Final Review of the Audit Chapter 20 Completing the Audit and Assessing Overall Risk and Materiality Final Review of the Audit Contingencies - Probable contingent losses that can be reasonably estimated must be accrued and disclosed. Probable contingencies that are not accrued and those that are reasonably possible should be disclosed. Responsibilities Management is responsible for designing and maintaining policies and procedures to identify, evaluate and account for contingencies.
Auditors are responsible for determining that the client has properly disclosed contingencies.
Sources of Evidence Primary source of corroborative evidence is the client's legal counsel Letter of audit inquiry sent from auditors to attorneys Effect of Contingencies on Audit Reports - Attorney's refusal to respond to the letter of audit inquiry either orally or in writing is a scope limitation that precludes an unqualified opinion. Explanatory paragraph is usually added to the audit report if the attorney is unable to form a conclusion on the likelihood of an unfavorable outcome or the amount of potential loss because of inherent uncertainties. Income Tax Provision Auditor's assessment must consider federal, state and foreign income tax expense and the related current and deferred liabilities. Inherent risk is usually very high for income taxes because of the complexities of the judgments, factors and calculations involved. Auditor should inquire about the status of IRS audits of prior years and examine IRS auditor's reports for any disputes or additional assessment.