Completion and review Flashcards
A subsequent event is:
An event occurring between the date of the
financial statements and the date of the auditor’s report, and facts
that become known to the auditor after the date of the auditor’s
report.
Examples of adjusting events include:
Allowances for damaged inventory and doubtful receivables.
Amounts received or receivable in respect of insurance claims
which were being negotiated at the reporting date.
The determination of the purchase or sale price of non-current
assets purchased or sold before the year end.
Agreement of a tax liability.
Discovery of errors/fraud revealing that the financial statements
are incorrect
Non-adjusting events
These are events concerning conditions which arose after the reporting
date. If material, disclosure is required in the notes to the financial
statements indicating what effect the events may have. Such events,
therefore, will not have any effect on items in the statements of financial
position or statement of profit or loss for the period
Examples of non-adjusting events include:
Issue of new share or loan capital.
Major changes in the composition of the group (for example,
mergers, acquisitions or reconstructions).
Losses of non-current assets or inventory as a result of fires or
floods.
Strikes, government action such as nationalisation.
Purchases/sales of significant non-current assets
The auditor is under no obligation to perform audit procedures after the
auditor’s report has been issued, however, if they become aware of a fact
which would cause them to amend the auditor’s report, they
must take
action. This will normally be in the form of asking the client to amend the financial
statements, auditing the amendments and reissuing the auditor’s report.
If the client issues the financial statements despite being requested not to
by the auditor, the auditor shall
take action to prevent reliance on the
auditor’s report - legal.
Going concern is
the assumption that the entity will continue in business for
the foreseeable future.
Where the assumption is made that the company will cease trading, the
financial statements are prepared using the break-up or liquidation basis
under which:
The basis of preparation and the reason why the entity is not regarded as
a going concern are disclosed.
Assets are recorded at likely sale values.
Inventory and receivables may need to be written down as inventory may
be sold for a lower price or may be scrapped, and receivables may not pay
if they know the company is ceasing to trade.
Additional liabilities may arise (redundancy costs for staff, the costs of
closing down facilities, etc.).
The auditor should X the audit opinion if the directors have not made
adequate disclosure of any material uncertainty related to going concern or if
the directors have not prepared the financial statements on the appropriate
basis
modify
The auditor should issue an X opinion with additional communication if
the directors have appropriately disclosed going concern uncertainties or
prepared the financial statements on the break-up basis
unmodified
Before forming an opinion on the financial statements and deciding on the
wording of the auditor’s report, the auditor should conduct an
overall review
The auditor should perform the following procedures:
1 Review the financial statements to ensure:
– compliance with accounting standards and local legislation disclosure
requirements. This is sometimes performed using a disclosure
checklist.
– accounting policies are sufficiently disclosed and to ensure that they
are in accordance with the accounting treatment adopted in the
financial statements.
– they adequately reflect the information and explanations previously
obtained and conclusions reached during the course of the audit.
2 Perform analytical procedures to corroborate conclusions formed during
the audit and assist when forming an overall conclusion as to whether the
financial statements are consistent with the auditor’s understanding of the
entity. [ISA 520, 6]
3 Review the aggregate of the uncorrected misstatements to assess
whether a material misstatement arises. If so, discuss the potential
adjustment with management
The auditor must consider the effect of misstatements on both the
audit
procedures performed and ultimately, if uncorrected, on the financial statements
as a whole
If management has failed to correct all of the misstatements, the auditor should:
Reassess materiality to determine whether it is still appropriate in the
circumstances as the level of risk may be deemed higher as a result of
management’s refusal. [ISA 450, 10]
Determine whether the uncorrected misstatements, either individually or in
aggregate, are material to the financial statements as a whole, considering
both the size and nature of the misstatements and the effect of
misstatements related to prior periods (e.g. on corresponding figures,
comparatives and opening balances). If an individual misstatement is
considered material it cannot be offset by other misstatements.
[ISA 450, 11]
Communicate the uncorrected misstatements to those charged with
governance and explain the effect this will have on the audit opinion.
[ISA 450, 12]
Request a written representation from management and those charged
with governance that they believe the effects of uncorrected
misstatements are immaterial
The date of the written representation letter should be
the same as the date the
financial statements are authorised. It must be obtained and signed before the
auditor’s report is finalised
