7(New). Completion and Review

Question 1

Meaning of subsequent events.

Answer 1

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 are known as subsequent events.

Question 2

Objectives of auditor in accordance with SA 560 “Subsequent Events”.

Answer 2

The objectives of the auditor are to: -

a) 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 require adjustment of, or disclosure in, the financial statements are appropriately reflected in those financial statements and

b) Respond appropriately to facts that become known to the auditor after the date of the auditor’s report, that, had they been known to the auditor at that date, may have caused the auditor to amend the auditor’s report.

Question 3

Audit procedures relating to events occurring between the date of the financial statements and the date of the auditor’s report.

Answer 3

The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements have been identified.
The auditor is not, however, expected to perform additional audit procedures on matters to which previously applied audit procedures have provided satisfactory conclusions.

The auditor shall perform the procedures required above so that they cover the period from the date of the financial statements to the date of the auditor’s report, or as near as practicable thereto.
The auditor shall take into account the auditor’s risk assessment in determining the nature and extent of such audit procedures, which shall include the following:-

a) Obtaining an understanding of any procedures management has established to ensure that subsequent events are identified.

b) Inquiring of management and, where appropriate, those charged with governance as to whether any subsequent events have occurred which might affect the financial statements.

c) Reading minutes, if any, of the meetings, of the entity’s owners, management and those charged with governance, that have been held after the date of the financial statements and inquiring about matters discussed at any such meetings for which minutes are not yet available.

d) Reading the entity’s latest subsequent interim financial statements, if any.

When, as a result of the procedures performed, the auditor identifies events that require adjustment of, or disclosure in, the financial statements, the auditor shall determine whether each such event is appropriately reflected in those financial statements.

Question 4

Meaning of “Date the financial statements are issued”.

Answer 4

It reflects the date that the auditor’s report and audited financial statements are made available to third parties.

The date the financial statements are issued generally depends on the regulatory environment of the entity. In some circumstances, the date the financial statements are issued may be the date that they are filed with a regulatory authority.

Since audited financial statements cannot be issued without an auditor’s report, the date that the audited financial statements are issued must not only be at or later than the date of the auditor’s report, but must also be at or later than the date the auditor’s report is provided to the entity.

Question 5

Facts which become known to the auditor after the date of the auditor’s report but before the date the financial statements are issued.

Answer 5

The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report.
However, when, after the date of the auditor’s report but before the date the financial statements are issued, a fact becomes known to the auditor 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:
a) Discuss the matter with management and, where appropriate, those charged with governance.

b) Determine whether the financial statements need amendment and, if so,

c) Inquire how management intends to address the matter in the financial statements.

If management amends the financial statements, the auditor shall:
a) Carry out the audit procedures necessary in the circumstances on the amendment.

b) Provide a new auditor’s report on the amended financial statements.
The new auditor’s report shall not be dated earlier than the date of approval of the amended financial statements.

However, when management does not amend the financial statements in circumstances where the auditor believes they need to be amended, then:
a) If the auditor’s report has not yet been provided to the entity, the auditor shall modify the opinion as required by SA 705 and then provide the auditor’s report or

b) If the auditor’s report has already been provided to the entity, the auditor shall notify management and, unless all of those charged with governance are involved in managing the entity, those charged with governance, not to issue the financial statements to third parties before the necessary amendments have been made.
If the financial statements are nevertheless subsequently issued without the necessary amendments, the auditor shall take appropriate action, to seek to prevent reliance on the auditor’s report.

Question 6

Facts which become known to the auditor after the financial statements have been issued.

Answer 6

After the financial statements have been issued, the auditor has no obligation to perform any audit procedures regarding such financial statements.
However, when, after the financial statements have been issued, a fact becomes known to the auditor 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:
a) Discuss the matter with management and, where appropriate, those charged with governance.

b) Determine whether the financial statements need amendment and, if so,

c) Inquire how management intends to address the matter in the financial statements.

If the management amends the financial statements, the auditor shall:
a) Carry out the audit procedures necessary in the circumstances on the amendment.

b) Review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s report thereon is informed of the situation.

c) Provide a new auditor’s report on the amended financial statements.
The date the new auditor’s report no earlier than the date of approval of the amended financial statements.

If management does not take the necessary steps to ensure that anyone in receipt of the previously issued financial statements is informed of the situation and does not amend the financial statements in circumstances where the auditor believes they need to be amended, the auditor shall notify management and, unless all of those charged with governance are involved in managing the entity, those charged with governance, that the auditor will seek to prevent future reliance on the auditor’s report.

If, despite such notification, management or those charged with governance do not take these necessary steps, the auditor shall take appropriate action to seek to prevent reliance on the auditor’s report.

Question 7

Meaning of Going concern.

Answer 7

Going concern is one of the fundamental accounting assumptions.

Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future.

When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.

Question 8

Responsibility for assessment of the entity’s ability to continue as a going concern.

Answer 8

The preparation of the financial statements requires management to assess the entity’s ability to continue as a going concern.

Management’s assessment of the entity’s ability to continue as a going concern involves making a judgment, at a particular point in time, about inherently uncertain future outcomes of events or conditions.

The following factors are relevant to that judgment: -
i) The degree of uncertainty associated with the outcome of an event or condition increases significantly the further into the future an event or condition or the outcome occurs.

ii) The size and complexity of the entity, the nature and condition of its business and the degree to which it is affected by external factors affect the judgment regarding the outcome of events or conditions.

iii) Any judqement about the future is based on information available at the time at which the judgment is made. Subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made.

Question 9

Responsibilities of the auditor regarding going concern.

Answer 9

The auditor’s responsibilities are to

i) Obtain sufficient appropriate audit evidence regarding and conclude on the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements; and

ii) To conclude, based on the audit evidence obtained, whether material uncertainty exists about the entity’s ability to continue as a going concern.

However, as described in SA 200, the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater for future events or conditions that may cause an entity to cease to continue as a going concern.

The auditor cannot predict such future events or conditions.

Accordingly, the absence of any reference to a material uncertainty about the entity’s ability to continue as a going concern in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern.

Question 10

Objectives of auditor in accordance with SA 570 (Going concern).

Answer 10

The objectives of the auditor are: -

a) To obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements;

b) To conclude, based on the audit evidence obtained, 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; and

c) To report in accordance with this SA.

Question 11

Evaluating management’s assessment of going concern basis of accounting.

Answer 11

The auditor shall evaluate management’s assessment of the entity’s ability to continue as a going concern.

It is not the auditor’s responsibility to rectify the lack of analysis by management.

In some circumstances, however, the lack of detailed analysis by management to support its assessment may not prevent the auditor from concluding whether management’s use of the going concern basis of accounting is appropriate in the circumstances.

If management’s assessment of the entity’s ability to continue as a going concern covers less than twelve months from the date of the financial statements, the auditor shall request management to extend its assessment period to at least twelve months from that date.

Question 12

Additional audit procedures when events or conditions are identified that may cast a significant doubt on entity’s ability to continue as a going concern.

Answer 12

If events or conditions have been 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 or not 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 through performing additional audit procedures, including consideration of mitigating factors.

These procedures shall include: -
a) Where management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting management to make its assessment.

b) Evaluating management’s plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management’s plans are feasible in the circumstances.

c) Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor in considering the future outcome of events or conditions in the evaluation of management’s plans for future actions:
i) Evaluating the reliability of the underlying data generated to prepare the forecast; and
ii) Determining whether there is adequate support for the assumptions underlying the forecast.

d) Considering whether any additional facts or information have become available since the date on which management made its assessment.

e) Requesting written representations from management and, where appropriate, those charged with governance, regarding their plans for future actions and the feasibility of these plans.

Question 13

Adequacy of disclosures when events or conditions have been identified and a material uncertainty exists related to these events that may cast a significant doubt on the entity’s ability to continue as going concern.

Answer 13

If the auditor concludes that management’s use of the going concern basis of accounting is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether the financial statements:

a) Adequately disclose the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and management’s plans to deal with these events or conditions and

b) Disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.

Question 14

Adequacy of disclosures when events or conditions have been identified and no material uncertainty exists related to these events that may cast a significant doubt on the entity’s ability to continue as going concern.

Answer 14

If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern but, based on the audit evidence obtained the auditor concludes that no material uncertainty exists, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework, the financial statements provide adequate disclosures about these events or conditions.

Question 15

Implication for the auditor’s report when a material uncertainty exists that may cast a significant doubt on entity’s ability to continue as a going concern.

Answer 15

1) If use of the Going concern basis of accounting is inappropriate:
If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s judgment, management’s use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor shall express an adverse opinion.

2) If use of the going concern basis of accounting is appropriate but a material uncertainty exists:
A) Adequate Disclosure of a Material Uncertainty is made in the Financial Statements:
If adequate disclosure about the material uncertainty is made in the financial statements, the auditor shall express an unmodified opinion and the auditor’s report shall include a separate section under the heading “Material Uncertainty Related to Going Concern” to:
a) Draw attention to the note in the financial statements that discloses such matters.
b) State that these events or conditions indicate that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is not modified respect of the matter.

B) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements:
If adequate disclosure about the material uncertainty is not made in the financial statements, the auditor shall:
a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705.
b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose this matter.

3) Management unwilling to make or extend its assessment:
If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor shall consider the implications for the auditor’s report.
In such a situation, a qualified opinion or a disclaimer of opinion in the auditor’s report may be appropriate, because it may not be possible for the auditor to obtain sufficient appropriate audit evidence regarding management’s use of the going concern basis of accounting in the preparation of the financial statements.

Question 16

Objective of auditor in accordance with SA 450 “Evaluation of Misstatements identified during the Audit”.

Answer 16

The objective of the auditor is to evaluate:-

a) The effect of identified misstatements on the audit and

b) The effect of uncorrected misstatements, if any, on the financial statements.

Question 17

Consideration of identified misstatements as the audit progresses.

Answer 17

The auditor shall determine whether the overall audit strategy and audit plan need to be revised if: -

a) The nature of identified misstatements and the circumstances of their OCcurrence indicate that other misstatements may exist that, when aggregated with misstatements accumulated during the audit, could be material or

b) The aggregate of misstatements accumulated during the audit approaches materiality determined in accordance with SA 320.

The auditor may request management to examine a class of transactions, account balance or disclosure in order for management to understand the cause of a misstatement identified by the auditor, perform procedures to determine the amount of the actual misstatement in the class of transactions, account balance or disclosure, and to make appropriate adjustments to the financial statements.

If, at the auditor’s request, management has examined a class of transactions, account balance or disclosure and corrected misstatements that were detected, the auditor shall perform additional audit procedures to determine whether misstatements remain.

Question 18

Documentation regarding misstatements identified during audit

Answer 18

The audit documentation shall include: -

a) The amount below which misstatements would be regarded as clearly trivial;

b) All misstatements accumulated during the audit and whether they have been corrected; and

c) The auditor’s conclusion as to whether uncorrected misstatements are material, individually or in aggregate, and the basis for that conclusion.

Question 19

Meaning of Written Representations.

Answer 19

A written representation is a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.

Question 20

Written representations as audit evidence

Answer 20

Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based.
Written representations are necessary information that the auditor requires in connection with the audit of the entity’s financial statements.
Accordingly, similar to responses to inquiries, written representations are audit evidence.

Written representations are requested from those responsible for the preparation and presentation of the financial statements.

Written representations are an important source of audit evidence.
Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal.

Furthermore, the fact that management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfilment of management’s responsibilities, or about specific assertions.

Question 21

Objectives of auditor in accordance with SA 580 “Written Representations”.

Answer 21

The objectives of the auditor are:

a) To obtain written representations from management and, where appropriate, those charged with governance that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor;

b) To support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representations, if determined necessary by the auditor or required by other SAs; and

c) To respond appropriately to written representations provided by management and, where appropriate, those charged with governance, or if management or, where appropriate, those charged with governance do not provide the written representations requested by the auditor.

Question 22

From whom written representations are requested by the auditor?

Answer 22

The auditor shall request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned.

In some cases, however, management may decide to make inquiries of others who participate in preparing and presenting the financial statements and assertions therein, including individuals who have specialized knowledge relating to the matters about which written representations are requested.
Such individuals may include:
i) An actuary responsible for actuarially determined accounting measurements.

ii) Staff engineers who may have responsibility for and specialized knowledge about environmental liability measurements.

iii) Internal counsel who may provide information essential to provisions for legal claims.

In some cases, management may include in the written representations qualifying language to the effect that representations are made to the best of its knowledge and belief.
It is reasonable for the auditor to accept such wording if the auditor is satisfied that the representations are being made by those with appropriate responsibilities and knowledge of the matters included in the representations.

Question 23

Why are written representations about management responsibilities necessary?

Answer 23

Audit evidence obtained during the audit that management has fulfilled its responsibilities regarding preparation of financial statements and about information provided and completeness of transactions is not sufficient without obtaining confirmation from management that it believes that it has fulfilled those responsibilities.

This is particularly appropriate when: -
i) Those who signed the terms of the audit engagement on behalf of the entity no longer have the relevant responsibilities;

ii) The terms of the audit engagement were prepared in a previous year;

iii)There is any indication that management misunderstands those responsibilities; or

iv) Changes in circumstances make it appropriate to do so.

Question 24

What are the points that the auditor should consider when obtaining evidence about, or evaluating, judgments and intentions?

Answer 24

When obtaining evidence about, or evaluating, judgments and intentions, the auditor may consider one or more of the following:

i) The entity’s past history in carrying out its stated intentions.

ii) The entity’s reasons for choosing a particular course of action.

iii) The entity’s ability to pursue a specific course of action.

iv) The existence or lack of any other information that might have been obtained during the course of the audit that may be inconsistent with management’s judgment or intent.

Question 25

Requested Written representations not provided by management.

Answer 25

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

a) Discuss the matter with management;

b) Re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of representations and audit evidence in general; and

c) Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in accordance with SA 705 having regard to the requirement of disclaimer of opinion.

Question 26

Disclaimer of opinion in case of non-reliability of Written Representations about management’s responsibilities or failure to provide such Written Representations

Answer 26

The auditor shall disclaim an opinion on the financial statements in accordance with SA 705 if:

a) The auditor concludes that there is sufficient doubt about the integrity of management such that the written representations about management fulfilling its responsibilities regarding preparation of financial statements and about information provided and completeness of transactions are not reliable; or

b) Management does not provide the written representations relating to fulfilling its responsibilities regarding preparation of financial statements and about information provided and completeness of transactions.

Question 27

Significance of communication with those charged with governance.

Answer 27

Communication from the auditor is important with those charged with governance. Effective two-way communication is important in assisting:

a) The auditor and those charged with governance in understanding matters related to the audit in context.

b) The auditor in obtaining from those charged with governance information relevant to the audit.

c) Those charged with governance in fulfilling their responsibility to oversee the financial reporting process, thereby reducing the risks of material misstatement of the financial statements.

Question 28

Objective of auditor in accordance with SA 260 “Communication with Those Charged with Governance”.

Answer 28

The objectives of the auditor are:

a) To communicate clearly with those charged with governance the responsibilities of the auditor in relation to the financial statement audit, and an overview of the planned scope and timing of the audit;

b) To obtain from those charged with governance information relevant to the audit;

c) To provide those charged with governance with timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial reporting process; and

d) To promote effective two-way communication between the auditor and those charged with governance.

Question 29

Matters to be communicated by the auditor to those charged with governance.

Answer 29

Following matters are required to be communicated by the auditor with those charged with governance:

1) The auditor’s responsibilities in relation to the financial statement audit:
The auditor shall communicate with those charged with governance the responsibilities of the auditor in relation to the financial statement audit, including that:

a) The auditor is responsible for forming and expressing an opinion on the financial statements that have been prepared by management with the oversight of those charged with governance and

b) The audit of the financial statements does not relieve management or those charged with governance of their responsibilities.

2) Planned scope and timing of the audit:
The auditor shall communicate with those charged with governance an overview of the planned scope and timing of the audit, which includes communicating about the significant risks identified by the auditor.

3) Significant findings from the audit:
The auditor shall communicate with those charged with governance:-

a) The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures.
When applicable, the auditor shall explain to those charged with governance why the auditor considers a significant accounting practice, that is acceptable under the applicable financial reporting framework, not to be most appropriate to the particular circumstances of the entity.

b) Significant difficulties, if any, encountered during the audit;

c) Unless all of those charged with governance are involved in managing the entity:-
i) Significant matters arising during the audit that were discussed, or subject to correspondence, with management;
ii) Written representations the auditor is requesting

d) Circumstances that affect the form and content of the auditor’s report, if any and

e) Any other significant matters arising during the audit that, in the auditor’s professional judgment, are relevant to the oversight of the financial reporting process.

Question 30

Communication with Those Charged with Governance of the auditor’s independence in case of listed entities.

Answer 30

In the case of listed entities, the auditor shall communicate with those charged with governance:-

a) A statement that the engagement team and others in the firm as appropriate, the firm and, when applicable, network firms have complied with relevant ethical requirements regarding independence and

b)
i) All relationships and other matters between the firm, network firms, and the entity that, in the auditor’s professional judgment, may reasonably be thought to bear on independence. This shall include total fees charged during the period covered by the financial statements for audit and non-audit services provided by the firm and network firms to the entity and components controlled by the entity. and
ii) The related safeguards that have been applied to eliminate identified threats to independence or reduce them to an acceptable level.

Question 31

Documentation of communication with Those Charged with Governance.

Answer 31

Where matters required by SA 260 to be communicated are communicated orally, the auditor shall include them in the audit documentation, and when and to whom they were communicated.

Where matters have been communicated in writing, the auditor shall retain a copy of the communication as part of the audit documentation.

Question 32

Objective of auditor in accordance with SA 265 “Communicating Deficiencies in Internal Control to Those Charged with Governance and Management”.

Answer 32

The objective of the auditor is to communicate appropriately to those charged with governance and management deficiencies in internal control that the auditor has identified during the audit and that, in the auditor’s professional judgment, are of sufficient importance to merit their respective attentions.

Question 33

Meaning of “Deficiency in internal control” and “significant deficiency in internal control”

Answer 33

a) Deficiency in internal control - This exists when: -
i) A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the financial statements on a timely basis; or
ii) A control necessary to prevent, or detect and correct, misstatements in the financial statements on a timely basis is missing.

b) Significant deficiency in internal control - This exists when:-
A deficiency or combination of deficiencies in internal control that, in the auditor’s professional judgment, is of sufficient importance to merit the attention of those charged with governance.
The significance of a deficiency or a combination of deficiencies in internal control depends not only on whether a misstatement has actually occurred, but also on the likelihood that a misstatement could occur and the potential magnitude of the misstatement.
Significant deficiencies may, therefore, exist even though the auditor has not identified misstatements during the audit.

Question 34

Communication of significant deficiencies in internal control to those charged with governance

Answer 34

1) The auditor shall communicate in writing significant deficiencies in internal control identified during the audit to those charged with governance on a timely basis.

2) The auditor shall also communicate to management at an appropriate level of responsibility on a timely basis:-
a) In writing, significant deficiencies in internal control that the auditor has communicated or intends to communicate to those charged with governance, unless it would be inappropriate to communicate directly to management in the circumstances; and

b) Other deficiencies in internal control identified during the audit that have not been communicated to management by other parties and that, in the auditor’s professional judgment, are of sufficient importance to merit management’s attention.

3) The auditor shall include in the written communication of significant deficiencies in internal control:-
a) A description of the deficiencies and an explanation of their potential effects; and

b) Sufficient information to enable those charged with governance and management to understand the context of the communication.

4) In particular, the auditor shall explain that:-
i) The purpose of the audit was for the auditor to express an opinion on the financial statements;

ii) The audit included consideration of internal control relevant to the preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control; and

iii) The matters being reported are limited to those deficiencies that the auditor has identified during the audit and that the auditor has concluded are of sufficient importance to merit being reported to those charged with governance.