Topic 9 - Completion

Question 1

Subsequent Events Review

Answer 1

o Adjusting event – an event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period.
E.g. bad debts, 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, inventory sold lower than cost, event that indicates going concern assumption.

o Non-adjusting event – an event after the reporting period that is indicative of a condition that arose after the end of the reporting period.
E.g. a take over, legal issues, reconstructing, fires.

Question 2

Audit procedures for Subsequent Events:

Answer 2

o Enquire and discuss with management or relevant parties involved.
o Review board minutes of meeting for the events.
o Review budget cash flows and forecasts.
o Obtain a letter of representation confirming that the event has been dealt with appropriately.
o Obtain information from the press releases.
o Review working papers.
o Review after-date transactions. E.g. cash payments, cash receipts, sales invoices and purchase invoices.

Question 3

Active and Passive dut

Answer 3

Year End = Active Duty - Perform procedures to ensure subsequent events have been accounted for appropriately.

Auditors Report Signed = Passive Duty - No obligation to perform procedures but must take action if they become aware of events which would cause a modified opinion.

Question 4

Is the Item Material??

Answer 4

Yes:

Update to be True and Fair

Period between YE and Signed Report
- Discuss with management
- Updated = Unmodified report
- Not updated = Modified report
Period between Signed report and Issued
- Discuss with management
- Redraft FS/possible recall if issued
- Updated = Unmodified report
- Not updated = Modified report

Question 5

Going Concern

Answer 5

Assumption that management believes that the business will continue for the foreseeable future. Not defined by ISA 570 but IAS 1 Presentation of FS = Minimum of 12months after year end.

Indicators:
o A major customer of the company has ceased trading owing a material balance.
o A major supplier to the company has ceased trading.
o Key staff leaving the company and yet to be replaced.
o Negative monthly cash flows.
o Late payment to suppliers.
o Threats of legal action.
o Inability to pay dividends to shareholders.
o Major losses or cash flow difficulties that have arisen since the reporting date.
o Indications of withdrawal of financial support from the bank or other financial institutions.

Question 6

Not a Going Concern..

Answer 6

If the business is expected to cease trading, accounts will be prepared on a break up basis
- Disclose why
- Assets recorded at sale value
- Inventory written down
- Additional liabilities may arrise
- All assets and liabilities are moved to current.

Question 7

Going Concern Procedures

Answer 7

o Obtain the company’s cash flow forecast and review.
o Discuss with the Finnace Director whether the Sales Director has been replaced and whether any new customers have been obtained.
o Review the company’s post year-end sales to assess if the levels are likely to increase.
o Review the loan agreement and recalculate the covenant which has been breached. Confirming the timing and amount of the loan repayment.
o Review any correspondence with shareholders and identify if any are likely to increase their equity.
o Review post year-end correspondence with suppliers to identify if any threats of legal action.
o Review post year-end board minutes to identify any issues being discussed.
o Obtain a written representation confirming the director’s view that the business is a going concern.

Question 8

Written Representations

Answer 8

A written statement by management provided to the auditors to confirm certain matters or to support other audit evidence

Auditors need to obtain for those charged with governance that they believe they have fulfilled their responsibility, judgement areas, confirm internal control deficiencies. Includes:
- Preperation of FS in accordance with Framework.
- Provide auditor with all relevant information
- Record all transactions in the FS.

• Written representations must be as near as possible but not after the date of the auditors report

Question 9

Treatment of misstatements

Answer 9

• Auditor to consider uncorrected misstatements are material.
• Communicated to those charged with governance.
• If refused, consider impact on audit report.
• Written representation to confirm unadjusted misstatements are immaterial.