Completion Of The Audit

Question 1

List the detail audit procedure to be performed with regard to the future cash flow forecast

Answer 1

1) consider reliability of the company’s system to generate information
2) discuss the assumptions on which the forecast is based on with management and determine whether adequate support exists for the assumptions
3) compare forecast with actual information and determine assumptions are being upheld
4) review budgets to ascertain if sales forecast can be maintained
5) correlate assumptions which are dependent with additional finance with the entity’s ability to finance them
6) review reasonableness of figures in relation to prevailing conditions
7) assess areas of vulnerability and sensitivity of forecast to change in assumptions
8) request from legal advisers, information about any significant outstanding legal matters
9) ensure all items, particularly those relating to expenditure have been include in the cash flow
10) re-perform the arithmetic calculations
11) decide whether the cash forecast can be relied upon and incorporate key features in management representation letter covering all items in the forecast
12) if forecast indicate shortfall, establish that arrangements have been made to overcome this

Question 2

List the financial indicators that could indicate going concern problems as per ISA 570

Answer 2

Net liability position
Borrowing mature with no renewal
Withdraw of supplier support
Negative cash flows
Adverse key financial ratios
Operating losses
Arrears/discontinued dividends
Inability to pay creditors at due date
Change form credit to cash on supplier request
Inability to obtain financing for new projects

Question 3

Audit procedure to assess ability to continue as a going concern

Answer 3

1) obtain a cash flow forecast for the new financial year
2) examine sales trends in the new year to determine whether sales are improving
3) evaluate the validity of the assumptions under which forecast have been prepared
4) consider whether previous forecast has been reliable
5) consider the correlation between the forecasts for the new year and actual performance to date
6) check the arithmetical accuracy of the cash flow forecast
7) inspect short term contracts
8) consider danger of cancellation of contracts
9) review product costing to ensure that products are sold at profit sufficient to recoup development costs
10) discuss with management, client banker and key suppliers to form an opinion as to whether the company is likely to enjoy ongoing support from them
11) discuss with bankers and review underwriting agreements the likelihood of company raising additional funds
12) review employment files of new executives to establish whether they are likely to achieve high performance

Question 4

Actions that can be taken by management to improve financial position

Answer 4

1) revalue land and building
2) negotiate with bank for an alternative long term loan with a reduce interest rate
3) decrease use of overdraft facility as this is the most expensive form of finance
4) negotiate With payables for extended credit terms as this is the cheapest form of finance
5) decrease debtors payment term
6) . Delay capital expenditure
7) evaluate running expenses and identify areas where these can be reduced

Question 5

Element of audit report

Answer 5

Title
Addressee
Introductory paragraph
Managment's responsibili for the financial statements
Auditor's responsibility
Auditor's opinion
Report on other legal and regualtory requirements
Auditor's signature
Date of the audit report 
Auditor's address

Question 6

What should be included in the title of audit report

Answer 6

The term “independent auditor”

Question 7

What is included in the addressee?

Answer 7

The report should have a heading of “report on financial statements” and it should be addressed to those who the financial statements were prepared for

Question 8

What should be included in the introductory paragraph?

Answer 8

The introductory paragraph should identify the company whose financial statements have been audited and state that the financial statements have been audited. It should also identify the title of each of the financial statement components that comprise the complete set of financial statements. It should refer to the summary if significant accounting policies and other explanatory information. It should also specify the date and period covered by the financial statements

Question 9

What is the management’s responsibility for the financial statements

Answer 9

Management’s responsibility should be described under a section with the heading “Management’s responsibility for the financial statements”
This section should describe Management’s responsibility for the preparation and their presentation of the financial statements in accordance with the applicable financial reporting framework and that this responsibility includes:
- the preparation and presentation of financial statement in accordance with the applicable financial reporting framework
- maintaining such internal controls as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Question 10

What is included in the auditor’s responsibility section

Answer 10

The auditor’s responsibility should be described under a section with the heading”auditor’s responsibility”
This should state that the responsibility of the auditor is to express an opinion on the financial statements based on the audit. It should state that the audit was conducted in accordance with International Standards of Auditing and explain that those standards require the auditor to comply with ethical requirements, and to plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatements.

Question 11

Why is the completion of the audit procedure performed?

Answer 11

1. To ensure sufficient and appropriate audit evidence was obtained to justify the opinion on the statements and to limit the audit risk
2. To form an opinion on the fair presentation of the financial statements
3. Be able to issue an audit report

Question 12

What is the framework for the completion of the audit?

Answer 12

1. Sufficiently and appropriateness of audit evidence
2. Evaluation of misstatements
3. Overall review of the financial information
4. Consider whether the liabilities exceed the assets (going concern)
5. Post balance sheet events
6. Concluding and reporting
7. Post audit review

Question 13

Discuss the sufficiency and appropriateness of audit evidence.

Answer 13

Sufficient is affected by the risk and quality of evidence, higher the risk, more evidence is required; the higher the quality of evidence, the less may be required.
Appropriateness is affected by relevance and reliability of source and nature.

Question 14

Discuss the evaluation of misstatement.

Answer 14

1. Determine the final materiality
2. Consider the nature of misstatement
3. State of provisions and contingencies/contingent liabilities
4. Consider the materiality of audit differences and the effect thereof on the financial statements and audit report
5. Search for information that could affect the fair presentation of the financial statements

Question 15

What is involved in the overall review of the financial information?

Answer 15

1. Draft financial statements (casting, cross reference to the working paper)
2. Final analytical procedures (reasonableness test)
3. Consider in respect of the fair presentation of financial statements

Question 16

What is involved in post audit review?

Answer 16

1. Staff evaluation
2. Appropriateness of re-engagement
3. Aspects of importance in respect of future audits
4. Invoicing

Question 17

List the procedures to perform in completion of the audit.

Answer 17

1. Adequacy of the audit evidence
2. Evaluation of misstatements identified during the audit
3. Consider the nature of misstatement
4. Consider the state of provisions and contingent liabilities
5. Materiality of misstatements and the effect thereof on the financial statements and audit opinion
6. Search information that could affect the fair presentation if the financial statements

Question 18

In the adequacy of the audit evidence, what should the audit evidence be?

Answer 18

1. Sufficient = to reduce the risk to acceptable level and to justify the opinion on the fair presentation of the statements
2. Appropriate = reliable and relevant (consider nature and source)

Question 19

In adequacy of audit evidence, what should be the considerations on documentation/working paper?

Answer 19

1. Contain sufficient information of the work performed and audit evidence obtained
2. Properly cross referenced to the working paper, trial balance and financial statements
3. Adequately reviewed by senior staff members and audit partner

Question 20

What should also be obtained as standard confirmation in ensuring the adequacy of the audit evidence?

Answer 20

1. An attorney’s letter

2. Management representation letter

Question 21

How does misstatements arise?

Answer 21

1. Differences (identified) - amounts, accounting treatments, disclosure.
2. Uncertainties - inherent uncertainties about amounts, scope limitations.

Question 22

In assessing the material misstatements and the effect thereof on the financial statements and audit opinion, the auditor should compile a schedule of misstatements, what is a schedule of misstatements?

Answer 22

The auditor lists all misstatements found during the audit in the list of misstatements for consideration of their effect on the financial statements, separately or jointly

Question 23

What procedures should an auditor perform to identify I recorded liabilities?

Answer 23

1. Inspect/read through minutes of meeting of shareholders, BoD and management for the period covered during the audit and thereafter
2. Enquiry from internal and external legal advisors
3. Enquiry for management and obtain a management representation letter on:
   - the existence of legal actions and pending litigation
   - guarantee provided
   - insurance cover
4. Read through correspondence file of
   - SARS
   - supplier and clients
   - banker, etc
5. Work through contacts and material agreements
6. Work through accounting records for entries that could indicate unrecorded or undisclosed transactions.

Question 24

What procedures should an auditor perform to search for related party transactions?

Answer 24

1. Review prior years’ working paper for names of related parties
2. Review the entity’s procedures for identification of related parties
3. Enquire as to the affliction of directors and officers with other entities
4. Review share register or records for names of major shareholders
5. Review minutes of board and shareholders meetings
6. Review statutory registers
7. Enquire of other auditors about their knowledge of related parties
8. Review tax and other statutory returns
9. Review the accounting records for abnormal transactions
10. Review confirmation letters for indication of related party transactions
11. Investigate investment transactions
12. Consider the adequacy of internal control procedures over the authorization and recording of related party transactions
13. Review information provided by management regarding related party transactions and be alert for other similar transactions
14. Obtain a management representation letter in respect of related party transactions.

Question 25

What should an auditor do to get an overall review of the financial statements to determine of it is fairly stated?

Answer 25

1. Obtain the draft financial statement and test castings and calculations, and cross reference to trial balance and working papers
2. Perform final analytical procedures based in the draft financial statements to test reasonableness.

Question 26

List the factors to consider when considering the fair presentation of financial statements.

Answer 26

1. Compliance with fundamental accounting principles
   - matching, prudence, consistency, going concern
2. The accounting policies applied
   - compliance with IFRS, applicability and consistency of application
3. Financial position and results of operation
   - agree evidence to working paper and to knowledge of business
4. Fairness of presentation and disclosure
   - in accordance with IFRS, correctly classified and disclosed
   - statutory compliance

Question 27

What does concluding and reporting entails?

Answer 27

1. Formulating an opinion on the financial statements
2. Performing a quality control review to determine if the firms policies have been adhered to
3. Consider the reasonableness of other information in documents which contained audited statements
4. Comparing the final financial statements with the draft audited statements
5. Reporting to shareholders and management.

Question 28

Discuss the going concern concept.

Answer 28

The concept accepts that the entity will continue in operational existence for the foreseeable future. This means in particular that the income statements and balance sheet are prepared on the assumption that no intention of necessity exists to liquidate or curtail significantly the scale of operations.

Question 29

List the financial indicators that may cause concern as the entity’s ability to continue as a gong concern.

Answer 29

1. Net current asset/liability position
2. Substantial fixed term borrowings approaching maturity without realistic prospects of renewal or repayments or excessive reliance on short term borrowings to finance long term assets
3. Adverse key financial ratios
4. Indication of withdrawal of financial support
5. Negative cash flows
6. Substantial losses
7. Arrear or discontinuance of dividends
8. Inability to pay creditors on due dates or difficulty in complying with loan agreements
9. Change from credit to cash on delivery transactions at the request of suppliers
10. Inability to obtain financing for necessary new product development or other necessary investments

Question 30

List the operating indicators for risk of going concern.

Answer 30

1. Loss of key management without replacement
2. Loss of major markets, franchises or license
3. Loss of major suppliers or shortage of suppliers
4. Labour difficulties

Question 31

What are other indicators for risk of gong concern?

Answer 31

1. Pending legal proceedings against the entity that may, if successful, result in judgements that could not be met
2. Non-compliance with statutory requirements or regulations
3. A decision by management to discontinue the whole or a substantial part of the business
4. Changes in legislation that may adversely affect the entity

Question 32

What are the procedures to be performed to assess the applicability of the going concern?

Answer 32

1. Discuss with management future plans
2. Consider information obtained from outside sources in respect of the going concern
3. Obtain a management representation letter in respect of the going concern
4. Analyses and discuss cash flow, profit and other projections with management
5. Analyses and discuss the entity’s latest available financial statements
6. Review the terms of debentures and loan agreements and determine if they have been breached

Question 33

What are the actions to be taken when the auditor becomes aware of facts that may materially affect the financial statements?

Answer 33

1. Consider whether the financial statements should be adjusted
2. Discuss the matter with management
3. If management change the statement:
   - perform audit procedures on the revised statements
   - issue a new audit report
4. If management refuses to change the statements, and the auditor deems it necessary:
   - if the auditors report has not yet been issued = qualified
   - if the report has been issued to the entity, inform management not to make the auditors report available to third parties