Chapter 5 - Review and Reporting Flashcards
What are adjusting events?
Those that provide additional evidence of conditions that exist at the year end (write off of a trade receivable)
What are non-adjusting events?
Events which did not ecist at year end (loss of inventory in post year fire - example of subsequent event)
What are 7 procedures to undertake in performing a subsequent events review?
1) Review mgmt procedures to try and ensure subsequent events are identified
2) Read minutes of post year-end company meetings and Board meeting and enquire into unusual items
3) Obtain company’s latest accounts as well as any budgets and cash flow forecasts
4) Ask mgmt about any subsequent events such as new borrowing commitments or significant sales of assets
5) Check whether any events have occurred that could call into question the validity of going concern assumption
6) Enquire of the company’s solicitors as to any new developments
7) Include matter on mgmt representation letter
Does the auditor have any responsibility to perform audit procedures or make any enquiry regarding the financial statements after the date of the auditors report?
No - unless they are made aware of something
What is the key evidence an auditor will review to establish whether a company is a going concern?
Mgmts assessment of going concern
If the auditor identifies events or conditions that raise doubt over the going concern, what additional audit procedures should they perform?
1) Obtain copy of cash flow forecast and discuss results with directors
2) Make enquiries of the directors and examine appropriate documentation supporting company’s going concern
3) Consider appropriateness of assumptions which directors have made, sensitivity of assumptions to external and internal changes, existence and adequacy of borrowing facilities and the directors plans to deal with any going concern problems
4) Document extent of any concerns, taking account of matters that have come to their attention during audit
5) Obtain entitys latest available interim FS to ascertain whether there is sufficient audit evidence to confirm or dispel whether material uncertainty exists
6) Make enquiries of entity’s lawyer regarding existence of litigation and claims and reasonableness of mgmts assessments of their outcome
7) Seek written representations from mgmt regarding plans for future action
8) Review correspondence from companys bankers regarding continuance of loan facilities
9) Review receivables ageing analysis to determine whether there is an increase in days - cash flow problems
When are written representations sent to the auditor?
Prior to the completion of audit work and before the auditor’s report is signed
What two reasons are representations required?
1) Directors acknowledge collective responsibility for prep of FS and that they approved them
2) Confirm any matters which are material to the FS where where representations are crucial to obtaining sufficient and appropriate audit evidence
What does the written representations also contain?
1) All matters since year end have been brought to attention of the auditor
2) All of the accounting records have been brought to their attention
3) all related party relationships and transactions have been appropriately disclosed
What should the auditor do if mgmt refuses to give a written representation?
Produce a qualified opinion or a disclaimer of opinion
What is the 5 step procedure for obtaining written representations?
1) Auditor agrees need for mgmt representation letter with client before audit commences
2) Auditor drafts letter for client, discussing key points
3) Client types up letter on its own notehead
4) Letter should be signed by at least one senior executive on behalf of the board
5) Letter should be dated as close as possible to date the auditors report is signed
What is an unmodified auditors report given?
When auditor concludes that FS are prepared, in all material respects, in accordance with applicable financial reporting framework
What is the general layout for an auditors report?
1) Title - stating that its a report of the independent auditor
2) Addressee - usually shareholder
3) Opinion paragraph - identifying company, what has been audited and whether a true and fair view is given
4) Basis for opinion - Refers to ISAs, ethical requirements and sufficient, appropriate evidence
5) Key audit matters - draws attention to significant matters (listed companies only)
6) Other information - clarifies that the auditor is responsible only for reading this and assessing whether consistent with the FS
7) Mgmts responsibility - preparing FS
8) Auditors responsibility - for expressing an opinion on FS and audit was conducted in accordance with international standards on auditing
9) Other reporting responsibilities - will vary according to jurisdiction in which audit was conducted
10) Name, signature and address of auditor
11) Date of auditors report
When would an auditor issue a modified auditors report with an unmodified opinion?
1) If material uncertainty exists relating to going concern, but this has been adequately disclosed in FS
2) Auditor will emphasise material uncertainty by highlighting it in a paragraph after basis of opinion paragraph under heading ‘Material uncertainty relating to going concern’ (this modifying the audit report, but not opinion on them being true and fair)
What words will the emphasis of matter paragraph start with?
Without qualifying our opinion
What are the three types of modified opinion?
1) Qualified opinion
2) Adverse opinion
3) Disclaimer opinion
When might a qualified opinion be given?
Material misstatements could arise due to inappropriate selection or application of accounting policies (valuing inventory)
