14. Reporting On An Audit Engagement (Development) Flashcards
Do As have to report significant deficiencies in internal control?
YES
Examples of things to consider judging internal control deficiencies
- The likelihood of material misstatements
- Susceptibility to loss or fraud
- Size of the item in the financial statements
- Volume of activity
- Importance of the controls to the financial reporting process.
Is the auditor required to carry out specific testing on internal controls for the purposes of communication with those charged with governance
NO
A report to those charged with governance/management will include:
- A covering letter
- An appendix
Setting out the deficiencies, consequences and recommendations
Exam technique: Potential audit report modification
- Describe and classify the issue
- Discuss materiality
- Identify the appropriate opinion
- Describe the modifications to the audit report.
Audit report: Scenario: The company is a going concern and there are no material uncertainties regarding going concern.
Unmodified opinion
Include ‘Conclusions relating to going concern’ section
Audit report: Scenario: The company is not a going concern but the directors have prepared the financial statements on the going concern basis
Material and pervasive misstatement
Do not include the ‘Conclusions relating to going concern’ section
Instead, issue an adverse opinion
Audit report: Scenario: The company is not a going concern. The directors have prepared the financial statements on the break-up basis, with adequate disclosure of the basis of preparation
The financial statements are not misstated
Do not include the ‘Conclusions relating to going concern’ section
Unmodified opinion
An emphasis of matter paragraph is used to highlight:
a. the alternative basis of preparation
b. reasons for doing so
c. the disclosure
Audit report: Scenario: The going concern status of the company is uncertain and the directors have made adequate disclosure of the uncertainty
The financial statements are not misstated
Do not include the ‘Conclusions relating to going concern’ section
Unmodified opinion
A separate section is included in the auditor’s report under the heading ‘Material uncertainty related to going concern’ to:
a. draw attention to the disclosure note
b. state that the material uncertainty may cast significant doubt on the entity’s ability to continue as a going concern
c. state that the auditor’s opinion is not modified in this respect
Audit report: Scenario: The going concern status of the company is uncertain and the directors have not made adequate disclosure of the uncertainty.
The financial statements are misstated
Do not include the ‘Conclusions relating to going concern’ section
This could be considered material or pervasive
Qualified (‘except for’) opinion or adverse opinion
Explain in the ‘Basis for qualified/adverse opinion’ section that the material uncertainty exists and it is not disclosed adequately
Assessing going concern: Should the auditor consider the period used by management in their assessment?
YES
ISA states the requirement is to consider the period of 12 months from the date of approval of the financial statements
IAASB requirement is to consider the period of 12 months from the end of
the reporting period
What must A do if management have considered a shorter period than 12m for going concern?
Ask to extend
If they refuse, it will be discussed with those charged with governance
If the assessment is not extended, the auditor should consider whether they have sufficient appropriate audit evidence to conclude on going concern and consider the impact this will have on the audit report.
OBT: Going concern: Additional requirement where C is applying UKCGC
Perform necessary procedures to identify if any material inconsistencies exist between the auditor’s knowledge and the annual report/Board statements.
Audit report: Other information: Examples
Management or director’s reports/commentaries
Chairman’s statement
Corporate governance statement
Internal control/risk assessment reports.
The issue for A with Other Info
The volume of other information often outweighs the financial statements. The risk for the auditor is that somewhere in the other pages of the annual report, there might be a comment that is inconsistent with the financial statements. This could undermine
the credibility of the financial statements and the auditor’s report.
OBT: Contents of ‘Other Information’ para (Audit report)
Management is responsible for the other information
The auditor’s opinion does not cover the other information
The auditor is responsible for reading the other information
A statement that there is nothing to report, or details of any material misstatement in the other information.
What should A do if it identifies an inconsistency between the other information and the financial statements?
Discuss the matter with management
Conclude whether a material misstatement exists in either the financial statements or the other information.
What A should do if material misstatement in Other Info
Ask management to correct the other
information
If they fail to do so, use the ‘Other
information’ section of the auditor’s report to describe the uncorrected misstatement
Where is most climate info disclosed?
In other information within the annual
report
Or outside annual report, e.g. sustainability report
Which can often sit outside the audited financial statements.
In the UK, the relationship between other information and other legally required disclosures (e.g. those relating to a strategic report), must be considered. The auditor would (most likely) deal with this at the same time
CA: What should auditors report on in relation to Other Info?
- Whether the information contained in the directors’ report and strategic report is consistent with the financial statements
- If the directors’ report and strategic report have been prepared in accordance with applicable legal requirements
- Whether any material misstatements have been identified (where a directors’ report or strategic report are a legal
requirement)
This opinion is included in a section of the auditor’s report entitled ‘Opinion on other matters prescribed by the Companies Act 2006’.
A response if CA Other info inconsistencies are identified
- Discuss the matter with management
- If the inconsistency is not resolved, disclose/highlight in the auditor’s report
Exam: What to do if material issues in statutory Other info? (Impact on audit report)
- Amend the ‘Other information’ section
- Modify the ‘Opinion on other matters as prescribed by Companies Act 2006’
- Consider the type of opinion to give (e.g. qualified ‘except for’)
- Explain the misstatement under subheading ‘Matters on which we are required to report by exception’
Summary: Audit reporting: Strategic report/ Directors report
(section 4.3)
Opinion on other matters
prescribed by the Companies
Act 2006
Give an opinion on whether they
are:
a. properly prepared re CA06,
and
b. consistent with the financial
statements.
Matters on which we report by
exception
a. say if directors/strategic
report contain a material
misstatement.
Summary: Other information
(section 4.2)
Everything except the financial statements, audit report, directors/strategic reports
a. e.g. chairman’s report/statement, corporate governance report.
b. Separate paragraph in the audit report
Other information
Say if:
a. inconsistent with the financial statements, or our audit knowledge, or
b. materially misstated (as far as
we can see)
