Chapter 12: Audit Completion

Question 1

Steps when errors are discovered

Answer 1

1. Promptly communicate to management the error + adjustments required.
2. Auditor should then review these adjustments.

Question 2

Three audit phases

Answer 2

1. Planning
2. Gathering evidence
3. Completion

Question 3

During the completion phase the audit partner will consider 3 things

Answer 3

1. Do the FS comply with the CA 2006
2. Do the FS make sense
3. Consideration of the work done

Question 4

Doing the completion phase the following 5 things will be done

Answer 4

1. Evaluation of discovered errors.
2. Ensuring the opening balance and comparatives are correct
3. Review whether the going concern basis of the FS is appropriate.
4. Review subsequent events.
5. Obtain necessary management representations.

Question 5

What should the auditor do if discovered errors remain unadjusted?

Answer 5

• Reassess materiality and evaluate if the unadjusted errors are material, either individually or in total.

*Understand management’s reasons for not making the adjustments - ensure they acknowledge the immateriality of the errors in the representation letter.

Question 6

Financial indications of going concern issues (8)

Answer 6

1 Net liability position.
2 Excessive reliance on short-term borrowings.
3 Indications of withdrawal of financial support.
4 Inability to pay creditors on due dates.
5 Inability to comply with terms of loan agreements
6 Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment.
7 Adverse key financial ratios.
8 Substantial operating losses.

Question 7

Operating indications of going concern issues (6)

Answer 7

1 Management intentions to liquidate the entity or to cease operations.
2 Labour difficulties.
3 Emergence of a highly successful competitor.
4 Loss of key management without replacement.
5 Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
6 Shortages of important supplies.

Question 8

Other indications of going concern issues (4)

Answer 8

1 Non-compliance statutory/regulatory requirements.
2 Uninsured or underinsured catastrophes when they occur.
3 Pending legal proceedings against the entity that the entity is unlikely to be able to satisfy.
4 Changes in law or regulation expected to adversely affect the entity.

Question 9

Implication for the auditors report for the following situation: Company is not going concern but financial statements have been prepared on a going concern basis rather than a break up basis.

Answer 9

Wrong basis leads to a:
Pervasive Misstatement – Adverse opinion

Question 10

Implication for the auditors report for the following situation: Company is not a going concern, financial statements have been prepared on a break up basis BUT there is a lack of disclosure.

Answer 10

Lack of disclosure re something so significant to the understanding of the whole accounts leads to a:
Pervasive Misstatement – Adverse opinion

Question 11

Implication for the auditors report for the following situation: Company is not a going concern, financial statements have been prepared on a break up basis BUT there is inadequate disclosure.

Answer 11

Inadequate disclosure leads to a:
Material Misstatement – Qualified opinion

Question 12

Implication for the auditors report for the following situation: Company is not a going concern and the financial statements have been created on a break up basis with full adequate disclosure

Answer 12

The financial statements are true and fair
BUT an emphasis of matter paragraph should be used to highlight the director’s disclosure note explaining the situation.

Question 13

Implication for the auditors report for the following situation: There are significant uncertainties relating to the companies going concern where evidence cannot be expected to reasonably exist. The directors should adequately disclose the issue at stake.

Answer 13

Evidence did exist but was unavailable: a Material or Pervasive Inability to obtain sufficient appropriate evidence – Qualified or Disclaimer opinion would be provided.

However as evidence does not exist to support the uncertainty the auditor should conclude the financial statements are true and fair and include a note ‘Material uncertainty related to going concern’ after the basis of opinion paragraph explaining the issue.

Question 14

Adjusting events (subsequent events)

Answer 14

These events provide evidence of conditions that existed at the reporting date and require adjustments to the financial statements.

Question 15

Non-adjusting events (subsequent events)

Answer 15

These events indicate conditions that arose after the reporting date and generally do not require adjustments, but may require disclosure.

Question 16

Written representations from management should confirm 3 things

Answer 16

1 Their responsibility for preparing the financial statements.
2 They have provided all relevant information to the auditor.
3 All transactions have been recorded in the financial statements.

While the written representation supports the audit evidence, it is not sufficient or appropriate evidence on its own.