Concluding on evidence Flashcards
Financial statements review
The auditors must perform a final review of the financial statements at the end of the audit. They look at two things:
Do the financial statements comply with laws and regulations?
Do the financial statements make sense?
Going concern
ISA 570 explains the auditors’ responsibilities regarding going concern and says that auditors must obtain sufficient appropriate evidence on:
- Whether material uncertainty relating to going concern exists; and
- Whether it was appropriate for management to use the going concern basis for preparation of the accounts.
If a company is a going concern it is believed to be able to continue to operate for the foreseeable future (12 months from date of accounts) and pay its’ debts as they fall due
How do auditors decide if a company is a going concern? They look for indicators that suggest a material uncertainty exists
Indicators of problems
Financial indicators
Consider the impact on going concern of:
• Net current liability position
• Necessary borrowing facilities not yet agreed
• Major debt repayments fall due which will require external financing
• Financial rations
• Inability to comply with loan agreements
• Major re-structuring of debt
Operational indicators
Consider the impact on going concern of:
• Loss of key management and staff without replacement
• Loss of major market, franchise, customer, supplier or licence
• Labour difficulties or shortages or important supplies
• Technical developments rendering a key product obsolete
Other indicators
Consider the impact on going concern of:
• Non-compliance by the entity with statutory requirements
• Pending legal claims against the entity which may result in claims that cannot be met
How do we audit going concern?
Evaluate management assumptions in arriving at their decision regarding GC
Understand the clients GC risk assessment process
Consider any outside events that may cast doubt on managements GC evaluation
Examine cash flows forecasts, loan agreements, solicitor letters re pending
lawsuits
Document findings
Remain professionally skeptical
Reporting overview
Client management - management letter, general audit issues
Shareholders - statutory audit report
Management letter
The auditors need to inform client management of key findings during the audit.
These findings will include:
• Any weaknesses in the control systems which may give rise to misstatements
• Comments on the internal control systems
• Areas which may give rise to future audit issues
• Recommendations for improvements
The audit report
The Auditors present their report to the shareholders at the Annual General Meeting (AGM) for approval by the members.
Audit opinion
The audit opinion is one section within the audit report. The auditors are required to report on whether in their opinion:
• the financial statements show a true and fair view
• the accounts are prepared in line with the Companies Act 2006
If the auditors believe the financial statements are true and fair and in line with the Companies Act 2006 then the audit opinion is said to be an unmodified opinion. If there is a material issue in the financial statements then the audit opinion will be modified (the wording will be altered).
Modified audit opinion
2 problems
Disagreement - financial materials misstated - something is wrong in the statements
Limitation on scope - auditors unable to obtain necessary evidence - unable to form an opinion on an area
The auditors are not able to change the financial statements if they believe something is materially mistated. Responsibility for preparation of the financial statemens lies with the directors. If the directors refuse to adjust an error then the financial statements remain misstated.
Types od modification to the audit opinion
There are three different modified opinions:
1. Qualified “except for” opinion – The financial statements are true and fair except for one area where there is a material issue.
- Adverse opinion – The financial statements do not show a true and fair view
- Disclaimer of opinion - The financial statements do not show a true and fair view
The type of modification to the opinion depends on the size of the problem outlined above as well as the nature of the problem.
The problem will be material but NOT pervasive where is affects only one particular part of the financial statements and it is a one off issue. This size of problem doesn’t stop the financial statements from still being true and fair overall.
The problem will be material AND pervasive if the issue is so material (significant) and fundamental that it affects the overall truth and fairness of the financial statements. Often the problem will affect numerous balance and possibly the going concern status of the company.
