Completing the audit
Before finalising the audit report, you need to consider additional issues that may affect the financial statements. These are: (6)
Before finalising the audit report, you need to consider additional issues that may affect the financial statements. These are:
- Subsequent events, also called post-balance sheet events
- Provisions and Contingencies
- Evaluation of misstatements
- Written Representations by management
- Audit Documentation and final check
- Going Concern concept (considered throughout audit)
At this stage the auditor is still gathering audit evidence, but now pulling together all of the evidence in advance of forming an opinion.
Subsequent Events
Its definition in auditing?
Types of subsequent events as recognised in financial reporting frameworks (2)
Definition in auditing
Events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.
Types of subsequent events as recognised in financial reporting frameworks
a. Those that provide evidence of conditions that existed at the date of the financial statements; - Adjust financial statements
b. Those that provide evidence of conditions that arose after the date of the financial statements. - Do not adjust financial statements
Subsequent Events - Audit objective for auditing subsequent events: (2)
- Obtain sufficient appropriate audit evidence about whether events occurring between the date of the financial statements and the date the auditor’s report that require adjustment of, or disclosure in, the financial statements … are appropriately reflected … in accordance with the applicable financial reporting framework
- Respond appropriately to facts that become known to the auditor after the date of the auditor’s report, that, had they been known … at that date, may have caused the auditor to amend the auditor’s report
Subsequent Events - Examples of adjusting (3) and non-adjusting events (3)
Adjusting subsequent events
- Resolution of a court case
- Bankruptcy of a major customer
- Discovery of fraud or error
Non-adjusting subsequent events
- Destruction of major asset (flood, fire etc)
- Closure plans
- Dividends announced after reporting period
Subsequent Events - Appreciation of dates when subsequent events occurred
What should be considered when reviewing subsequent events?
What periods should be considered for collecting evidence and responding to events? (3)
What should be considered when reviewing subsequent events?
- Determine if events are adjusting or non-adjusting.
What periods should be considered for collecting evidence and responding to events?
- Events occurring between the financial statement date (directors) and the audit report date (auditor). - date i
- Facts that become known to the auditor after the audit report date but before the financial statements are issued. - date ii
- Facts that become known to the auditor after the financial statements have been issued. - date iii
Subsequent Events - Auditing Subsequent Events
Under what circumstances should the auditor carry out procedures?
Have appropriate amendments/disclosures been made in financial statements?
What is the auditor’s responsibility between the date of the audit report and the date financial statements are issued? (3)
What is the auditor’s responsibility after the financial statements are issued? (3)
If a fact didn’t exist at the date of the audit report, what should the auditor do? (3)
Under what circumstances should the auditor carry out procedures?
- Up to the date of the audit report.
Have appropriate amendments/disclosures been made in financial statements?
- Consider the need to amend the audit report.
What is the auditor’s responsibility between the date of the audit report and the date financial statements are issued?
- No responsibility for further work, but if the auditor becomes aware of material facts:
- Discuss with management.
- Take appropriate action.
What is the auditor’s responsibility after the financial statements are issued?
- No responsibility for further work, but if the auditor becomes aware of material facts:
- Discuss with management.
- Take appropriate action.
If a fact didn’t exist at the date of the audit report, what should the auditor do?
- No statutory provision for revising the audit report but:
- Discuss with management whether to withdraw the financial statements.
- Take legal advice on withdrawal of the audit report.
Subsequent Events - Audit Requirements: Date (i)
What should be done? (1+2)
Particular attention to? (7)
Perform audit procedures, not previously performed, to obtain sufficient appropriate audit evidence that subsequent events occurring between the date of the financial statements and the date of the auditor’s report:
- have been identified
- Financial statement adjustment/disclosures have been made as required and are appropriate
Particular attention to:
- Understanding management procedures to identify subsequent events
- Inquiring of management if subsequent events have occurred
- Meeting and board minutes
- Latest interim financial statements and forecasts
- Enquire of the legal department and external lawyer
- Obtain confirmation from third parties
- Obtaining written representation from management
Subsequent Events - Audit Requirements: Date (ii) and (iii)
The auditor has no…?
What should the auditor do if a fact becomes known in either of these periods? (3)
How can the auditor inquire if subsequent events have occurred? (2)
What is important to note about these circumstances? (2)
The auditor has no obligation to perform any audit procedures … after the date of the auditor’s report or after the financial statements have been issues
What should the auditor do if a fact becomes known in either of these periods?
- Discuss with management – do financial statements need amending?
- Carry out audit procedures as necessary
- Provide a new audit report
How can the auditor inquire if subsequent events have occurred?
- Read board minutes and interim financial statements during this period
- Obtain written representation from management
What is important to note about these circumstances?
- Both circumstances are rare
- In the case of Date (iii), the auditor may never know
Uncertain events: provisions and contingencies - Provisions
What do they mitigate against?
What is a provision?
What is a liabiltity?
A provision may be …or…?
When is a provision recognised? (4)
As an auditor…?
IAS 37 Provisions, Contingent Liabilities and Contingent Assets [mitigate against income smoothing, ‘big bath accounting’, creative accounting].
- Provision = a liability of uncertain timing or amount’;
- A liability is “a present obligation as a result of past events, and settlement is expected to result in an outflow of resources”
- A provision may be legal or constructive
A provision is recognised when an entity has:
- Present obligation (legal or constructive)
- As a result of a past event
- Probably a transfer of economic benefits will be required
- Reliable estimate of amount of the obligation.
As an auditor, you will want to obtain reasonable assurance about whether account balances and disclosures relating provisions (and contingencies) are free from material misstatements
Uncertain events: provisions and contingencies - Contigencies - definition
- Contingent liability (2)
- Contingent Asset
Contingent liability
- A possible obligation arising from past events and whose existence will only be confirmed by the occurrence of one or more uncertain future events, not wholly within the control of the entity, or
- A present obligation, but payment is not probable or the amount cannot be measured reliably
Contingent Asset
- A possible asset that arises from past events, andwhose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity
Uncertain events: provisions and contingencies- Contingent Liabilities
According to the IAS 37, ‘future events’ can be classed into three ways. As an auditor, you have to judge if the accounting treatment reflects economic reality: (Picture)
Uncertain events: provisions and contingencies - Contingent Assets
The concept of _____________ applies again, more _____________ to contingent assets – exercise ___________ when making judgements under conditions of _________________: (3 situations and solutions)
The concept of prudence applies again, more prudently to contingent assets – exercise caution when making judgements under conditions of uncertainty:
Uncertain events: provisions and contingencies - Audit work – the importance of inquiry
_______________ and _______________ may be known by the auditor during the _______, or may become apparent through ________________ _______ ___________. The importance of ______________ __________ here is ____________.
Make specific inquiries about, for example: (6)
Provisions and contingencies may be known by the auditor during the audit, or may become apparent through subsequent event auditing. The importance of management inquiry here is pertinent.
Make specific inquiries about, for example:
- Current status of items where significant judgement used
- New commitments
- Planned/actual asset sales/acquisitions
- Planned/actual increase in capital or debt instruments
- Any natural catastrophies/damage?
- Any unusual accounting adjustments
Written Representations, Audit Documentation and Final Review - Misstatements
Definition of misstatements?
Types of misstatements? (3)
Misstatement Definition
the difference in the amount, classification, presentation or disclosure of a reported financial statement item and what it should be to comply with the applicable financial reporting framework.
Types of Misstatements:
Factual Misstatements:
- These are objective errors with no room for interpretation, such as arithmetic mistakes.
Judgement Misstatements:
- These arise when the auditor’s professional judgement differs from management’s, e.g., in valuation methods.
Projected Misstatements:
- These are extrapolated errors based on samples reviewed by the auditor and applied to the larger population.
Written Representations, Audit Documentation and Final Review - Evaluation of misstatements
Misstatements may be…?
Audit requirements (5)
What should happen after?
Written Representations, Audit Documentation and Final Review - Evaluation of misstatements
Misstatements may be immaterial individually, but cumulatively may have an material impact on the financial statements
Audit requirements:
- Keep a record of errors/evaluate aggregate of misstatements as the audit progresses
- Discuss any changes that may be needed to the financial statements with management
- Check if the scope of the audit work is adequate
- Check if there are matters discovered that need to be raised with third parties and not with management (e.g. illegal acts by management)
- Obtain Written Representation from management
Any uncorrected misstatements should be justified by management in their Written Representation letter; auditor will consider impact on their opinion.
To…
Written Representations, Audit Documentation and Final Review - Written Representations - Para 6
3 requirements
- To obtain written representations from management … that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information … to the auditor;
- To support other audit evidence relevant to the financial statements or specific assertions in the financial statements … if determined necessary by the auditor …; and
- To respond appropriately to written representations provided by management … , or … if they do not provide the written representations requested by the auditor.
Written Representations, Audit Documentation and Final Review - Written Representations
5 questions auditors should consider
Who provides the written representations?
- It’s important to identify the appropriate individuals, often senior management or those charged with governance, to make these representations.
What representations are required?
- This involves understanding the specific assertions or confirmations needed from management to support audit conclusions.
Other written representations
- This refers to representations beyond the standard requirements, such as additional confirmations needed in special circumstances.
Written representations required by other ISAs (International Standards on Auditing)
- Different ISAs may have specific requirements for written representations in various areas of the audit.
What period should the written representation cover?
- The time frame the representations should apply to, ensuring their relevance to the audit period.
Written Representations, Audit Documentation and Final Review - Audit Documentation
Objectives are to find? (2)
Purpose is to? (2)
Basic rule is for it to be?
Practical Matters..?
Objective
- Sufficient and appropriate record of the basis for the auditor’s report
- Evidence that the audit was planned and performed in accordance with ISAs and applicable legal and regulatory framework
Purpose:
- Increase efficiency and effectiveness of audit, end evidence regulatory compliance.
Basic rule:
- Sufficient for experienced auditor to understand important matters:
Practical matters:
- Also need to be considered and evidenced
Written Representations, Audit Documentation and Final Review - Final Review
3 things needed to be done?
The auditor records: (5)?
records the verb not the noun
- All routine matters dealt with – no outstanding matters in the audit documentation
- All important matters have been covered
- Financial statements reviewed – as a whole show a true and fair view
The auditor records:
- Results of analytical review
- Conclusions on financial statement headings.
- Memorandum on major account headings
- Whether evidence recorded supports conclusions
- Management letter of representation.
Going Concern
Conncept (2)
Management’s Responsibilty (3)
Auditor’s Responsibility (3)
Risk assessment procedures - Identify events of conditions that might cast doubt on CG assumption (3/7,6,4)
Concept:
- Refers to the assumption that an entity will continue operating for the foreseeable future.
- Forms the basis of preparing financial statements under this assumption.
Management’s Responsibility:
- They must use the going concern assumption appropriately when preparing financial statements.
- Assess whether the entity can continue as a going concern.
- Make judgments based on evidence about the entity’s ability to remain operational.
Auditor’s Responsibility:
- Gather sufficient and appropriate evidence regarding the entity’s use of the going concern assumption.
- Reach conclusions about whether the entity is a viable going concern.
- Reflect this conclusion in the auditor’s report.
Risk assessment procedures
Identify events of conditions that might cast doubt on CG assumption
- Financial:
- gearing;
- borrowing;
- cashflow;
- key financial ratios;
- operating losses;
- inability to pay creditors;
- inability to obtain finance
- Operating:
- intention to liquidate/cease operations;
- loss of key management;
- labour difficulties;
- emergence of highly successful competitor;
- shortage of suppliers;
- loss of key customer, licence
- Other:
- pending legal or regulatory proceedings;
- non-compliance with regulatory requirements (esp financial institutions);
- changes in law or regulation likely to adversely affect the reporting entity;
- catastrophes
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The Audit Framework15
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Planning and Risk Assessment (1)9
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Planning & Risk Assessment (2)12
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Planning & Risk Assessment (3): Audit Documentation8
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Internal Controls (2)15
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Internal Controls (3) & Internal Audit15
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Audit Evidence 1 (Sem 2)13
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Audit Evidence 2 (Sem 2)23
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Audit Completion20
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Audit Opinion and Reporting25
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Fraud and Behaviours15
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Professional Ethics - Auditor Independence and embedded conflicts11
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Professional Ethics - Codes of ethics, compliance and identifying, evaluating and addressing threats21
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Regulatory Framework and Audit Quality23
