18 Audit review & final

Question 1

What are subsequent events?

Answer 1

Subsequent events are events occurring between the period end and the date of the auditor’s report and

also include facts discovered after the auditor’s report has been issued. Auditors shall consider the effect

of such events on the financial statements and on their audit opinion

Question 2

IAS 10 Events after the reporting period deals with the treatment in the financial statements of events, both

favourable and unfavourable, occurring after the period end. There are two types of event defined by IAS 10. These are:

Answer 2

 Those that provide evidence of conditions that existed at the year-end date (adjusting events)

 Those that are indicative of conditions that arose after the year-end date (non-adjusting events)

Question 3

Describe adjuesting and non adjusting?

Question 4

ISA 560 Subsequent events provides guidance to auditors in this area. The objectives of the auditor are:

Answer 4

(a) To obtain sufficient appropriate audit evidence about whether events occurring between the date of

the financial statements and the date of the auditor’s report that need adjustment or disclosure in

the financial statements are properly reflected in the financial statements

(b) To respond appropriately to facts that become known to the auditor after the date of the auditor’s

report which may have caused the auditor to amend the auditor’s report if they were known to the

auditor at the date of the report

Question 5

Auditors have a responsibility to…

Answer 5

Auditors have a responsibility to review subsequent events before they sign the auditor’s report, and

may have to take action if they become aware of subsequent events between the date they sign the

auditor’s report and the date the financial statements are issued.

Question 6

Draw a timeline when considering subsequent events and the auditor’s responsibilities

concerning them.

Answer 6

Active Duty: (year end to Auditors report signed)

Passive duty: (Auditors report signed, financial issued, FS approved by members)

Question 7

What are some of the equiries of management or audit procedures to test subsequent events?

Answer 7

Status of items involving subjective judgement Status of items accounted for using preliminary or inconclusive data Whether there are any new commitments, borrowings or guarantees Whether there have been any:  Sales or destruction of assets  Issues of shares/debentures or changes in business structure  Developments involving risk areas, provisions and contingencies  Unusual accounting adjustments  Major events (eg going concern problems) affecting appropriateness of accounting policies for estimates  Litigations or claims

Question 8

What are some of the other procedures which are used in audit procedures to test subsequent events?

Answer 8

procedures
Review management procedures for identifying subsequent events to ensure that such events are identified. Read minutes of general board/committee meetings and enquire about unusual items. Review latest available interim financial statements and budgets, cash flow forecasts and other management reports. Obtain evidence concerning any litigation or claims from the company’s solicitors (only with client permission). Obtain written representation that all events occurring subsequent to the period end which need adjustment or disclosure have been adjusted or disclosed

Question 9

What happens if facts are discovered after the date of the auditrs report but before the financial statements are issued?

Answer 9

Inform the auditors material statemnts.The auditor does not have any obligation to perform procedures, or make enquiries regarding the financial statements, after the date of the report.

Question 10

What if if the auditor becomes aware of a fact that, had it been known to the auditor at the date of the auditor’s report which causes the auditor to amend his auditors report?

Answer 10

Discuss the matter with management and those charged with governance.  Determine whether the financial statements need amendment.  If amendment is required, enquire how management intends to address the matter in the financial statements

Question 11

What if amendment is required to the financial statements and management makes the necessary changes, the auditor must carry out a number of procedures? what are they

Answer 11

Undertake any necessary audit procedures on the changes made.  Extend audit procedures for identifying subsequent events that may require adjustment of or disclosure in the financial statements to the date of the new auditor’s report.  Provide a new auditor’s report on the amended financial statements

Question 12

What if If management does not amend the financial statements?

Answer 12

If the auditor’s report has not yet been provided to the entity, the auditor shall modify the opinion and then provide the auditor’s report.  If the auditor’s report has already been provided to the entity, the auditor shall notify management and those charged with governance not to issue the financial statements before the amendments are made; but if the financial statements are issued anyway, the auditor shall take action to seek to prevent reliance on the auditor’s report.

Question 13

What if the auditor becomes aware of a fact that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall:

Answer 13

Discuss the matter with management and those charged with governance  Determine whether the financial statements need amendment  If amendment is required, enquire how management intends to address the matter in the financial statements

Question 14

If management amends the financial statements, the auditor shall carry out…

Answer 14

any necessary procedures on the amendment and review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements is informed. The auditor shall also issue a new or amended auditor’s report, which will include an explanatory paragraph (known as an emphasis of matter paragraph or other matter paragraph

Question 15

What is a going concern assumption?

Answer 15

Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. When the use of the going concern assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business.

Question 16

What f the going concern assumption is not appropriate?

Answer 16

If the going concern basis is not appropriate, the financial statements are prepared on a break-up basis.

Question 17

ISA 570 Going concern provides guidance to auditors in this area. The objectives of the auditor are:

Answer 17

To obtain sufficient appropriate audit evidence regarding the appropriateness of management’s use of the going concern assumption (b) To conclude whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern (c) To report in accordance with ISA 570.

Question 18

What are the financial indicators of a going concern?

Answer 18

 Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment  Indications of withdrawal of financial support by creditors  Negative operating cash flows (historical or prospective)  Adverse key financial ratios  Substantial operating losses or significant deterioration in the value of assets used to generate cash flows  Arrears or discontinuance of dividend Net liability or net current liability position

Question 19

What are some of the other financial going concern indicators

Answer 19

 Inability to pay creditors on due dates  Inability to comply with terms of loan agreements  Change from credit to cash-on-delivery transactions with suppliers  Inability to obtain financing for essential new product development or other essential investments

Question 20

What are some of the operating going concerns?

Answer 20

 Management intentions to liquidate or cease operations  Loss of key management without replacement  Loss of a major market, key customers, licence, or principal suppliers  Labour difficulties  Shortages of important supplies  Emergence of a highly successful competitor

Question 21

What are some of the other going concerns?

Answer 21

Non-compliance with capital or other statutory requirements  Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy  Changes in laws/regulations/government policy expected to adversely affect the entity  Uninsured or underinsured catastrophes when they occur

Question 22

If events or conditions are identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether a material uncertainty exists by:

Answer 22

Requesting management to make its assessment where this has not been done  Evaluating management’s plans for future action  Evaluating the reliability of underlying data used to prepare a cash flow forecast and considering the assumptions used to make the forecast  Considering whether any additional facts or information have become available since the date management made its assessment  Requesting written representations from management and those charged with governance about plans for future action and the feasibility of these plans

Question 23

Whata re the specific going concern reviews & specific audit procedures the auditor might carry out could include the following

Answer 23

 Analyse and discuss cash flow, profit and other relevant forecasts with management  Analyse and discuss the entity’s latest available interim financial statements (or management accounts)  Review the terms of debentures and loan agreements and determine whether they have been breached  Read minutes of the meetings of shareholders, the board of directors and important committees for reference to financing difficulties  Enquire of the entity’s lawyer regarding litigation and claims  Confirm the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties  Assess the financial ability of such parties to provide additional funds  Consider the entity’s position concerning unfulfilled customer orders  Review events after the period end for items affecting the entity’s ability to continue as a going concern  Confirm the existence, terms and adequacy of borrowing facilities  Obtaining and reviewing reports of regulatory actions  Determining the adequacy of support for any planned disposals of assets

Question 24

How does the following senario impact the auditors report:

Going concern assumption appropriate but material uncertainty which is adequately disclosed

Answer 24

Unmodified opinion

Section headed ‘Material Uncertainty Related to Going Concern’

Question 25

Going concern assumption appropriate but material uncertainty which is not adequately disclosed

Answer 25

Qualified or adverse opinion (ie modified opinion)

Question 26

Use of going concern assumption inappropriate

Answer 26

Adverse opinion (ie modified opinion)

Question 27

Management unwilling to make or extend its assessment

Answer 27

Qualified or disclaimer of opinion (ie modified opinion)

Question 28

The auditor shall communicate with those charged with governance events or conditions that may cast doubt on the entity’s ability to continue as a going concern. This will include

Answer 28

 Whether the events or conditions constitute a material uncertainty  Whether the use of the going concern assumption is appropriate in the preparation and presentation of the financial statements  The adequacy of related disclosure

Question 29

Whata re the written reporesentations and how do they provide guidance to auditors. The objectives of the auditor are:

Answer 29

 To obtain written representations that management believes that it has fulfilled the fundamental responsibilities that constitute the premise on which an audit is conducted  To support other audit evidence relevant to the financial statements if determined by the auditor or required by other ISAs  To respond appropriately to written representations or if management does not provide written representations requested by the auditor

Question 30

There are three areas in which written representations are necessary. These are:

Answer 30

to confirm management’s responsibilities, where they are required by other ISAs and to support other audit evidence

Question 31

The auditor shall request management to provide written representations on the which matters

Answer 31

(a) That management has fulfilled its responsibility for the preparation and presentation of the financial statements as set out in the terms of the audit engagement and whether the financial statements are prepared and presented in accordance with the applicable financial reporting framework (b) That management has provided the auditor with all relevant information agreed in the terms of the audit engagement and that all transactions have been recorded and are reflected in the financial statements

Question 32

Provide examples of other written scenarios:

Answer 32

Whether the selection and application of accounting policies are appropriate Plans or intentions that may affect the carrying value or classification of assets and liabilities Liabilities, both actual and contingent Title to, or control over, assets, liens or encumbrances on assets and assets pledged as collateral Aspects of laws, regulations and contractual agreements that may affect the financial statements, including non-compliance All deficiencies in internal control that management is aware of have been communicated to the auditor Written representations about specific assertions in the financial statements Significant assumptions used in making accounting estimates are reasonable All subsequent events requiring adjustment or disclosure have been adjusted or disclosed The effects of uncorrected misstatements are immaterial, both individually and in aggregate Management has disclosed the results of its assessment of the risk that the financial statements may be materially misstated as a result of fraud Management has disclosed all information in relation to fraud or suspected fraud involving management, employees with significant roles in internal control, and others where fraud could have a material effect on the financial statements Management has disclosed all information in relation to allegations of fraud or suspected fraud communicated by employees, former employees, analysts, regulators or others Management has disclosed all instances of non-compliance or suspected non-compliance with laws or regulations

Question 33

If management does not provide one or more requested written representations, the auditor shall

Answer 33

Discuss the matter with management  Re-evaluate the integrity of management and evaluate the effect this may have on the reliability of representations and audit evidence in general  Take appropriate actions, including determining the impact on the auditor’s report

Question 34

How can an auditor ensure compliance with accounting regulations:

Answer 34

The auditors should consider whether: (a) The information presented in the financial statements is in accordance with local/national statutory requirements. (b) The accounting policies employed are in accordance with accounting standards, properly disclosed, consistently applied and appropriate to the entity.

Question 35

When examining the accounting policies, auditors should consider:

Answer 35

(a) Policies commonly adopted in particular industries (b) Policies for which there is substantial authoritative support (c) Whether any departures from applicable accounting standards are necessary for the financial statements to give a true and fair view (d) Whether the financial statements reflect the substance of the underlying transactions and not merely their form

Question 36

What are the principal considerations to review for consistency and reasonableness:

Answer 36

a) Whether the financial statements adequately reflect the information and explanations previously obtained and conclusions previously reached during the course of the audit (b) Whether it reveals any new factors which may affect the presentation of, or disclosure in, the financial statements (c) Whether analytical procedures applied when completing the audit, such as comparing the information in the financial statements with other pertinent data, produce results which assist in arriving at the overall conclusion as to whether the financial statements as a whole are consistent with their knowledge of the entity’s business (d) Whether the presentation adopted in the financial statements may have been unduly influenced by the directors’ desire to present matters in a favourable or unfavourable light (e) The potential impact on the financial statements of the aggregate of uncorrected misstatements (including those arising from bias in making accounting estimates) identified during the course of the audit and the preceding period’s audit, if any

Question 37

The analytical review at the final stage should cover the following:

Answer 37

 Important accounting ratios  Related items  Changes in products/customers  Price and mix changes  Wages changes  Variances  Trends in production and sales  Changes in material and labour content of production  Other expenditure in the statement of profit or loss  Variations caused by industry or economy factors

Question 38

What is a misststement?

Answer 38

A misstatement is a difference between the amount, classification, presentation, or disclosure of a reported 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.

Question 39

What is an incorrect misstatement?

Answer 39

An uncorrected misstatement is a misstatement that the auditor has accumulated during the audit and that have not been corrected.

Question 40

The ISA distinguishes between factual___, judgemental ___and ..___. Explain them

Answer 40

factual misstatements (misstatements about which there is no doubt), judgemental misstatements (misstatements arising from management’s judgement concerning accounting estimates or accounting policies) and projected misstatements (the auditor’s best estimate of misstatements arising from sampling populations

Question 41

Professional judgement is required in determining whether a misstatement in a qualitative disclosure is material or not. ISA 450 gives some examples of misstatements which may be material.

Answer 41

 For insurance or banking companies, inaccurate or incomplete descriptions of information about the objectives, policies and processes for managing capital  The omission of information about the events which have led to an impairment loss (for example, in a mining company, this may be a significant long-term decline in the demand for a metal)  The incorrect description of an accounting policy relating to a significant item in the statement of financial position, the statement of comprehensive income, the statement of changes in equity or the statement of cash flows  For an entity trading internationally, the inadequate description of the sensitivity of an exchange rate

Question 42

ISA 450 requires the auditor to document the following information:

Answer 42

 The amount below which misstatements would be regarded as clearly trivial  All misstatements accumulated during the audit and whether they have been corrected  The auditor’s conclusion as to whether uncorrected misstatements are material and the basis for that conclusion