AA3 Flashcards
Broadly speaking, what are the three main considerations for an audit partner reviewing FS and audit opinion?
Do the FS comply with the Companies Act 2006?
Do the FS make sense?
Consideration of the work done.
What are the other matters the auditor needs to address in the audit?
- Evaluate discovered errors
- Ensure opening balance and comparatives are correct
- Review whenever the going concern basis of the financial statements is appropriate
- Review subsequent events
- Obtain necessary management representations
How should auditors evaluate misstatements and errors?
The auditor should evaluate the effect of identified misstatements and accumulated uncorrected misstatements on the financial statements.
As such:
- All misstatements should be communicated to management on a timely basis and adjustment requested. The auditor should then review the adjustments.
- If misstatements remain uncorrected the auditor should reassess materiality and determine if any unadjusted errors are material, individually or in aggregate).
-The auditor must obtain an understanding from management reasons for not adjusting.
- The auditor should ensure that management acknowledge that the unadjusted errors are immaterial by including such in the management representation letter.
Why are opening balances a risk?
What does an auditor need obtain sufficient evidence of, in relation to opening balances?
- Whether opening balances contain material misstatements that affect the current period’s financial statements.
- Consistent accounting policies have been applied, and any changes have been adequately disclosed.
How can opening balances be tested?
- Determining whether the prior period’s closing balances have been brought forward correctly.
- Determining whether the opening balances reflect the application of appropriate accounting policies.
- Performing specific audit procedures to obtain evidence regarding the opening balances.
What are management’s responsibilities in relation to going concern?
Management should assess the entity’s ability to continue as a going concern and ensure that the correct basis of preparation is made.
Where the directors intend to cease trading, or have no realistic alternative but to do so, the financial statements should be prepared on a ‘break up’ basis.
What are the auditor’s responsibilities in relation to going concern?
- The auditor’s responsibility is to obtain sufficient appropriate audit evidence about the
appropriateness of management’s use of the going concern assumption. - The risks of the client not being a going concern will need to be considered
and planned for at the planning stage, and, at the completion stage, certain specific tasks will have to be carried out. - Review of future plans for the business including financial forecasts and projections.
- Review of the company’s borrowing facilities and other sources of finance to ensure that they will be adequate for the forthcoming year.
- Review of minutes and other information such as correspondence with legal advisers.
Explain the break-up basis:
If it becomes clear that the client cannot be considered to be a going concern, the financial statements will need to disclose this and the basis for preparing them will change to the ‘break-up’ basis.This means that values will have to be adjusted to the amounts expected to be realised.
In practice this tends not to be a problem for the auditor, because by the time this stage is reached, the client may well have passed into the hands of the receiver or ‘corporate recovery’ expert.
What are the financial indications of going concern issues?
- Net liability position
- Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment
- Excessive reliance on short-term borrowings
- Indications of withdrawal of financial support
- Adverse key financial ratios
- Substantial operating losses
- Inability to pay creditors on due dates
- Inability to comply with terms of loan agreements
What are the operating indications of going concern issues?
- Management intentions to liquidate the entity or to cease operations
- Loss of key management without replacement
- Loss of a major market, key customer(s), franchise, license, or principal supplier(s)
- Labour difficulties
- Shortages of important supplies
- Emergence of a highly successful competitor
What are the other indications of going concern issues?
- Non-compliance with statutory/regulatory requirements
- Pending legal proceedings against the entity that the entity is unlikely to be able
to satisfy - Changes in law or regulation expected to adversely affect the entity
- Uninsured or underinsured for catastrophes when they occur
- Sustainability issues could have a significant impact on a business (for instance, new legislation could make a business model unworkable, or a threat to reputation on sustainability issues could significantly impact the ability to continue trading.
When might you include a note for Material Uncertainty Related to Going Concern?
There are significant uncertainties relating to the companies going concern where evidence cannot be expected to reasonably exist. The directors should adequately disclose the issue at stake.
What are the two different types of subsequent event according to IAS 10 events after the reporting period?
Adjusting events - Those that provide evidence of conditions that existed at the date of the financial statements. E.g., resolution of a court case that existed prior to the year end; bankruptcy of a major customer who was having difficulties prior to the year end; evidence of the NRV of inventories that existed at the year end
Non-adjusting events - Those that provide evidence of conditions that arose after the date of the financial statements. E.g., destruction of a major asset by flood or fire; major share transactions; announcement of a plan to close part of a business; dividends proposed/declared after the end of the reporting period.
From what point does the auditor take a passive duty?
The date that the audit report is issued.
