8. Audit completion and Reporting

Question 1

Why is quality management important?

Answer 1

QM is important to ensure that the audit is completed efficiently and in line with auditing standards and other relevant laws and regulations and audit engagement risk is reduced to an acceptable level.

Question 2

What are the key elements of a firm’s quality management system?

Answer 2

1. The firm’s risk assessment process
2. Governance and leadership
3. Relevant ethical requirements
4. Acceptance and continuance of client relationships and specific engagements
5. Engagement performance
6. Resources
7. Information and communication
8. The monitoring and remediation process

Question 3

What is audit documentation and why is it important?

Answer 3

‘Audit documentation’ is the record of audit procedures performed, relevant audit evidence obtained and the conclusions the auditor reached.

Audit documentation is important because it:
* Provides evidence of the auditor’s basis for a conclusion about the achievement of the overall objective of the audit.
* Provides evidence that the audit was planned and performed in accordance with ISAs and applicable legal and regulatory requirements.
* Assists the engagement team to plan and perform the audit.
* Assists the engagement partner in directing, supervising and reviewing the audit work.
* Assists in engagement quality reviews that are a part of the firm’s quality management systems.
* Enables the engagement team to be accountable for its work.
* Retains a record of matters of continuing significance to future audits.

Question 4

What are the typical working papers on audit documentation?

Answer 4

1. Name of client
2. Year-end date
3. Subject
4. Working paper reference
5. Preparer.
6. Date prepared
7. Reviewer
8. Date of review
9. Objective of work/test
10. Details of work performed
11. Results of work performed
12. Conclusion

Question 5

What 4 things need to be communicated to those charged with governance under ISA (UK) 260 Communication With Those Charged With Governance?

Answer 5

1. The auditor’s responsibilities in relation to the financial statement audit
2. The planned scope and timing of the audit
3. Significant findings from the audit
4. Auditor independence (in the case of listed companies)

Question 6

What significant findings should be communicated to those charged with governance, give examples?

Answer 6

• Views on the qualitative aspects of the entity’s accounting practices and financial reporting (ie accounting policies or estimates)
• Significant difficulties, if any, encountered during the audit
• Unless all those charged with governance are involved in day-to-day management, significant audit matters discussed with management, and details of written representations requested by the auditor
• Circumstances that affect the form and content of the auditor’s report (such as the need to modify the audit opinion)
• Any other significant matters that are judged relevant by the auditor

Question 7

What are subsequent events under ISA (UK) 560 Subsequent Events ?

Answer 7

Subsequent events are events which occur between the year end and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.

Question 8

What is the whole point of ISA (UK) 560 Subsequent Events?.

Answer 8

requires the auditor to be alert for any events occurring after the year-end date.

Question 9

What are the responsibilities of directors and auditors in relation to subsequent events?

Answer 9

Directors:
- Undertake the subsequent events review and reflect any necessary adjustments or disclosures as part of their preparation of the financial statements.

Auditor:
- Perform procedures designed to obtain sufficient, appropriate audit evidence that all events from the date of the financial statements up to the date of the audit report that require adjustment or disclosure have been identified and appropriately reflected in the financial statements.

Question 10

What procedures are done for the Auditor to meet ISA (UK) 560 Subsequent Events?

Answer 10

• Obtaining an understanding of any procedures management has established to identify subsequent events
• Enquiring of management and those charged with governance as to whether any subsequent events have occurred which may impact the financial statements
• Reviewing post-year-end minutes of all shareholder and board meetings
• Reviewing post-year-end management accounts
• Requesting details of pending litigation from the company lawyer
• Obtaining written representations from management regarding subsequent events.

Question 11

What is meant by a company being a ‘going concern’ under ISA (UK) 570 Going Concern?

Answer 11

Is the company expected to continue for the foreseeable future, at least 1 year from the approval of the financial statement

If it’s not: the companies value is limited to resale/salvage of its assets.

Question 12

What would happen to certain items in the SoFP when prepared on a going concern assumption?

Answer 12

Items in SoFP would need to reflect MV and what can be collected almost immediately.

The reason is:
- Assets at Carrying value instead of MV or Receivables that if needed to be collected now would be much less etc.

• Inventory written down as there may need to be sales to get rid etc.

Question 13

What are the responsibilities of directors and auditors in relation to going concern?

Answer 13

Directors:
- Preparing the financial statements and, therefore, for making an assessment as to whether or not the entity is a going concern and preparing the financial statements accordingly
- Disclosing any material uncertainties in relation to going concern if they exist
- Disclosing if the company has not prepared the financial statements on a going concern basis of accounting

Auditors:
- Obtaining sufficient, appropriate audit evidence regarding, and concluding on, the appropriateness of management’s use of the going concern basis of accounting
- Concluding on whether a material uncertainty exists about the entity’s ability to continue as a going concern
- In meeting these responsibilities, the auditor will evaluate the directors’ assessment of the entity’s ability to continue as a going concern throughout the audit process, including performing an evaluation immediately prior to the signing of the audit report

Question 14

What does material uncertainty mean and why does this affect going concern?

Answer 14

A material matter whose outcome depends on future actions or events not under the direct control of the entity that may affect, or cast significant doubt over, the going concern status of the entity.

Question 15

What are examples of indicators that a company may be facing going concern issues?

Answer 15

• Substantial operating losses
• Inability to pay payables on due dates
• Difficulty in complying with the 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
• Loss of major market, franchise, licence, or principal supplier
• Labour difficulties or shortages of important supplies
• Pending legal proceedings against the entity that may, if successful, result in judgements that could not be met

Question 16

What is the impact of going concern issues on the financial statements under the 3 scenarios?

1. Auditor is happy that entity has applied going concern principle correctly and non material uncertainties exist
2. Auditor judges that entity has not applied the going concern principle correctly.
3. There is a material uncertainty that could affect liquidity

Answer 16

1. No impact, auditors can sign off that FS give a true and fair view
2. FS do not show a true and fair view
3. If disclosed appropriately about the material uncertainty, the FS show a true and fair view. If not disclosed appropriately or omitted the FS do not show a true and fair view

Question 17

What are the key audit procedures performed in conducting an overall review of the financial statements, during the completion stage?

Answer 17

• Ratio analysis
• Comparisons with prior period Financial Statements
• Other techniques to confirm trends are as expected. If the trends are different to what was previously recognised there may be a need to go back and do more audit procedures for high risk matters.
• Review the directors’ report, and other information released with the financial statements, to check for consistency with the financial statements.
• Review aggregate of uncorrected misstatements to assess if its material.

Question 18

What are the two main reasons auditors conduct an overall review of FS at the completion stage of an audit?

Answer 18

1. The auditor must be satisfied that there are no obvious inconsistencies in the final version of the financial statements.
2. The auditor will have learned more about the client during the audit, so is in a better position at the end of the audit to analyse the figures and understand trends etc.

Question 19

How is the effect of uncorrected misstatements evaluated at the completion stage of audit under ISA (UK) 450 Evaluation of Misstatements Identified During the Audit ?

Answer 19

Auditor uses a Summary of Audit misstatements (SAM) to give to the entity where:

• If the auditor has found any misstatements during the audit, these should be reported to the entity (unless clearly trivial, based on the auditor’s professional judgement).
• All material misstatements should be adjusted otherwise its not true and fair view.
• All immaterial errors can be corrected at the discretion of the entity.
• If in aggregate the total of all immaterial are above threshold then audit opinion may need to be modified.

Question 20

How are uncorrected misstatements communicated to those charged with governance?

Answer 20

Communicated through a SAM (Summary of Audit misstatements) and presented to those charged with governance.

ISA (UK) 580 Written Representations means Auditor must ask for written representations from management as to whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate to the FS as a whole.

Question 21

What are the 3 main areas which require representation from the management and those charged with governance?

Answer 21

1. Audit evidence that those charged with governance acknowledge their collective responsibility for the preparation of the financial statements, have fulfilled their responsibilities and provided necessary information to the auditor.
2. Required representations by other ISAs (UK) e.g. ISA (UK) 570 Going Concern: Management confirms their plan for future actions and the feasibility of these plans
3. Representations to support other audit evidence obtained during the audit of the financial statements such as valuation where mgmt uses their assumptions etc.

Question 22

How reliable are written representations as evidence?

Answer 22

They do not provide sufficient appropriate audit evidence on their own about the matters with which they are concerned.

SHOULD ALWAYS be used in conjunction with corroborative evidence and investigated if other evidence casts doubt on these representations.

Question 23

What are the two types of audit opinion?

Answer 23

1. Unmodified opinion: This is issued when, in the auditor’s opinion, the accounts give a true and fair view.
2. Modified opinion: This is issued when, in the auditor’s opinion, the accounts do not give a true and fair view or the auditor cannot form an opinion on the financial statements.

Question 24

What are the 2 circumstances that would result in a modified audit opinion?

Answer 24

1. When the auditor concludes that, based on the evidence obtained, the financial statements as a whole are not free from material misstatement; or
2. When the auditor is not able to obtain sufficient, appropriate evidence to conclude that the financial statements as a whole are free from material misstatement.

Question 25

What does pervasive mean in terms of audit opinion?

Answer 25

• An item is considered pervasive if the effects of the matter:
• Are not confined to specific elements, accounts or items of the financial statements;
• Represent a substantial proportion of the financial statements; or
• In relation to disclosures, are fundamental to users’ understanding of the financial statements.

Question 26

Explain the circumstances that would mean the following modified opinions are given to an entity:
- Qualified
- Adverse
- Disclaimer

Answer 26

Qualified:
- If there is a material misstatement
- Is there is a material limitation on scope (Can’t get sufficient, appropriate evidence to support)

Adverse:
- Pervasive misstatement in the Financial statements

Disclaimer of opinion:
- Pervasive limitation on scope.

Question 27

What is the impact of the incorrect use of going concern basis on the audit opinion?

Answer 27

• Incorrect use of going concern would result in a adverse opinion where the FS contain a misstatement about the going concern of the business.

or

Disclaimer of opinion where the auditor has been unable to obtain sufficient appropriate evidence to support the directors’ assessment of going concern.

Question 28

What is included within the Conclusions relating to going concern section of the audit report?

Answer 28

• Whether the going concern assumption is appropriate; and
• Whether there are any material uncertainties requiring to be reported by the directors.

Question 29

When a scenarios asks about what is the audit opinion of the scenario, what technique should be used?

Answer 29

1. Identify the circumstances causing concern in the scenario;
2. Determine whether the issue is not material, material only or material and pervasive;

Not material = unmodified
material = modified (Qualified except for opinion)
Material and pervasive = modified (Adverse or Disclaimer of opinion)

Then answer.

Question 30

What are the contents of the audit report?

Answer 30

• Title
• Addressee
• Opinion
• Basis for opinion
• Conclusions relating to going concern
• Other information
• Reporting on other legal and regulatory requirements
• Matters on which auditors are required to report by exception
• Responsibilities of directors
• Responsibilities of auditors
• Signature of engagement partner (Auditor)
• Address
• Date of the audit report

Question 31

What ISA’s do auditors comply with when preparing the audit report?

Answer 31

• ISA (UK) 700 Forming an Opinion and Reporting on Financial Statements
• ISA (UK) 701 Communicating Key Audit Matters in the Independent Auditor’s Report
• ISA (UK) 705 Modifications to the Opinion in the Independent Auditor’s Report
• ISA (UK) 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report (this will be covered in the Advanced Assurance course)

Question 32

What are the additional elements that need to be included in the audit reports of listed and public interest entities/ companies that volunteer?

Answer 32

1. Key audit matters (why it was key, how it was addressed in the audit and reference to any disclosures)
2. Summary of audit approach ( Explanation of how material was applied and figures, explain the scope of the audit and how this scope was influenced by materiality)
3. Reporting on other legal and regulatory requirements (Directors remuneration report, Corporate governance statements)
4. Name of the engagement partner (Partner responsible for audit)

Question 33

How does the audit report change when a modified opinion is given?

Answer 33

When a modified opinion is given, the auditor should:

• Amend the heading of the opinion and basis for opinion paragraphs to basis for qualified opinion/adverse opinion/disclaimer of opinion (as appropriate)
• Give reasons for the modification
• Quantify the effect on the accounts if possible (if not possible, a statement to this effect should be included)

Question 34

What are the additional responsibilities of auditors in relation to additional information in the annual report and other reporting documents, under ISA (UK) 720 The Auditor’s Responsibilities Relating to Other Information?

Answer 34

Auditors MUST read all other information presented to the shareholders and request that management resolve any discrepancies with the audited financial statements or inconsistencies with the auditor’s understanding of the entity, if they are encountered.

These are:
* Directors’ report
* Strategic report
* Chairman’s report
* Corporate social responsibility report
* Corporate governance statement
* Report on the effectiveness of a company’s internal controls
* Directors’ remuneration report