Chapter 10 Audit completion Flashcards
1.1 Financial statements review
At the end of the audit the engagement partner will sign the audit report on the accounts, so needs to review the final version of the accounts. The auditor should use a checklist to determine whether disclosures have been properly made.
1.2 Do the accounts make sense
The auditor should use the analytical procedures:
- Interpretation: review the accounts considering absolute figures and ratios
- Investigation: unusual movements or numbers should been identified as audit risks so the answers to questions should be in audit working papers
- Corroboration: if answers cannot be found in the working papers, then further work is required
2.1 Evaluation of misstatements
ISA 450 requires the auditor to accumulate misstatements identified during the audit unless the misstatements are trivial. The auditor should accumulate misstatements identified during the audit and inform management, reassess materiality, determine whether uncorrected misstatements are material (individually or in aggregate) and seek written management representations to confirm that the effect of uncorrected misstatements is immaterial.
3.1 Opening balances
If opening balances are misstated, then the accounts for the current will may also be. The auditor should consider if there is evidence to support the opening balances figures. For a recurring engagement this is simple, as they check last year’s audited balances. ISA 510 sets out the procedures for opening balances in a new audit. The procedure is:
- Agree brought forward figures to last year’s accounts
- Assess accounting policies have been appropriately applied to opening balances
- Perform at least one of reviewing the previous auditor’s working papers, consider whether this year’s audit tests providence evidence over opening balances and perform specific procedures on opening balances
3.2 Comparatives
ISA 710 requires the auditor to obtain sufficient evidence that the comparative figures in the accounts are true and fair. If last year’s statement contained a misstatement and the matter was unresolved, the auditor should consider the need to modify this year’s audit opinion.
4.1 Going concern
Accounts are prepared on the going concern basis unless management intend to cease or liquidate the company or have no realistic alternative to do so. If there are any doubts over the company’s ability to continue as a going concern, they must be disclosed in the accounts. If the company is not a going concern the accounts should be prepared on a liquidation or break up basis. The effects of this are no long term assets or liabilities recognised, assets valued at recoverable amount and provisions may be required such as redundancy costs.
4.2 Audit issues
ISA 570 sets out the requirements for the auditor in relation to going concern. Directors are responsible for preparing the accounts under appropriate basis and making necessary disclosures. They must complete a going concern assessment. If less than one year has been considered for this assessment, the auditor must ask for this to be extended. Auditor’s responsibility is to obtain sufficient evidence and conclude the appropriateness of management’s use of the going concern assumption.
For acceptance clients who are unlikely to continue in business will be classed as high risk and the firm must consider carefully if they wish to commit to such work.
For planning when performing risk assessment procedures, the auditor should consider events or conditions that cast doubt on the entity’s ability to continue as a going concern. An understanding of the entity, its operating environment and internal control systems must be gained. The process of identifying and addressing business risks should be considered as this links closely to going concern. ISA 570 contains a list of factors that may indicate going concern problems.
For evidence when events or conditions are identified, the auditor needs to obtain evidence to determine whether or not a material uncertainty exists. This will involve making enquiries of management and consideration of a management bias risk should be made. Procedures are likely to include review of future plans including financial forecasts, projections and latest interim accounts and review of the company’s borrowing facilities and other finance considering whether any loan covenants are likely to be breached and review of board/management meetings.
For reporting going concern problems may lead to the auditor modifying the audit report.
5.1 Subsequent events
Auditor signs the audit report for the financial period, sometime after it has passed. The auditor should also consider up to date information before issuing an opinion. For accounting requirements there are two types of subsequent events:
- Adjusting events: provide evidence of conditions existing at the date of the accounts. The accounts should be adjusted for these. Examples are resolution of a court case, major customer enters liquidation and discovery of fraud or error
- Non-adjusting events: provide evidence of conditions arising after the date of the accounts, the event should be disclosed but accounts not adjusted. Examples are destruction of an asset by fire. Dividends declared after the year-end and announcement of plan to close part of the business
5.2 Audit issues
ISA 560 sets out the requirements for the auditor’s response to subsequent events.
Response between year-end and audit report sign off: auditor has active duty to carry out audit procedures to identify events that require adjustment or disclose in accounts. Auditors seek written management representations that all subsequent events have been adjusted for or disclosed.
Response after audit report sign off: auditor required to react if they become aware of an event which requires adjustment or disclosure. Matter discussed with directors, who should be asked to amend the accounts. If directors do not amend, the auditor should consider withdrawing the audit report. If directors do not allow this and continue to distribute the accounts with the audit report, the auditor should seek legal advice, use the right to speak at the AGM and consider resignation and call an EGM.
6.1 Written representations
ISA 580 requires auditor obtains written representations. Letter of representation should be signed by the directors before audit report is signed. ISA 580 notes that appendix 1 provides a loss of other ISAs that contain requirements for written representation and appendix 2 provides an illustrative management representation letter to demonstrate how an auditor might implement the requirements of the ISA.
