, if any, have been summarized?
4	Have you reviewed the audit conclusion on all material items in the financial statements?
5	Based on your review and your knowledge of the client, do the financial statements fairly present the company’s financial position, results of its operations and cash flow?
6	Is the work performed consistent with the arrangements made with the client?
7	Does the work performed comply with the firm’s quality control policies in all material respects?
8	Has the computer-assisted audit techniques-related documentation been reviewed by a qualified computer specialist?
9	Have required job evaluation forms been completed?
II. Financial Statements
1	Is the name of the company exact?
2	Are the dates of the balance sheet and period covered by statements of income, stockholders’ equity, and cash flow exact?
3	Are all material facts that are necessary to make the financial statements not misleading adequately disclosed?
4	Have all material and/or extraordinary subsequent events been evaluated and properly treated and/or disclosed?
5	Is there adequate footnote disclosure? Do the footnotes clearly communicate the facts?
6	Do the financial statements maintain a uniform manner of format, capitalization, headings and appearance in general within itself?

Illustration 11.11 (continued)

Client Closing Date		Yes	No		Comments
7	Are you satisfied that other information contained agrees with the financial statements and auditor’s report?
III. The Audit Report
1	Is the audit report addressed to the proper party?
2	Is the audit report properly worded?
3	Is an explanatory paragraph included in our opinion when the financial statements are inconsistent?
4	Is the date of our report proper?
5	Is any date in the footnotes that requires special mention, with respect to the date of our report, appropriately reflected in the date of our report (e.g. dual dating)?
6	Is the option on the supplementary financial information proper and supported by auditor examination?
7	Are disclosures in the opinion, financial statements, and notes to financial statements adequate?
D. Client Relations
1	Have we performed the engagement in accordance with the arrangement (including any request by the client for extra services)?
2	Are you satisfied that the audit did not disclose any suspicions of irregularities or illegal acts?
3	Are you satisfied that the client is a going concern?
4	Have arrangements been made: For the client’s review and approval of the proposed adjustments? For the client to review a draft of the report? To communicate reportable conditions and material weaknesses in the internal control structure?
5	Have suggestions been summarized for a management letter?
6	Are we satisfied that no unusual client problem was noted during the audit?
E. Report Production
1	Are instructions as to processing specific, including the type of report, client number, numbers of copies required, due date, delivery instruction (when and how)?
2	Does the report style and appearance conform appropriately with the standards we have established for all reports?
3	Is the language of the report simple and concise?

By (Audit Partner): Date:

ILLUSTRATION 11.12

Independent Review Checklist

Client Closing Date		Yes	No	Comments
1	In-charge engagement performance and administration review performed and the appropriate questionnaires completed and signed?
2	Have all exceptions noted on the questionnaires discussed above been resolved?
3	Have we obtained an appropriate engagement letter, legal representation letter, and client representation letter?
4	Have you reviewed the vertical review for completeness and unusual problems?
5	Were an audit program, time budget and time summary prepared, approved and properly utilized?
6	Were all problem areas adequately reviewed and conclusions properly documented?
7	Have you concurred with alternative procedures employed to satisfy us when such procedures deviate from our firm’s basic audit policies?
8	Are the financial statements free from material errors of omission?
9	Are the engagement files, to the extent reviewed, free from any evidence of material non-compliance with auditing standards or firm policies?
10 Is our audit report appropriate?
11 Does our audit report comply with generally accepted auditing standards?
12 Do the report style and appearance conform appropriately with the standards we have established for all reports?
13 Is the language of the report simple and concise?
14 Have identified reportable conditions in the internal control structure been appropriately communicated?
15 Have all conditions, that you are aware of, that require reevaluation of our relationship with the client been appropriately considered?
16 Have you reviewed the reference points raised in working paper review and noted the disposition thereof?
17 Are you satisfied that there are no unresolved statements in the working paper files? If there are any, they must be properly and adequately explained.
18 Have you removed all queries from working papers?

By (Audit Partner): Date:
Resolution of Review Questions
Resolution of review questions raised by the manager and partner will usually require more extensive documentation and explanation in the working papers. This phase of the review will usually involve a completion of a firm checklist to determine that all reporting standards have been complied with. Illustration 11.11 is a review checklist. Illustration
11.12 is a review checklist for use by those reviewers independent of the audit.

• 
  Working Paper Review
  

The “in-charge” or “senior” auditor will obtain the agreement of the manager that the fieldwork is complete before leaving the client’s premises. This will usually involve the manager spending the last day or two of the fieldwork at the client’s offices reviewing the working papers to determine that the audit programs are complete and that sufficient evidence has been obtained to support the opinion.
Working papers (or work papers) are a record of the auditor’s planning; nature, timing and extent of the auditing procedures performed; results of such procedures; and the conclusions drawn from the evidence obtained. Working papers may be in the form of data stored on paper, film, electronic or other media. A detailed discussion of audit documentation and working papers appears in Appendix A to this chapter.
Aid in Supervision and Primary Support for Audit Opinion
Working papers serve two main functions: to aid in the conduct and supervision of the audit and as primary support for the auditor’s opinion, especially the representation that the audit was conducted in accordance with ISAs.
Working papers are a physical aid in recording the results of audit tests. For example, when a sample is taken, the items sampled must be recorded and computations must be made. Since supervisors who perform few of the audit tests make final decisions conc- erning the audit opinion, the working papers serve as a basis for evaluating the evidence given. After the opinion has been given, working papers are the only physical proof that the auditor has that an adequate audit was conducted because original documents and accounting records remain with the client.
The working papers are reviewed for sufficiency of evidence. Evidence recorded in the working papers should be both relevant and valid. Relevance is largely a matter of the relationship between the evidential matter and the financial statement assertion involved. For example, if the assertion concerns existence of an asset, the reviewer should find that the auditor selected items included in the account balance and physically examined and confirmed those items.
Independent Review
Someone who did not take part in the audit reviews the working papers. This is called an independent review. At the completion of the audit, work papers may be reviewed by an independent member of the audit firm who has not participated in the audit for four basic reasons:

1. 
   to evaluate the performance of inexperienced personnel;
   
2. 
   to make sure that the audit meets the audit firm’s standard of performance;
   
3. 
   to counteract the bias that frequently enters the auditor’s judgment;
   
4. 
   to comply with audit regulation such as the Sarbanes-Oxley Act.
   

• 
  Evaluating Audit Findings for Material Misstatements
  

When the audit tests for each item in the financial statements are completed, the staff auditor doing the work will sign off completion of steps in the audit program, identify monetary misstatements in the financial statements, and propose adjustment to the financial statements. Monetary misstatements are misstatements that cause a distortion of the financial statements. Monetary misstatements may result from mistakes in processing transactions (such as mistakes in quantities, prices or computations), mistakes in the selection of accounting principles, and mistakes in facts or judgments about accounting estimates.
Misstatement Worksheet
The most practical way to consider whether the financial statements are materially mis- stated at the conclusion of the audit is to use a worksheet that determines the combined effect of uncorrected misstatements on important totals or subtotals in the financial statements. Known misstatement, likely misstatement, and allowance for undetected misstatement would be determined for each account balance included in the financial statements. Known misstatement is the amount of misstatement specifically identified by the auditor or as a result of applying audit procedures. Likely misstatement is the auditor’s best estimate of misstatement based on an extrapolation or projection of misstatement detected in sampling applications. Allowance for undetected misstatement is the auditor’s allowance for potential misstatement that remains undetected after applying audit pro- cedures. In the combined effect worksheet procedure, a worksheet summarizing the results of sampling on each account balance is combined with a worksheet giving the results of audit tests that did not use sampling.
If the total misstatement for any account balance exceeds materiality by more than a
small amount, the auditor must determine an effective method of resolving the problem. The auditor may persuade the client to correct more of the known misstatements in the financial statements. Additional procedures may be performed to reduce the basis allowance for undetected misstatements. The client may be asked to record projected misstatement for the applications.

• 
  Review Laws and Regulation
  

All countries have laws that apply to businesses operating there. The auditor should know the laws that apply to their client, review the criteria required to comply with that statute, and test for the client company’s compliance.

Government Review of Publicly Traded Companies

GOING CONCERN ISSUES

The governing authorities may review publicly traded companies because they meet certain high-risk criteria. Therefore it is wise for the auditor to understand the criteria that will set the client apart for review and determine if any problems may occur. For example, the SEC reviews a publicly traded company if the following factors are evident: ⁴³

• 
  companies that have issued material restatements of financial results;
  
• 
  companies that experience significant volatility in their stock price as compared to other companies;
  
• 
  companies with the largest market capitalization;
  
• 
  emerging companies with disparities in price to earning ratios;
  
• 
  companies whose operations significantly affect any material sector of the economy;
  
• 
  
  any other factors that the Commission may consider relevant.
  

Going Concern Issues

Assessment of the going concern assumption is particularly important to the auditor. ISA 570⁴⁵ specifies that when performing audit procedures the auditor should consider the appropriateness of the going concern assumption underlying the preparation of the financial statements.

The going concern assumption is a fundamental principle in the preparation of finan- cial statements. Under the going concern assumption, a company is viewed as continuing in business for the foreseeable future. As a result, assets and liabilities are recorded on the basis that the company will be able to realize its assets and discharge its liabilities in the normal course of business.
Most financial legislation, regulation, and accounting standards, including Inter- national Financial Reporting Standards, specifically require management to assess the entity’s ability to continue as a going concern. IAS 1, “Presentation of Financial Statements,” paragraphs 23 states: “When preparing financial statements, management should make an assessment of an entity’s ability to continue as a going concern. Financial statements should be prepared on a going concern basis unless management intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.”
Illustration 11.13 gives examples of events and conditions, which individually or col- lectively, may cast significant doubt about the going concern assumption. The significance

of the indications in Illustration 11.13 can often be mitigated by other factors. For example, the effect of an entity being unable to make its normal debt repayments may be counterbalanced by management’s plans to maintain adequate cash flows by alternative means, such as disposal of assets.

ILLUSTRATION 11.13
Indications that the Going Concern Assumption Might be Questioned ⁴⁶
This listing is not all-inclusive nor does the existence of one or more of the items always signify that a material uncertainty exists.