Chapter 12 Reporting on an audit engagement (development) Flashcards
1.1 Communicating internal control deficiencies
ISA 265 requires the auditor to communicate any significant deficiencies in internal control encountered during the course of their audit work. ISA 265 provides examples of matters that may be considered in determining whether internal control deficiencies are significant such as likelihood of material misstatements, susceptibility to loss or fraud, size of item in accounts, volume of activity and importance of the controls to the financial reporting process. The auditor is not required to carry out specific testing on internal controls for the purposes of this communication with those charged with governance.
1.2 Reports to those charged with governance/management
A report to those charged with governance/management includes a covering letter and an appendix setting out the deficiencies, consequences, and recommendations.
2.1 Overview of possible audit reports
Audit reports can be an unmodified report or a modified report. Modified reports can have a modified opinion on financial statements (split between qualified, adverse and a disclaimer) or an unmodified opinion on financial statements (split between other matter and emphasis of matter).
3.1 Accounting for going concern
Going concern basis is used to prepare company financial statements unless management intends to liquidate the entity or to cease operations or has no realistic alternative but to do so. It is the director’s responsibility to prepare the accounts so they should carry out an assessment of the company’s ability to continue for the foreseeable future. The auditor should evaluate this assessment and consider the implications for their audit report.
3.2 Impact of going concern issues on the audit report
The company is a going concern with no material uncertainties regarding going concern: the impact is an unmodified opinion on the auditor’s report including conclusions relating to going concern section.
The company is not a going concern, but the directors have prepared the accounts on the going concern basis: the impact is this is material and pervasive misstatement. Do not include the conclusions relating to going concern section, instead use an adverse opinion.
The company is not a going concern and the directors have prepared accounts on the break-up basis, with adequate disclosure of the preparation: the accounts are not misstated. Do not include the conclusions relating to going concern section. Unmodified opinion. An emphasis of matter paragraph used to highlight the alternative basis of preparation, reasons for doing so and the disclosure to the users of the accounts.
The going concern status of the company is uncertain and directors have made adequate disclosure: the accounts are not misstated. Do not include the conclusions relating to going concern section. Separate section included in auditors report under heading material uncertainty related to going concern to draw attention to disclosure note, state the material uncertainty may cast doubt on ability to continue as a going concern and state the auditor’s opinion is not modified in this respect
The going concern status of company is uncertain and directors have not made adequate disclosure: the accounts are misstated, do not include conclusions relating to going concern section. Could be considered material or pervasive. Qualified (except for) opinion or adverse opinion. Explain in the basis for qualified/adverse opinion section that the material uncertainty exists, and it is not disclosed adequately.
3.3 Reporting on management’s assessment for going concern
ISA 570 requires the auditor to evaluate management’s assessment of the company’s ability to continue as a going concern. The auditor must consider the period used by management in their assessment. The ISA 570 requirement is to consider the period of 12 months from the date of approval of the accounts. The IAASB requirement is to consider the period of 12 months from the end of the reporting period. If management, consider a shorter period they will be asked to extend this assessment by auditors. If they refuse it will be discussed with those charged with governance and then the auditor should consider if they have enough evidence to conclude on going concern and consider the impact this will have on the audit report.
3.4 Additional reporting requirements for listed entities
Where the entity is applying the UK corporate governance code, ISA 570 requires the auditor to perform necessary procedures to identify if any material inconsistencies exist between the auditor’s knowledge and the annual report/board statements.
4.1 Other information
The auditor reports on the accounts but these are often published in a larger annual report containing additional information about the company. The volume of other information often outweighs the financial statements. The risk for the auditor is that somewhere in the other pages of the report there might be a comment that is inconsistent with the financial statements. This could undermine the credibility of the financial statements and the auditor’s report.
4.2 Auditor’s responsibilities under ISA 720
ISA 700 requires the audit report to include a separate section with a heading ‘Other information’. ISA 720 sets out the contents of this section:
- Management is responsible for the other information
- The auditor’s opinion does not cover the other information
- The auditor is responsible for reading the other information
- A statement that there is nothing to report, or details of any material misstatement in the other information
If the auditor identifies an inconsistency between the other information and the financial statements, they should discuss with management and conclude whether a material misstatement exists in either the financial statements or the other information. A material misstatement may exist in the other information even where there is no inconsistency with the financial statements. For example, where other information misstates information which is not included in the financial statements such as employment data.
If there is a material misstatement in the financial statements, consider the impact for the auditor’s report (qualified or adverse opinion). If there is a material misstatement in the other information, ask management to correct the other information. If they fail to do so, use the other information section of the auditor’s report to describe the uncorrected misstatement in the other information.
4.3 Auditor’s responsibilities under the Companies Act 2006
Companies Act 2006 requires the auditor to report on whether the information contained in the director’s report and strategic report is consistent with the financial statements. This option is included in a section of the auditor’s report entitled Opinion on other matters prescribed by Companies Act 2006. The auditor is required to read the information, and if any inconsistencies are identified discuss the matter with management and if the inconsistency is not resolved, amend the auditor’s report.
The FRC bulletin sets out the modifications to the audit report that are required where there is an inconsistency between the financial statements and the director’s report or strategic report.
