SAMARA UNIERSITY

COLLEG OF BUSINESS AND ECONOMICS

DEPARTEMENT ACCOUNTING AND FINANCE

GROUP ASSIGNMENT ONE

 COURSE TITLE…………………….. AUDIT PRINCIPALE AND PRACTICE II
 COURSE CODE………………………ACFN{4062}
 INSTUCTURE NAME………………. ABEBU
 SECTION

GROUP NAME ID NO

1. LEGESE ISHETU……………………… 1402186

2. GAMECHU ABDULAHI………………1402050
3. IBSA SIRAJI…………………………….1402125
4. IMAMUDIN BAYAN…………………..1402129
5. TESFAYE GASHEWU…………………1402428
6. NIGATU ASSEFA……………………....1402323
7. MILKESO KARENTI…………………1402251
8. WARIO DIMA………………………….1302069
9. ALI UMAR……………………………. 1401787
10. NIAL BEIL………………………… ….. 1402320

[Link] the Audit1

Completing an audit involves performing final procedures to evaluate evidence, such as
reviewing subsequent events and contingencies, performing final analytical procedures, and
evaluating the overall financial statement presentation
. It culminates in the auditor forming an opinion, issuing the audit report, and communicating
with management and the audit committee.
Key steps in completing an audit

 Perform additional procedures:

o Review subsequent events: Look for any events that occurred after the balance
sheet date but before the audit report date that may require adjustment or
disclosure.
o Review contingent liabilities and commitments: Inquire about and evaluate
potential legal claims or unrecorded commitments.
o Read meeting minutes: Review minutes from board of directors and shareholder
meetings.
 Accumulate final evidence:
o Obtain management representations: Get a formal written representation letter
from management that confirms their responsibilities for the financial statements
and their attestations about the audit.
o Perform final analytical procedures: Compare the final financial statements to
expectations and the results of previous procedures to identify any unusual
fluctuations or relationships.
 Evaluate findings and form an opinion:
o Evaluate misstatements: Assess the impact of any uncorrected misstatements
identified during the audit and discuss them with management.
o Evaluate going concern assumption: Determine if there is substantial doubt
about the company's ability to continue as a going concern and if disclosures are
adequate.
o Assess the overall audit evidence: Review all evidence to ensure all necessary
procedures were completed and conclusions are supported.
 Issue the report and communicate findings:
o Issue the audit report: The final report contains the auditor's opinion on the
fairness of the financial statements.
o Communicate with management and the audit committee: Report on internal
control weaknesses, matters related to the audit, and any other required
communications.

1.1 Review of Contingent Liabilities and Commitments

The review of contingent liabilities and commitments involves identifying, evaluating, and
disclosing potential future financial obligations that depend on uncertain future events or existing
contractual agreements
. These items are crucial for providing a complete picture of an entity's financial position to
stakeholders.
Contingent Liabilities
A contingent liability is a potential obligation arising from past events whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the entity's control. They can also be present obligations where an outflow of
resources is not probable or the amount cannot be measured reliably.
Accounting standards, such as IAS 37 and GAAP, require specific treatment based on the
likelihood of the obligation materializing and the ability to estimate the amount:

 Probable and Estimable: If a loss is probable (more likely than not, generally
considered a high probability) and the amount can be reasonably estimated, the liability is
accrued (recorded on the balance sheet) and disclosed in the financial statement notes.
 Reasonably Possible: If the chance of the future event occurring is more than remote but
less than probable, the contingent liability is disclosed only in the financial statement
notes.
 Remote: If the chance of the future event occurring is slight, generally no action is
necessary (neither accrual nor disclosure).

Examples of contingent liabilities:

 Pending lawsuits or legal claims

 Product warranties and guarantees
 Guarantees of another entity's debt (e.g., a subsidiary's loan)
 Environmental cleanup costs if the outcome is uncertain
 Commitments
 Commitments are intentions to give up resources that stem from existing contractual or
legal agreements but are not yet liabilities because the entity has not yet received the
related economic benefits or assets. They represent future obligations that are certain to
occur, regardless of other events.
 Commitments are generally not recognized on the balance sheet as liabilities but are
essential to disclose in the notes to the financial statements to inform users about
potential future cash outflows.

 Commitments
 A commitment is a promise made by a company to an external party, resulting from legal
or contractual requirements, that will require future payments. Commitments are not
present liabilities but intentions to give up resources; a liability typically arises only when
the entity has received the asset or service and is obliged to pay for it.
1.2. Review of Subsequent Events

The review of subsequent events is a critical auditing and accounting process designed to ensure
that financial statements are accurate and reliable
. This review focuses on significant events that occur after the date of the financial statements
but before they are authorized for issuance.
Purpose of the Review
The primary purpose is to determine if any post-year-end events affect the current financial
year's statements and require inclusion, adjustment, or disclosure. This is governed by
accounting standards like IAS 10 "Events After the Reporting Period" and auditing standards
such as ISA 560 "Subsequent Events".
Types of Subsequent Events
Subsequent events are categorized into two types:

 Recognized (Adjusting) Events: These provide further evidence of conditions that

existed at the financial statement date. The financial statements must be adjusted to
reflect these events.
o Examples: A major customer filing for bankruptcy shortly after the year-end due
to pre-existing financial distress (requiring a bad debt write-off), or the final
determination of a long-term contract price that was estimated at year-end.
 Nonrecognized (Non-adjusting) Events: These are indicative of conditions that arose
after the financial statement date. These events are typically disclosed in the footnotes
to the financial statements if material, but the financial statement figures themselves are
not adjusted.
o Examples: A natural disaster (e.g., fire, flood) that damages company assets, a
significant change in foreign exchange rates, or a major merger or acquisition
after the balance sheet date.


o

Auditor's Procedures
Auditors perform specific procedures, as close as practicable to the date of the auditor's report, to
identify all material subsequent events:

 Reviewing management's procedures: Assessing the process management has in place

to identify subsequent events.
 Reviewing minutes: Examining minutes of meetings of shareholders, directors, and
committees held after the financial statement date.
 Reviewing interim financial statements: Analyzing the latest available interim
financials, budgets, and cash flow forecasts.
 Inquiring of management and lawyers: Asking management and legal counsel about
the occurrence of any significant events, new commitments, sales of assets, or pending
litigation and claims.
  Obtaining a management representation letter: Obtaining written confirmation from
management that all known subsequent events have been appropriately accounted for and
disclosed.

Key Accounting and Auditing Standards

The review process is governed by specific professional standards:

 IFRS: IAS 10 (Events After the Reporting Period).

 Auditing: ISA 560 (Subsequent Events) outlines the auditor's responsibilities.
 US GAAP: Follows ASC 855 "Subsequent Events".

The auditor's objective is to ensure that users of the financial statements are not misled by the
omission of material information that occurred after the reporting date.

1.3. Communication with the Audit Committee and Management

Effective communication between auditors and the audit committee/management is a critical

corporate governance function, mandated by auditing standards, that ensures transparency and
accountability throughout the audit process
. This communication involves a continuous dialogue, not just formal year-end reporting, and
covers specific key areas.

Communication with the Audit Committee

The external auditor communicates with the audit committee (or those charged with governance)
to ensure the committee can effectively oversee the financial reporting process. Key areas of
communication include:

 Auditor Responsibilities and Engagement Terms: Establishing an understanding of the

auditor's responsibilities and the objectives, scope, and timing of the audit.
 Significant Audit Findings: Providing timely observations that are significant to the
financial reporting process, such as:
o Significant Accounting Policies: Discussion of the initial selection, changes in,
and application of significant accounting policies, especially in controversial or
emerging areas.
o Critical Accounting Estimates: How management formulates sensitive estimates
and the range of possible outcomes.
o Corrected and Uncorrected Misstatements: A schedule of all uncorrected
misstatements and a discussion of their potential impact on future financial
 statements. Corrected misstatements, other than trivial ones, that were identified
through audit procedures are also communicated.
o Material Weaknesses and Significant Deficiencies: All material weaknesses
and significant deficiencies in internal control over financial reporting must be
communicated in writing.
 Difficulties and Disagreements: Any significant difficulties encountered during the
audit (e.g., delays, availability of information), and any disagreements with management
(whether resolved or not) that could be significant to the financial statements or the
auditor's report.
 Fraud and Illegal Acts: Any discovered fraud or illegal acts, regardless of their
materiality, must be communicated to the appropriate level of authority (if involving
senior management, directly to the audit committee).
 Management Representations: The auditor's requests for, and receipt of, management's
written representations.
 Independence: Matters related to the auditor's independence.

Meetings should include regular private sessions with the independent auditor, without
management present, to facilitate open and unhindered communication.
Communication with Management
Auditors communicate with management throughout the audit to gather information, resolve
issues, and ensure that management has the opportunity to correct misstatements or control
deficiencies. Communications primarily focus on:

 Routine Inquiries: Obtaining necessary information, explanations, and representations

relevant to the audit.
 Misstatements: Bringing misstatements (other than clearly trivial ones) to management's
attention as they are identified to allow for timely correction.
 Control Deficiencies: Communicating all control deficiencies to management (and
significant deficiencies/material weaknesses in writing to management and the audit
committee).
 Discussions on Accounting: Discussing the application of accounting principles and the
basis for management's determinations of accounting estimates.

Ultimately, the final audit report is a formal communication of the auditor's opinion on the
financial statements.
1.4. Management Letter
management letter is a formal document issued by an external auditor to an organization's
management and those charged with governance at the conclusion of an audit. It is separate from
the formal audit opinion on the financial statements and focuses on providing recommendations
for improvement in internal controls and operational efficiency.
Purpose and Content
The primary purpose of a management letter is to serve as a constructive feedback tool for
management to improve operations and mitigate risks. It typically covers:

 Identified Weaknesses: It highlights specific deficiencies in internal control systems and

operational processes observed during the audit fieldwork.
 Consequences/Risks: It explains the potential consequences or risks arising from these
weaknesses (e.g., potential for material misstatement, operational inefficiencies).
 Recommendations: It provides cost-effective suggestions and best-practice advice on
how to strengthen controls, improve compliance, enhance cash management, and boost
operating efficiency.
 Other Matters: It may also cover other matters that the auditor identified as
opportunities for improvement, even if they are not considered material weaknesses or
significant deficiencies.

Key Characteristics

 Auditor-Initiated: The letter is prepared and issued by the external auditor. (This is
different from a "management representation letter," which is a document prepared by
management and addressed to the auditors to confirm their responsibilities and
representations made during the audit).
 Non-Mandatory (Usually): While not typically required by law, it is considered a best
practice in audit processes and a valuable form of communication.
 Confidentiality: The communication is usually intended solely for the information and
use of management, the audit committee, and others within the organization.
 Response Required: Management is expected to review the letter and provide a formal
response outlining the corrective actions they have taken or plan to take to address the
raised points.

In essence, a management letter translates the technical findings of an audit into actionable
advice for business improvement, going beyond mere financial compliance.