This chapter explained auditing operations and the considerations and procedures involved in completing the audit. To summarize:
The analysis throughout the text has emphasized the need to consider revenue and expense accounts in conjunction with the audit of asset and liability accounts. However, vouching and other substantive procedures are generally necessary for revenue and expense accounts that are less directly associated with transaction cycles, such as miscellaneous revenue and selling, general, and administrative expenses.
Substantive tests for payroll accounts address the overall reasonableness of payroll costs and the proper allocation of these costs to the functional areas of manufacturing, selling, and administration. In addition, tests must be performed on the allocation of manufacturing costs to work in process, finished goods, and cost of goods sold.
Because of their objectives, certain audit procedures cannot be completed before the end of the audit. These procedures include: (a) search for unrecorded liabilities, (b) review the minutes of meetings, (c) perform final analytical procedures, (d) perform procedures to identify loss contingencies, (e) perform the review for subsequent events, and (f) obtain the representation letter.
The auditors must perform audit procedures to determine that loss contingencies have been properly presented and disclosed in conformity with FASB No. 5. To identify loss contingencies, auditors perform various procedures, such as reviewing minutes of directors' meetings, inquiring of the client's lawyer, reviewing correspondence with financial institutions and regulatory agencies, sending confirmations to financial institutions, and obtaining a representation letter from officers of the company.
Subsequent events may be classified into two broad categories: (a) those providing additional evidence about facts existing on or before the balance sheet date (which may require adjusting entries), and (b) those involving facts coming into existence after the balance sheet date (which may require note disclosures). Many of these subsequent events relate to loss contingencies, and the audit procedures involved are similar to the ones used to audit those items.
Also important to completing the audit are the procedures performed to evaluate audit findings and review the audit work. In evaluating audit findings, the auditors accumulate known misstatements, projected misstatements, and other estimated misstatements to determine if the aggregate results of their procedures support the fairness of the financial statements. In addition, the auditors should consider whether any audit results indicate a need to reassess the risks of material misstatement of the financial statements.
Auditors also have certain post-audit responsibilities. When auditors find, subsequent to the issuance of their audit report, that the financial statements are materially misleading, they should take steps to prevent continued reliance on their report. In some cases this might involve notification of regulatory agencies.
Identify the audit objectives for revenue and expense accounts.
Explain the relationships between revenue and expense accounts and balance sheet accounts.
Describe the nature of appropriate substantive audit procedures to accomplish the objectives for the audit of revenue and expense accounts.
Describe the fundamental controls over payroll.
Complete an audit program for payroll.
Explain the types of procedures that are necessary to complete the audit.
Describe the auditors' responsibilities for the detection and evaluation of various types of subsequent events.
Explain the steps involved in evaluating audit findings.
Discuss the auditors' post-audit responsibilities.