20. Final matters Flashcards
What is active review?
Auditor is responsible for active review i.e., auditor shall perform procedures to identify subsequent events affecting financial statements till the date of auditor’s report.
What are the auditor’s procedures to identify subsequent events affecting the financial statements?
- Obtaining an understanding of system established by management to identify subsequent events.
- Inquiring management and TCWG as to whether any subsequent events have occurred which require adjustment or disclosure.
- Reading minutes of the meetings.
- Reading interim financial statements of subsequent periods.
- Requesting the management to provide written representation that all events requiring adjustment have been adjusted or disclosed.
- Other procedures like: inspection of available books and records, read available budgets and cash flow forecasts, require legal counsel.
What to do if subsequent event is identified?
If any subsequent event is identified, auditor shall perform procedures (depending on the event) to determine whether it is included in financial statements in accordance with AFRF.
Auditor may also consider to include “Emphasis of matter” Paragraph in his report if a subsequent event especially a non-adjusting event is identified.
What is written representation?
Written representation aka management representation or management representation letter is a written statement by the management to the auditor:
to confirm management’s responsibilities and
to support other evidence.
These don’t include financial statements, the assertions therein or supporting books or records.
All verbal discussions with the client are documented in working papers by the auditor however the auditor obtains written representation from management on significant discussions.
What is the DATE, PERIOD, FORM of written representation?
DATE: as near as possible to date of audit report but not after. If the representation is obtained during the audit, update representation should be obtained at the end of audit.
PERIOD: Same period as covered by the audit report.
FORM: It is obtained in the form of representation letter addressed to auditor.
What are the representations required by ISAs?
- representation about mgt’s responsibilities:
about prep of f/s
about info provided and completeness of transactions. - Other representations:
assumptions and estimates, related parties, subsequent events, fraud, litigations, going concern.
Some other that may be determined necessary by auditor:
*regarding intentions, plans and judgements of mgt about future course of action.
*regarding completeness of liabilities, mortage.
Comment on appropriateness of written representation?
- Appropriate when required by ISAs or considered necessary by auditor.
- Not appropriate in case of material misstatement or scope limitation.
- Effect of representations about mgt’s responsibilities is always pervasive. Effect of other representations may be material or pervasive.
What should the auditor do when representation is not provided?
Representation letter is to be obtained in all audits.
If the representation about managements responsibilities is not provided:
Auditor is unable to obtain sufficient appropriate evidence and effect is pervasive so disclaimer of opinion should be expressed.
If any other representation is not provided:
Auditor is unable to obtain sufficient appropriate evidence, Qualified or Disclaimer of opinion should be expressed. He should also re-assess the integrity of management and shall determine its effect on reliability of other representation and evidence.
What is the formula of Sufficient Appropriate Evidence?
Sufficient Appropriate Evidence= Written representation + Other evidence.
How does the auditor evaluate reliability of representation?
Reliability is evaluated by considering:
1. Consistency of representation with other evidence
2. Competence and Integrity of management.
What happens when written representation is inconsistent with other evidence?
Risk of misstatement increases. Auditor shall discuss the matter with management and shall perform further procedures.
If the matter remains unresolved, auditor shall re-assess competence, integrity of management and its effect on reliability of representation and other evidence.
What if the auditor has serious concerns about competence, integrity of management?
This may effect the reliability of representations and other evidence. If the concerns are very serious and risk of material misstatement is very high, auditor may withdraw from the engagement unless TCWG take appropriate measures.
Define subsequent event?
These are the events which occur between the date of financial statements and date of auditor’s report.
Explain passive review?
After the auditor’s report, auditor himself doesn’t perform procedures to identify subsequent events. but if such event is identified from other sources like mgt or newspaper, he discuss the matter with mgt/TCWG and inquires how mgt intends to address the matter in f/s.
What are the procedures when subsequent event is identified and mgt does not amend F/S?
- If the report has not yet been provided, the auditor shall modify his opinion and then provide report to the entity.
- If report has been provided to the entity:
auditor shall notify management and TCWG not to issue f/s to 3rd party without amendment.
if the mgt still issue the f/s, the auditor shall obtain legal advice and shall take appropriate action to prevent users from relying on auditor’s report.
