Chapter 9 - Completion And Review

Question 1

Subsequent events

Answer 1

1. Adjusting
   Events providing additional evidence relating to conditions existing at the reporting date they require adjustment in the financial statements.
2. Non-adjusting
   Events concerning conditions which arose after the reporting date, which may be material that disclosure is required to ensure the financial statements are not misleading.

Question 2

Between the date of the financial statements and the date of the auditor’s report

Answer 2

1. The auditor must perform audit procedures to ensure the client has complied with IAS 10.
2. If material adjusting events are not adjusted for or material non adjusting events are not disclosed, the auditor will ask management to make the necessary amendments to the financial statements.
3. A written representation from management should be obtained stating all events requiring adjustment or disclosure have been adjusted or disclosed.
4. If management refuse to amend the financial statements, the auditor should consider the implications.
5. If the matter is material, the audit report should be modified with either a qualified or adverse opinion depending on whether the matter is material or material persuasive.

Question 3

Between the date of the auditor’s report and the date the financial statements are issued

Answer 3

1. The auditor is is under no obligation to perform audit procedures after the audit report has been issued. However they must take action if they become aware of a fact which causes them to issue a modified report.
2. The auditor should discuss the matter with management and consider if the financial statements require amendment.
3. Request management to make the necessary amendments.
4. Perform audit procedures on these amendments.
5. Issue a new auditor’s report.
6. If management does not amend the financial statements and the audit report has not yet been issued to the client, the auditor can still modify the opinion.
7. If the audit report has been provided to the client, the auditor shall notify management and those charged with governance not to issue financial statements before the amendments are made.
8. If the client issues the financial statements despite being requested not to by the auditor, action will be taken to prevent reliance on the auditor’s report.

Question 4

After the financial statements are issued

Answer 4

1. The auditor is under no obligation to perform audit procedures after the financial statements have been issued, but action must be taken if they become aware of a fact which caused them to modify their report.
2. The auditor should discuss with management and consider if the financial statements require amendment.
3. Request management to make the necessary amendments. Management must also take the necessary actions to ensure anyone in receipt of the previously issued financial statements is informed.
4. The auditor should perform audit procedures on the amendments to ensure they have been put through correctly.
5. Issue a new auditor’s report including an emphasis of matter paragraph to draw attention to the fact the financial statements and audit report have been issued.
6. If management refuses to recall and amend the financial statements, the auditor shall take action to prevent reliance on the auditor’s report.

Question 5

Going concern

Answer 5

The assumption the enterprise will continue in operational existence for the foreseeable future.

Question 6

Directors responsibilities for going concern

Answer 6

1. Assess the company’s ability to continue as a going concern when they are preparing the financial statements.
2. Prepare forecasts to help assess whether they are likely to continue trading for the next 12 months as a minimum.
3. If they are aware of any material uncertainties which may affect this assessment then IAS 1 requires to disclose such uncertainties in the financial statements.
4. The directors should take into account a number of relevant factors such as:- current and expected profitability, debt repayment, sources (and potential sources) of financing.

Question 7

Auditor’s responsibilities for going concern

Answer 7

1. ISA 570 Going concern states the auditor needs to ensure the financial statements are prepared on the appropriate basis.
2. If the going concern basis is used, obtain sufficient appropriate evidence.
3. Where there are material uncertainties, the auditor must ensure that the directors have made sufficient disclosure of such matters in the notes to financial statements.
4. The auditor must consider the implications for their audit report.

Question 8

Indicators of going concern problems

Answer 8

1. Net current liabilities indicates an inability to meet debts as they fall due.
2. Borrowing facilities not agreed or close to expiry of current agreement, lack of access to cash makes it difficult to manage its operating cycle.
3. Defaulted loan agreements, loans become repayable on default, the company may find it difficult to repay loan.
4. Unplanned sales of non-current assets, indicates an inability to generate cash from other means and as non-current assets generate income, will cause a decline in income and therefore profits.
5. Missing tax payments, results in fines and penalties, companies normally prioritise tax payments indicating a lack of working capital.
6. Failure to pay staff, indicates lack of working capital.
7. Negative cash flow, indicates overtrading.
8. Inability to obtain credit from suppliers, suggests failure to pay suppliers on time and working capital problems.
9. Major technology changes, insufficient funds to keep up with changes in technology.
10. Legal claims, successful claims lead to significant cash payments that can only be settled with liquidation.
11. Loss of key staff, result in inability to trade.
12. Over reliance on a small number of products, staff, suppliers or customers.
13. Customers ceasing to trade or having cash flow difficulties, likely to become bad debt and therefore payment not received.
14. Emergence of a successful competitor, impact revenues if customers switch.
15. Uninsured/under insured catastrophes, the company may not have enough cash to survive.
16. Changes in laws and regulations, cost may be more than can afford.

Question 9

Audit procedures to assess managements evaluation of going concern

Answer 9

1. Evaluate management’s assessment of going concern.
2. Assess the same period that management have used in their assessment and if this is less than 12 months, ask management to extend their assessment.
3. Consider whether management’s assessment includes all relevant information.

Question 10

Audit procedures to perform where there is doubt over going concern

Answer 10

1. Analyse and discuss cash flow, profit and other relevant forecasts with management.
2. Analyse and discuss the latest interim financial statements.
3. Review the terms of debentures and loan agreements and determine whether any have been breached.
4. Read minutes of the meetings of shareholders, the board of directors and important committees for reference to financing difficulties.
5. Enquiry of the entity’s lawyer regarding the existence of litigation and claims and the reasonableness of management’s assessments of their outcome and the estimate of their financial implications.
6. Confirm the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assessing the financial ability of such parties to per ice additional funds.
7. Review events after the period end to identify those that either mitigate or otherwise affect the entity’s ability to continue as a going concern.
8. Review correspondence with customers of any disputes which might impact recoverability of debts and affect future sales.
9. Review correspondence with suppliers for issues regarding payments that might impact the company’s ability to obtain supplies or credit.
10. Review correspondence with the banks or indication that a bank loan or overdraft may be recalled.
11. Obtain written representations from management regarding its plans for the future and how it plans to address the going concern issues.

Question 11

Examination of the cash flow statement

Answer 11

1. Agree the opening balance of the cash forecast is in agreement with the closing balance of the cash book to ensure accuracy.
2. Consider how reasonable company forecasts have been in the past by comparing past forecasts with actual outcomes.
3. Determine the assumptions in preparing the cash flow forecast.
4. Agree the timing of receipts from realisation of receivables and payments to suppliers with credit periods and previous trade receivables and payables payment periods.
5. Examine the company’s detailed budgets for the forecast period and discuss any specific plans with directors.
6. Examine non current assets required to meet production needs
7. For acquisitions of buildings, agree the timing and amount of cash out flows to completion date and consideration in sale and purchase agreement.
8. Consider the adequacy of the increased working capital and working capital cash flows in the forecast.
9. If relevant, inspect post year management accounts to compare the actual performance against the forecast figures.
10. Recalculate and cast the cash flow forecast balances to verify arithmetical accuracy.
11. Inspect board minutes for any other relevant issues which should be included within the forecast.

Question 12

Written representations

Answer 12

A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence (ISA 580 Written Representations).

Question 13

Evaluation of misstatements

Answer 13

1. Accumulate a record of all identified misstatements unless they are clearly trivial.
2. Consider if misstatements exists and when aggregated with other misstatements could be considered material.
3. Consider if the audit plan and strategy need to be revised.
4. Assess the materiality of the matter (both quantitive and qualitative).
5. Report all misstatements identified during the course of the audit to an appropriate level of management on a timely basis.
6. Request all misstatements are corrected.
7. If management refuses to correct some or all of the misstatements the auditor should consider their reasons for refusal and take these into account when considering if the financial statements are free form material misstatement.

Question 14

Evaluation of uncorrected misstatements

Answer 14

If management have failed to correct all of the misstatements reported to them, the auditor should:

1. Revisit the assessment of materiality to determine whether it is still appropriate in the circumstances.
2. Determine whether the uncorrected misstatements either individually or in aggregate are material to the financial statements as a whole.
3. Report the uncorrected misstatements to those charged with governance.
4. Request a written representation from those charged with governance that they believe the effects of uncorrected misstatements are immaterial.