week 3 - Audit 2

Question 1

What are post-balance sheet events?

Answer 1

Events occurring between the balance sheet date and when financial statements are issued.

Question 2

What are the two types of subsequent events?

Answer 2

1. Adjusting events – Provide evidence of conditions that existed at the balance sheet date (e.g., bad debts).
2. Non-adjusting events – Indicate conditions arising after the balance sheet date (e.g., natural disasters).

Question 3

What audit work is done in the post-balance sheet period?

Answer 3

Reviewing receivables, inventory valuation, legal liabilities, management discussions, and external confirmations.

Question 4

What is the purpose of an audit report?

Answer 4

The audit report communicates the auditor’s opinion on whether the financial statements give a true and fair view.

Question 5

What are the four categories of audit reports?

Answer 5

1. Unmodified (clean) opinion – No material misstatements.
2. Unqualified with an Emphasis of Matter (EOM) paragraph – A key issue is highlighted without modifying the opinion.
3. Qualified opinion (except for) – A material issue is present but does not overshadow the whole financial statement.
4. Adverse opinion or Disclaimer – A significant misstatement or scope limitation prevents forming an opinion.

Question 6

What are Key Audit Matters (KAMs)?

Answer 6

KAMs are issues of most significance in the audit, such as areas of high risk, significant estimates, or major transactions.

Question 7

Give examples of common KAMs in UK audits.

Answer 7

• Going concern assessment
• Revenue recognition and fraud risks
• Management override of controls
• New accounting standards
• Valuation of financial instruments
• Impairment of goodwill and assets

Question 8

What does ‘going concern’ mean?

Answer 8

It assumes a company will continue operating for the foreseeable future.

Question 9

Who is responsible for assessing going concern?

Answer 9

The directors assess going concern, while auditors review and form an opinion on the assumption’s validity.

Question 10

What factors indicate going concern issues?

Answer 10

• Negative cash flows
• High debt levels
• Delayed creditor payments
• Loss of key customers
• Market or regulatory changes
• Legal disputes affecting viability