Topic 11: Completion Flashcards
what are the components of a completion stage
Components of completion stage . 1) Subseuent event review 2) Going concern review 3) Mang representation obtained 4) Final analytical review 5) Review procedures 6) evaluation of misstatements . 7) Consideration of firms continued independence (Ethics) 8) Second partner reiew (Links to quality control procedures)
what is the definition of subsequent event
Subsequent events are transactions and events occuring between the accounting period end and the date the financial statements are authorised for issue.
IAS 10 determines when an event that occurs after the reporting date will result in the financial statements being adjusted, or where such events merely require disclosure within the financial statements
what is the definition of adjusting event
An event after the reporting period that provides
further evidence of conditions that existed at the end
of the reporting period.
give examples of adjusting event and what step you need to take after that event
✓ trade receivables become irrecoverable debts
✓ Inventory held at YE is sold lower than cost
✓ Estimate for a provision is revised
✓ Sales credit notes that relate to sales raised
before the period end
✓ Purchase invoices raised after the period end
but relate to the period end
✓ Legal issues
✓ including an event that indicates that the
going concern assumption in relation to the
whole or part of the enterprise is not
appropriate.
Change the figures in the disclosures / accounts
IAS 10 determines when an event that occurs after the reporting date will result in the financial statements being adjusted, or where such events merely require disclosure within the financial statements
what is the definition of adjusting event
An event after the reporting period that is indicative
of a condition that arose after the end of the
reporting period.
give examples of NON- adjusting event and what step you need to take after that event
✓ Take over ✓ Legal issues ✓ Major restructuring ✓ Fire causing disruption to manufacturing or trade
Give examples of audit procedures for subsequent events
✓ Enquire and discuss with the management or relevant parties involved
✓ Review minutes of meeting for the events
✓ Review budget cash flows and forecasts
✓ Obtain a letter of written representation from management confirming that the event has been dealt with appropriately
✓ Obtain information from press releases
✓ Review working papers – if any
✓ Review after date transactions, for example cash payments, cash receipts, sales invoices, and purchase
invoices.
with regards to subsequent events, what is active duty and what period does this cover
Period between the year-end date and the date the auditor’s report is signed
The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements have been identified.
The auditor is not, however, expected to perform additional audit procedures on matters to which previously applied audit procedures have provided satisfactory conclusions.
with regards to subsequent events, what is passive duty and what period does this cover
Period between the date the auditor’s report is signed and the date the financial statements are issued
The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report.
However, if a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused him to amend the auditor’s report, the auditor shall: discuss the matter with management, determine whether the financial statements need amending and, if so, inquire how management intends to address the matter in the financial statements.
If management amends the financial statements, the auditor shall carry out the necessary audit procedures, extend the subsequent events testing to the date of the new auditor’s report, and provide a new auditor’s report on the amended financial statements.
.Period between the year-end date and the date the auditor’s report is signed
.
✓ Discuss with the management, and ask them to update the financial statements
✓ If the directors revise the financial statements then the auditors would give an unmodified report
(True and fair view)
✓ If the directors refuse to revise the financial statements then the auditors will give a modified report.
Period between the date the auditor’s report is signed and the date the financial statements are issued
.
✓ Discuss with the management, and ask them to update the financial statements
✓ If the directors revise and redraft the financial statements then the auditors would give a revised audit opinion of an unmodified report
(True and fair view)
✓ If the directors refuse to revise and redraft the financial statements have to seek legal advice, attend the AGM to inform the shareholders of the situation, or resign.
.Period between the date the auditor’s report is issued and the date the financial statements are sent to
members
.
✓ Discuss with the management, and ask them to update the financial statements
✓ The directors will have to recall the financial statements
✓ If the directors revise the financial statements then the auditors would give a revised audit opinion of an unmodified report (True and fair view)
✓ If the directors refuse to recall, revise and redraft the financial statements have to seek legal advice,
attend the AGM to inform the shareholders of the situation, or resign.
what is going concern
The going concern assumption means that management believes the company will continue in business for the foreseeable future.
Foreseeable future is not defined in ISA 570 Going Concern. However under IAS 1 Presentation of Financial Statements, this period is a minimum of 12 months after the year end.
what are the responsibilities of directors with regards to going concern
The directors will assess whether the company can continue to trade for the foreseeable future . They will prepare forecasts to help with this assessment . The directors must consider a period of twelve months from the reporting date .
make an assessment of whether the going concern presumption is appropriate, or not, when they are preparing the financial statements
Management will have to make judgments on various uncertain future outcomes of events or conditions
Explicit management assessment specify the period for which management is required to take into account all available information.
To include such disclosures in financial statements (FS) as are necessary for true and fair (T&F) view. The directors must make disclosure of going concern uncertainties in the financial statements .
what are the responsibilities of auditors with regards to going concern
Evaluate mang’s assesement of going concern and consider the appropriateness of this assumption (& if they agree) and whether there are adequate disclosures regarding uncertainties about the entity’s ability to continue as a going concern
To make enquiries of directors and examine information
To plan and perform audit procedures to identify matters
To determine and document his concerns
To consider disclosure required to give true and fair (T&F) view – issue of appropriate opinion
to report to those charged with gov on any issues that may cast doubt on going concern
what are some indicators of going concern?
✓ Loss of key management or staff (e.g. director)
–> Loss of a key director will impact on the company’s sales, without an experienced staff to generate new sales the company will face significantly reduced sales and cash flows.)
✓ Loss of key supplier or customer
–>A major customer of has ceased trading owing a material balance. This will result in a significant loss of future revenues and profit, and unless this customer can be replaced then there will be a reduction of future cash flows.
✓ necessary borrowing facilities not agreed / Indication of withdrawal of financial support from bank or other financial institutions
✓ significant liquidity problems (negative cash flow)
–> If the company continues to have cash outflows then it will increase its overdraft further and will start to run out of available cash
✓ substantial operating losses
✓ inability to pay debts (tax payments) as they’re due
✓ late payment to suppliers
–> may refuse to continue supplying or impose cash on delivery which can disrupt services / sales to customers
✓ threats of legal action
–>If this occurs then the company will have legal costs on top of the amounts owed already and this will further increase the pressure on cash flows. In addition, other stakeholders may hear about the legal action and, as a result, stop dealing with the company
✓ inability to pay dividends to SH
✓ Indications of withdrawal of financial support from the bank or other financial institutions e.g. large overdraft or large bank loan to be repaid upcoming and no cash at hand
what are some audit procedures with regards to going concern?
✓ Review cash forecast and post year mang accounts to analyse trends in performance
✓ review correspondence with major customers for evidence of disputes
✓ Inspect correspondence from the bank to assess likelihood of obtaining further finance
✓ Inspect corrorpondence from lawyers regarding outcome of legal cases which could impact going concern
✓ inspect board min for mang’s plan to address going concern issues
✓ obtain written representation from mang that they believe the company is a going concern
▪ Obtain the company’s cash flow forecast and review the cash in and out flows. Assess the assumptions for reasonableness and discuss the findings with management to understand if the company will have sufficient cash flows. (assess the reasonableness of those assumptions. are they realistic or exaggerated in line with the expectation we have of this business?
▪ Discuss with the finance director whether the sales director has yet been replaced and whether any new customers have been obtained to replace the one lost.
▪ review loan agreements and recalculate the covenant which has been breached. Confirm the timing and mount of the loan repayment
▪ Review the company’s post year-end sales and order book to assess if the levels of trade are likely to increase and if the revenue figures in the cash flow forecast are reasonable.
▪ Review any agreements with the bank to determine whether any other covenants have been breached, especially in relation to the overdraft.
▪ Review any correspondence with shareholders to assess whether any of these are likely to increase their equity investment in the company.
▪ Review post year-end correspondence with suppliers to identify if any others have threatened legal action or refused to supply goods
▪ Perform audit tests in relation to subsequent events to identify any items that might indicate or mitigate the risk of going concern not being appropriate.
▪ Review the post year-end board minutes to identify any other issues that might indicate further financial difficulties for the company
▪ Review post year-end manag accounts to assess if in line with cash flow forecast.
if a business is expected to cease trading, under what basis are the accounts prepared
under the break up basis where the assets are all put together and uses FV/MV
what is the break up basis and
when does break up basis occur
under the break up basis where the assets are all put together and uses FV/MV
It occurs when:
- business goes into liquidation
- a company ceases to trade
what is a written representation
WR are documentary EVIDENCE obtained directly by the auditor WR are representations made by mang to the auditor during the course of the audit, either unsolicited or in response to specific enquiries
however the vidence is not independent. So the auditor uses prof judgement to assess the value of such representation and consider mang’s competence to make the representations and mang’s integrity
what is the purpose of mang representation letter
ISA 580 requires that auditors should obtain written rep from mang on matters material to the FS when other sucfficient appropriate audit evidence cannot reasonably be expected to exist
The auditor needs to obtain written representations from management and, where appropriate, those charged with governance that they believe they have fulfilled their responsibility.
Written representations are needed to support other audit evidence relevant to the financial statements or specific assertions in the financial statements, if determined necessary by the auditor or required by other International Standards on Auditing.
This may be necessary for judgmental areas where the auditor has to rely on management explanations.
mang representations are in the form of what
Written representations are normally in the form of a letter, written by the company’s management and
addressed to the auditor. T
who prepares the mang rep letter and when is this signed
as part of the completion process the auditor’s will write to the clients mang stateting the issues about which they are seeking representations
During the final review stage, the auditors will produce a draft representation letter.
The directors will review this and then produce it on their letterhead. It will be signed by the directors and dated as at the date the audit report is signed, but not after.
Whoe signs the mang letter
The letter is usually requested from management but can also be requested from the chief operating officer or chief financial officer.
Throughout the fieldwork, the audit team will note any areas where representations may be required.
what are the contents of a mang rep letter
To obtain representations that management and those charged with governance, have fulfilled their
responsibility for the preparation of the financial statements, including:
✓ Preparing the financial statements in accordance with an applicable financial reporting framework
✓ Providing the auditor with all relevant information and access to records
✓ Recording all transactions and reflecting them in the financial statements
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.what are the 3 categories of matters that could be included in a written representation
1) general matters
2) Specific matters
3) Matters required by ISA
the 3 categories of matters that could be included in a written representation
1) general matters
2) Specific matters
3) Matters required by ISA
Give examples of general matters
Confirmation from management that they have fulfilled their responsibilities in relation to:
- Preparing the financial statements in accordance with an applicable financial reporting framework
- Providing the auditor with all relevant information and access to records
- Recording all transactions and reflecting them in the financial statements
. the 3 categories of matters that could be included in a written representation
1) general matters
2) Specific matters
3) Matters required by ISA
Give examples of Specific matters
Specific matters required by ISAS
That management believe the assumptions used for areas of judgement are reasonable
That provisions and liabilities are complete
That a particular product line is going to continue
Plans or intentions that may affect asset values
.. the 3 categories of matters that could be included in a written representation
1) general matters
2) Specific matters
3) Matters required by ISA
Give examples of Matters required by ISA
All known and suspected frauds have communicated to the auditor (ISA 240)
All instances of non-compliance with laws and regulations have been communicated to the auditor (ISA 250)
Management believe the effects of uncorrected misstatements are immaterial (ISA 450)
All subsequent events have been communicated to the auditor (ISA 560)
All going concern issues have been communicated to the auditor (ISA 570)
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if the directors have prepared the statement on a GC basis but the period assessed is less than 12m
and the auditor wants to extend the period assessed and the directors refuse
what is the impact on the audit opinion
except for/disclaimer
The directors must consider a period of twelve months from which date .
The directors must consider a period of twelve months from the reporting date .
what will directors prepare to assist with assessing the likelihood of trading for the foreseeable future
prepare a cash flow forecast to assess whether the company is likely to be able to trade for the foreseeable future
if a company has uncertainty to GC and they adequately disclose the gc uncertainties
what opinion do you issue
Unmodified opinion with going concern paragraph
if a company has uncertainty to GC and they do not adequately disclose the gc uncertainties
what opinion do you issue
Modified opinion because the FS will be materially misstated which requires a modified opinion
ISA580 Written Representations Appendix1 identifies other auditing standards that require subject specific written representations.
identify the 3 areas
ISA240 The Auditor’s Responsibilities Relating to Fraud in an Audit of FS,
ISA250 Consideration of Laws and Regulations in an Audit of FinancialStatements
and ISA560 Subsequent Events.
Extracts for the auditor’s report have already been drafted as follows:
1 We conducted our audit in accordance with International Standards on Auditing applicable to this audit.
2 Our objectives are to obtain maximum assurance about whether the financial statements as a whole are free from material misstatements .
3 Misstatements can arise from deliberate manipulation by management or error.
WRITE THEM CORRECTLY
1 We conducted our audit in accordance with International Standards on Auditing .
2 Our objectives are to obtain REAONSABLE assurance about whether the financial statements as a whole are free from material misstatements .
3 Misstatements can arise from FRAUD OR ERROR.
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Components of completion stage . 1) Subseuent event review 2) Going concern review 3) Mang representation obtained 4) Final analytical review 5) Review procedures 6) evaluation of misstatements . 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 what 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.
Components of completion stage . 1) Subseuent event review 2) Going concern review 3) Mang representation obtained 4) Final analytical review 5) Review procedures 6) evaluation of misstatements . what is the purpose of review procedures and give examples of procedures
Review forms part of the engagement performance quality control procedures covered in the Planning chapter.
As part of the overall review, the auditor should assess whether:
Has the work has been performed in accordance with professional standards and regulatory and legal requirements ?
What significant matters have been raised for further consideration Have appropriate consultations taken place and the resulting conclusions been documented and implemented ?
Is there a need to revise the nature , timing and extent of the work performed? (The auditor should ensure that initial assessments made at the start of the audit are still valid in light of the information gathered during the audit and that the audit plan has been flexed to meet any new circumstances.)
Does the work performed support the conclusions reached ?
Is the work appropriately documented ?
Is the evidence obtained sufficient and appropriate to support the audtor’s report ?
Have the objectives of the engagement procedures have been achieved ? .
Is the quality of the audit work up to the standard
have the firm’s procedures been followed?
Components of completion stage . 1) Subseuent event review 2) Going concern review 3) Mang representation obtained 4) Final analytical review 5) Review procedures 6) evaluation of misstatements . what are some final analytical procedures
Ensure FS are consistent with FR framework
ensure FS are consistent with auditor’s knowledge of the business
Enable the auditor to form an overall conclusion
Components of completion stage . 1) Subseuent event review 2) Going concern review 3) Mang representation obtained 4) Final analytical review 5) Review procedures 6) evaluation of misstatements . what is included in evaluation of misstatements
The auditor must consider the effect of misstatements on the audit procedures performed and ultimately, if uncorrected, on the financial statements as a whole.
Guidance on how this is performed is given in ISA 450 Evaluation of Misstatements Identified During the Audit.
In order to achieve this the auditor must::
Accumulate a record of all identified errors on a working paper set up for the purpose .
Individually immaterial errors may , in aggregate , amount to a material difference .
Management should be requested to adjust all identified misstatements .
All uncorrected misstatements should be communicated on a timely basis (and request that all misstatements are corrected) to those charged with governance and a description of the implications for the audit report , if appropriate
If any material misstatements remain unadjusted the auditor will modify the audit opinion . .
