Completing the Audit - Week 9 Flashcards
Memorize!
What is the significance of the date of the auditor’s report? (Q11.1 of textbook)
The date of the auditor’s report signifies the date on which the audit was completed. Therefore, an auditor cannot provide an opinion based on events that occur AFTER that date.
Explain the difference between an adjusting event and non-adjusting event?
An adjusting event requires adjustment to the figures within an income statement or balance sheet report. A non-adjusting event (if material) is disclosed in the notes of the accounts.
Give examples of adjusting events and non-adjusting events
Adjusting events (examples): Legislation after balance date that retrospectively changes the company's income tax rate, applying to the fiscal period ended prior to the balance date.
Examples of Non-Adjusting events:
A fire or flood loss after balance date, not fully covered by insurance. A major currency realignment, after balance date. Mergers and acquisitions, after balance date, etc.
How does an auditor go about discovering subsequent events?
The auditor must inquire by:
- reading the minutes of meetings
- read company’s directors’ reports regarding significant events occurring after the balance date
- inquire of the directors
Period 1, Events between balance date and the date of the auditor’s report. Discuss an auditor’s responsibilities for Period 1.
An auditor has a responsibility to apply audit procedures to enable him/her to determine whether all material adjusting and non-adjusting events have been adjusted (for adjusting) and disclosed (for non-adjusting) in the financial report, up until the date of the auditor’s report.
Period 2, Events subsequent to the date of the auditor’s report. Discuss an auditor’s responsibilities in Period 2.
The auditor has no responsibility at all to undertake audit procedures to identify events subsequent to the date of the auditor’s report. He or she, however, should discuss the matter with management and consider whether an amended financial report should be issued IF he/she becomes aware of events that materially affect the financial report (subsequent to the date of the auditor’s report).
Period 3, Events subsequent to the issue of the financial report
The auditor has no obligation to conduct a continuing inquiry of the financial report AFTER it has been issued.
There are 2 types of letters commonly sought towards completion of an audit.
Solicitor’s representation letter and a management representation letter.
As an audit test for each item in the financial report is completed, the auditor:
- must sign off completion in the steps of the audit plan/program.
What are the differences between quantitative misstatements and qualitative misstatements?
Quantitative misstatements can be measured but qualitative misstatements are subjective in nature - cannot be aggregated.
What audit procedures does an auditor apply in relation to reviewing accounting estimates?
The auditor must review transactions and events after balance date to confirm the estimate made.
- Test the effectiveness of controls over the estimate-making process.
- Test the procedure/logic used in making the estimate.
What is an accounting estimate? Describe.
An accounting estimate is an approximation of the amount of a financial report item in the ABSENCE of a precise measurement.
Describe the “going concern” assumption.
Going concern means the entity:
- is able to pay its debts as and when they fall due and payable.
- is expected to continue in business for the foreseeable future (12 months)
- has no intention or necessity to liquidate or stop trading
- has no intention or necessity to seek protection from creditors.
What happens when an entity is NOT a going concern?
Assets & Liabilities are recorded at liquidation values.
