Define subsequent events
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
Can financial statements be affected by events that occur after the reporting date?
Yes
Going concern basis of accounting
Under the going concern basis of accounting, the FS are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future. General purpose FS are prepared using the going concern basis, unless management either intends to liquidate the entity or to cease operations or has no realistic alternative to do so
If the going concern basis is not appropriate, the FS are prepared on a break up basis
Yes
What are the objectives of an auditor as per IAS 570 revised, going concern
- Obtain sufficient appropriate audit evidence regarding and conclude on the appropriateness of management’s use of the going concern basis of accounting
- To report in accordance with IAS 570
- To conclude whether a material uncertainty exists related to events/conditions that may cast doubt on the entity’s ability to continue as a going concern
Going concern indicators (Financial)
net liability or net current liability position
negative operating cash flows
inability to obtain new financing
change from credit to cash on delivery terms with suppliers
inability to pay creditors on due dates
inability to comply with the terms of loan agreements
arrears or discontinuance of dividends
adverse key financial ratios
substantial operating losses or significant deterioration in the value of assets used to generate cash flows
indications of withdrawal of financial support by creditors
fixed term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short term borrowings to finance non current assets
Going concern indicators (operational)
- Management intention to liquidate the entity or to cease operations
- Loss of key management without replacement
- Labour difficulties
- Emergence of a highly successful competitor
- Loss of a major market, key customer, license or principal supplier
- Shortages of important supplies
Going concern indicators (Other)
non compliance with capital or other statutory requirements
uninsured or underinsured catastrophes when they occur
changes in legislation or government policy expected to adversely affect the entity
pending legal or regulatory proceedings against the entity that may, if successful result in claims that they are unlikely to be satisfied
What is the requirement in IAS 1 for management’s assessment as it relates to going concern?
Management must make an assessment of an entity’s ability to continue as a going concern. The auditor shall evaluate management’s assessment of the entity’s ability to continue as a going concern. However, if this assessment covers less than 12 months from the date of the FS, the auditor shall ask management to extend its assessment period to at least 12 months from that date. The auditor shall also enquire of management its knowledge of events or conditions beyond the period of the assessment that may cast doubt on the entity’s ability to continue as a going concern
Per IAS 580, what are written representations?
written statements by management provided to the auditor to confirm certain matters or to support other audit evidence. They do not include the financial statements, assertions or supporting books and records
What are the three main areas where written representations are necessary?
- To confirm that management has fulfilled its responsibilities for the preparation of the FS, that all transactions have been recorded and reflected therein and that all relevant information and access has been provided to the auditor as agreed in the terms of the engagement.
- To support other audit evidence relevant to the FS if determined by the auditor
- A number of ISA’s require written representations, (such as fraud, laws and regulations, estimates, going concern, related parties and subsequent events)
Do written representations provide sufficient appropriate audit evidence?
No because they are from an internal source and on their own do not provide sufficient appropriate audit evidence about the issues they relate to
What should an auditor do if written representations are not provided?
- discuss the matter with management
- Take appropriate actions, including determining the impact on the auditor’s reports
- re evaluate the integrity of management and evaluate the effect this may have on the reliability of representations and audit evidence in general
At the finalization stage, why are the financial statements reviewed?
to determine whether they are consistent with the auditor’s understanding of the entity. ISA 520 states that the auditor shall design and perform analytical procedures to assist in forming that overall conclusion.
At the finalisation stage, when the FS are being reviewed, what will the review determine?
- Whether the FS are prepared using acceptable accounting policies, consistently applied and appropriate to the entity
- Information included in FS compatible with audit findings
- There is adequate disclosure and proper classification and presentation of information
- FS comply with statutory requirements and other regulations
What is a misstatement?
difference between the reported amount, classification, presentation or disclosure of a financial statement item and the amount, classification, presentation or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud
Uncorrected misstatement
a misstatement that the auditor has accumulated during the audit and that has not been corrected
During the audit, how/where does the auditor keep misstatements?
a schedule will have been maintained of misstatements identified that have not been corrected by the client. Some may have been individually immaterial but the schedule must be reviewed at this stage before the audit opinion is finalised. the effect of uncorrected misstatements must be considered in aggregate as their combined effect may be material and could affect the audit opinion
Should an auditor communicate uncorrected misstatements?
ISA 450 Evaluation of misstatements identified during the audit requires the auditor to communicate uncorrected misstatements and their effect to TCWG with material uncorrected misstatements being identified individually.
the auditor shall request uncorrected misstatements to be corrected. The auditor shall also communicate the effect of uncorrected misstatements relating to prior periods
Where there is a change in the useful life of an asset, depreciation must be adjusted. Remember to that useful lives of assets must be reviewed regularly.
Yes
Which of the following would form part of the auditor’s overall review of the FS?
- assessing whether the information and explanations obtained during the audit are adequately reflected
- Reviewing the adequacy of the disclosure of accounting policies.
What are preconditions for an audit?
a consideration before accepting an audit
list the audit procedures that can be used prior to the auditor’s report being signed to identify events that may require adjustment or disclosure in the FS
Review the procedures management has established to ensure that subsequent events are identified
Read board minutes held after the date of the FS up to the date of signing the auditor’s report
Read the entity’s latest available interim FS, budgets and cash flow forecasts
Enquire of management as to whether any subsequent events have occurred which might affects the FS
Obtain written representation as to the completeness of subsequent events identified by mgmt.
Enquire or extend previous oral or written enquiries of the entity’s legal counsel concerning litigation and claims
