Chapter 14: Reporting on an audit engagement (development) Flashcards
What does ISA 265 require?
ISA 265 specifically requires the auditor to communicate any significant deficiencies in internal control encountered during the course of their audit work
What will a report to those charged with governance/management include?
- a covering letter
- an appendix setting out the deficiencies, consequences and recommendations
The typical exam question asks you to prepare the contents of the appendix
How should you answer questions asking whether you would modify the audit opinon?
Decision-making process first:
- Heading (identify which part of the question you are answering)
- Describe and classify the issue
- Discuss materiality
- Identify the appropriate opinion
- Describe the modifications to the audit report
How should ‘work in progress’ be valued?
Lower of cost and net realisable value
What should you do if the management has refused to provide written representations?
- Opinion modified due to limitation on scope imposed by the directors, as the auditor is unable to obtain sufficient evidence
- ISA 580 Written Representations requires the auditor to disclaim an opinion on the financial statements when the directors refuse to provide representations regarding the fulfilment of their responsibilities in relation to the preparation of the financial statements
- the matter is both material and pervasive so ‘we do not express an opinion’ or are ‘unable to’
What is the going concern basis?
The going concern basis is used to prepare company financial statements, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so
Who is responsible for deciding whether an entity is a going concern?
It is the directors’ responsibility to prepare the financial statements 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
What opinion if the company is a going concern and no material uncertainties regarding going concern?
- Unmodified opinion
- Include ‘Conclusions relating to going concern’ section
ISA 570 (21-1)
What opinion If the company is NOT a going concern, but the directors have prepared the financial statements on a going concern basis?
- Material and pervasive misstatement
- Do not include the ‘Conclusions relating to going concern’ section
- Instead, issue an adverse opinion
What opinion if the company is not a going concern, and the directors have prepared the financial statements on the break-up basis, with adequate disclosure of the basis of preparation?
-The financial statements are not misstated
- Do not include the ‘Conclusions relating to going concern’ section
- Unmodified opinion
- An emphasis of matter paragraph is used to highlight:
the alternative basis of preparation,
reasons for doing so,
the disclosure,
to the users of the financial statements
ISA 570 (A27)
What opinion is offered if the going concern status of the company is uncertain and the directors have made adequate disclosure of the uncertainty?
- The financial statements are not misstated
- Do not include the ‘Conclusions relating to going concern’ section
- Unmodified opinion
- A separate section is included in the auditor’s report under the heading ‘Material uncertainty related to going concern’ to:
- draw attention to the disclosure note
- state that the material uncertainty may cast significant doubt on the entity’s ability to continue as a going concern
- state that the auditor’s opinion is not modified in this respect
ISA 570 (22)
What is opinion is offered in the going concern status of the company is uncertain and the directors have not made adequate disclosure of the uncertainty?
- The financial statements are misstated
- Do not include the ‘Conclusions relating to going concern’ section
- This 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
ISA 570 (23)
How do auditors report on management’s assessment of going concern?
ISA 570 requires the auditors to evaluate management’s assessment of the company’s ability to continue as a going concern.
Management should usually consider the next 12 months:
- in the UK: 12 months from the date the financial statements are approved
- under international rules: 12 months from the year end.
What if the directors have only prepared profit and cash flow forecasts for the next 6 months?
If management have considered a shorter period:
- They will be asked by auditors to extend this assessment
- if they refuse, it will be discussed with those charged with governance
- if the assessment is not extended, the auditor should consider whether they have sufficient appropriate audit evidence to conclude on going concern and consider the impact this will have on the audit report.
If forecasts have only been prepared for the next 6 months, there is a limitation on scope as the auditors would expect evidence to be available to support management’s assessment of the next 12 months.
This could be considered to be material OR material and pervasive (it’s really a matter for the auditor’s judgement) so the opinion could be qualified or adverse.
What are some additional reporting requirements for listed entities?
When an entity is also 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.
