Subsequent events, going concern and contingent liabilities

Question 1

What procedures may the auditor perform to check for contingent liabilities?

Answer 1

• Review minutes
• Review contracts and correspondence
• Review tax liability and correspondence
• Inspect other relevant documents
• Obtain a legal representation letter
• Obtain a management representation letter

Question 2

What procedures may the auditor follow to check for subsequent events?

Answer 2

• Review of procedures that management has established to ensure that subsequent events are identified
• Review of the minutes
• Review of interim financial statements
• Review of budgets, cash flow forecasts and other related management reports
• Inquiry of entity’s lawyers
• Inquiring of management

Question 3

What should the auditor do if management refuses to amend the financial statements when the auditor deems it necessary?

Answer 3

Issue a modified audit report

Question 4

What should the auditor do if conditions are identified that may cast significant doubt on the entity’s going concern status?

Answer 4

Have detailed communications with governance when they are separate from management.

Question 5

What are the reasons for an analytical review at the end of the audit?

Answer 5

• Corroborate conclusions formed during the audit on individual elements of financial information
• Conclude that the financial information is consistent with knowledge of the entity’s business
• Gain assurance that the company will remain a going concern for the relevant period

Question 6

What steps should the auditor take in evaluating the findings?

Answer 6

1. Make final assessment of materiality and audit risk
2. Undertake technical review of the financial statements
3. Undertake final review of the working papers
4. Formulate an opinion and draft auditor’s report.

Question 7

What are some audit matters which should be communicated with the entity?

Answer 7

• General approach and scope of audit
• Selection of accounting policies
• Potential effect of any significant risks and exposures
• Material uncertainties as to going concern assumption
• Disagreements with management
• Expected modifications to the audit report
• Any other matters agreed on in the terms of the audit engagement