Chapter 10: Audit Completion

Question 1

What analytical procedures should an auditor use to ensure the financial statements make sense?

Answer 1

• interpretation: review the financial statements considering absolute figures and ratios
• investigation - unusual movements or numbers should have been identified as audit risks so the answers to questions should be in the audit working papers
• corroboration - if answers cannot be found in the working papers then further work is required

Question 2

What does ISA 450 require? (accumulation)

Answer 2

ISA 450 requires the auditor to accumulate misstatements identified during the audit unless the misstatements are trivial

Theses should be identified and:

• Management informed
• Reassess materiality
• Determine whether uncorrected misstatements are material, individually or in aggregate
• Seek written management representations to confirm that the effect of uncorrected misstatements is immaterial

Question 3

Can opposing misstatements be offset?

Answer 3

ISA 450 provides guidance:

• If an individual misstatement is material, it is unlikely it can be offset by other misstatements. If revenue is materially misstated, then the financial statements as a whole are misstated and this cannot be corrected by offsetting a material misstatement in expenses.
• It may, however, be appropriate to offset misstatements within the same account balance or class of transactions

Question 4

How do you treat opening balances? Which ISA?

Answer 4

• If opening balances are misstated then the financial statements for the current year may also be misstated
• The auditor should consider whether there is sufficient evidence to support the opening balances figures
• For a recurring engagement, this should be a simple matter of checking that last year’s audited balances have been correctly brought forward
• ISA 510 sets out the procedures that the auditor should perform in relation to opening balances in a new audit engagement

Question 5

What if the auditor did not audit last year’s financial statements?

Answer 5

Following procedures:

• agree brought forward figures to last year’s financial statements
• assess accounting policies have been appropriately applied to opening balances
• perform at least one of the following: review the previous auditor’s working papers, consider whether this year’s audit tests provide evidence over opening balances, perform specific procedures on opening balances

Question 6

What ISA 710 require? (Comparatives)

Answer 6

ISA 710 requires the auditor to obtain sufficient evidence that the comparative figures in the financial statements are true and fair.

If last year’s financial statements contained a misstatement and the matter was unresolved, the auditor should consider the need to modify this year’s audit opinion

Question 7

How are going concern and acceptance related?

Answer 7

Clients who are unlikely to continue in business will be classed as high risk and the firm must consider carefully if they wish to commit to such work

Question 8

What is an adjusting event?

Answer 8

• Provide evidence of conditions existing at the date of the financial statements
• The financial statements should be adjusted
• E.g.: the resolution of a court case, major customer enters liquidation, evidence of the NRV of inventory, discovery of fraud or error

Question 9

What is a non-adjusting event?

Answer 9

• Provide evidence of conditions arising after the date of the financial statements
• If material, the event should be disclosed (adjust only if going concern status affected)
• E.g.: destruction of an asset by fire, dividends declared after the year end, announcement of plan to close part of the business

Question 10

Which ISA sets out the requirements for the auditor’s response to subsequent events?

Answer 10

ISA 560

Question 11

What is the response between year end and audit report sign-off?

Answer 11

• The auditor has an active duty to carry out audit procedures to identify events that require adjustment or disclosure in the financial statements
• The auditor should seek written management representations that all subsequent events have been adjusted for or disclosed

Question 12

What if there is an event after the audit report sign-off?

Answer 12

• If it requires adjustment or disclosure, discuss with the directors, who should be asked to amend the financial statements if necessary
• If the directors do not amend the financial statements accordingly, the auditor should consider withdrawing the audit report

Question 13

What if there is an event after the audit report sign-off and the directors do not amend the financial statements and continue to distribute them?

Answer 13

The auditor should take action to prevent reliance on the audit report which could include:

• seeking legal advice
• using the right to speak at the AGM
• considering resignation and calling an EGM