Clarified Auditing Standards: Consideration of Omitted Proceduresby
The objectives of the auditor under AU-C Section 585, Consideration of Omitted Procedures After the Report Release Date, are to assess the effect of any omitted procedures on the auditor's continued ability to support a previously expressed opinion on the financial statements and to respond appropriately.
An omitted auditing procedure is defined as one the auditor considered necessary in the circumstances existing at the time of the audit of the financial statements but which was not performed.
Requirements of the Standard
If, subsequent to the report release date, the auditor becomes aware of an omitted procedure, the auditor should:
1. Assess the effect of the omitted procedure on the auditor's present ability to support the previously expressed opinion on the financial statements.
- If the auditor concludes that an omitted procedure impairs the auditor's present ability to support a previously expressed opinion on the financial statements, and if he or she believes that there are users currently relying or likely to rely on the previously released report, the auditor should promptly perform the omitted procedure or alternative procedures to determine whether there is a satisfactory basis for the auditor's previously expressed opinion.
2. Document the procedures performed in accordance with the provisions of AU-C Section 230, Audit Documentation (Redrafted).
3. As a result of the subsequent performance of an omitted procedure or alternative procedures when the auditor becomes aware of facts that were unknown during the audit, apply the provisions of AU-C Section 560, Subsequent Events and Subsequently Discovered Facts.
Effects of Omitted Procedures on Evidence
While the requirements of AU-C Section 585 seem simple and clear, auditors realize application of this standard could create the events that produce nightmares! Discovery of omitted procedures could occur during annual CPA firms' inspections, peer review, or, in the worst case, during an adversarial action against the CPA firm. Evaluating the impact of an omitted procedure would depend on the nature and extent of the substantive evidence it would have produced and whether other procedures were performed that produce sufficient evidence to evaluate affected financial statement assertions.
For example, assume it is discovered that there were no tests of balances procedures performed to enable the auditor to evaluate the relevant assertions for the sales classifications. Receivables confirmation procedures and sales cutoff tests were performed at the beginning and end of the year, but no detailed tests of balances procedures and no tests of controls (or extensive systems walk-through procedures) were performed for sales transactions.
The auditor did perform, however, a highly-effective analytical procedure by multiplying the number of units sold (assuming big-ticket items transferred out of audited inventory records) times their average sales prices with acceptable results. In this case, the evidence from analytical procedures, along with the accounts receivable procedures at the beginning and end of the year, should be sufficient to evaluate relevant assertions in the sales classifications, and no other procedures would have been necessary.
On the other hand, if this procedure is not performed and no other tests of controls, tests of balances, or analytical procedures evidence is available, the evidence collected would not ordinarily be sufficient to evaluate relevant assertions for sales.
Effects of Omitted Procedures on Previously Issued Reports
If an omitted procedure or satisfactory alternative procedure can't be subsequently performed, if the results of performing the necessary procedures produced insufficient evidence, or if management refuses to make necessary revisions of previously issued financial statements, a previously issued opinion may not be supported by the auditor. In these circumstances, it would be necessary for the auditor to inform management and persons charged with governance that the previously issued financial statements are not to be relied upon or distributed to third parties.
Management should be requested to notify known users that the financial statements cannot be relied upon and, practically, request they return the statements. If they refuse to do so, it would be appropriate for the auditor to consult an attorney before taking further action.
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