KA T H E A R N
A C C A F 8
C H A P T E R 1 8
Audit
review
and
Learning
objectives
By the end of this lecture you should be able to:
Explain the purpose of, auditor's responsibilities
regarding, and procedures involved in a
subsequent events review.
Explain the responsibilities of auditors and
management regarding going concern, and the
procedures to be applied in performing going
concern reviews.
Discuss the purpose of, quality of and procedure for
obtaining
written representations.
Explain the auditor's responsibilities in relation to
opening balances and comparative information.
Understand the appropriate actions in respect of
misstatements.
Explain the significance of uncorrected
misstatements, and describe auditor's procedures
Audit
completion
and
finalisation
After the auditor has completed their
substantive testing there are still many
procedures that need to be performed
before they can sign the audit report.
These include:
the consideration of opening balances and
comparatives
a subsequent events review
a going concern review
obtaining written representations
consideration of misstatements
Auditing
opening
balances
and
comparative
Auditing
opening
balances
ISA 510 Initial Engagements – Opening
Balances requires that when auditors take
on a new client, they must ensure that:
opening balances do not contain
material misstatements
prior period closing balances have been
correctly brought forward or, where
appropriate, restated
appropriate accounting policies have
been consistently applied, or changes
Auditing
opening
balances
(continued)
There
are
several
considerations
to
be
made:
Were
the
previous
financial
statements
audited?
If
the
previous
financial
statements
were
audited,
was
the
opinion
modified?
If
the
previous
opinion
was
modified,
has
the
matter
been
resolved
since
then?
Were
any
adjustments
made
as
a
result
of
the
audit?
If
so,
has
the
client
adjusted
their
accounting
ledgers
as
Auditing
opening
balances
(continued)
Where the prior period was audited by another
auditor or unaudited, the auditors will need to
perform additional work in order to satisfy
themselves regarding the opening position. Such
work would include:
Consulting the client’s management.
Reviewing records and accounting and control
procedures in the preceding period.
Consulting with the previous auditor and reviewing (with
their permission) their working papers and relevant representation letters.
Substantive testing of any opening balances where
the above procedures are unsatisfactory.
Some evidence of the opening position will also
usually be gained from the audit work
Auditing
comparative
data
ISA 710 Comparative Information –
Corresponding Figures and Comparative Financial Statements requires that
comparative figures comply with the
identified financial reporting framework and
that they are free from material
misstatement.
IAS 1 Presentation of financial statements
requires that financial statements show
Auditing
comparative
data
(continued)
Two categories of comparatives exist:
corresponding figures where preceding
period figures are included as an integral part
of the current period financial statements; and
comparative financial statements where
preceding period amounts are included for
Auditing
comparative
data
(continued)
Audit procedures in respect of corresponding
figures should be significantly less than for the
current period and are limited to ensuring
that corresponding figures have been
correctly reported and appropriately
classified. This involves evaluating whether:
accounting
policies
are
consistently
applied;
and
corresponding
figures
agree
to
the
prior
Auditing
comparative
data
(continued)
Sufficient appropriate evidence should be
gathered to ensure that comparative financial
statements meet the requirements of an
applicable financial reporting framework. This
involves evaluating whether:
accounting
policies
are
consistently
applied;
and
comparative
figures
agree
to
the
prior
Reminder: Financial reporting
treatment of subsequent
events
An event after the reporting period can be
defined as a material event occurring
between the reporting date and the date on
which the financial statements are
approved.
Company’s year end (reporting date)
Financial statements approved and
published
Adjusting
and
non-adjusting
events
Events after the reporting date are
categorised as either being:
an adjusting event
a non-adjusting event
Adjusting events are incorporated into the
financial statements as if they existed at the
reported date
Non-adjusting events are not incorporated
into the financial statements, although they
Adjusting
events
An adjusting event is an event that brought to light
evidence of conditions that existed at the
reporting date.
Examples
The settlement after the reporting date of a court
case which confirms a year end obligation.
The receipt of information after the period end that
indicates that an asset was impaired at the period end.
The bankruptcy of a customer after the reporting date that
confirms that a year end debt is irrecoverable.
The sale of inventories after the period end at a price lower
than cost.
The determination after the reporting date of the cost of
assets purchased or proceeds from assets sold before the reporting date.
The discovery of fraud or errors showing that the
Non-adjusting
events
A non-adjusting event concerns conditions
that did not exist at the reporting date.
Examples
Announcing a plan to discontinue an operation. Major purchases of assets.
The destruction of assets after the reporting date
by fire or flood.
Entering into significant commitments or
contingent liabilities.
Commencing a court case arising out of events
Where
does
the
auditor
fit
in?
The auditor’s work isn’t done once the
audit is finished.
There will be a gap of time between the
auditor finishing the audit and the
financial statements being published and
issued to shareholders.
Subsequent events are events occurring
between the company’s reporting date and
the date of the auditor’s report, and facts that
become known to the auditor after the date of
The
auditor
and
subsequent
events
Reportin g date Audit report signed FSs issue d AG M Active duty Must obtain sufficient appropriate evidence that all subsequent events that require adjustment or disclosure have been identified. Passive dutyNo requirement to perform audit procedures. If fact
Auditing
subsequent
events
ISA 560 Subsequent Events details the
responsibilities of the auditors with respect
to subsequent events and suggests audit
procedures to perform
The nature of procedures performed in a
subsequent events review depends on many
variables, such as the nature of transactions
and events and the availability of data and
reports.
However, the following procedures are
Auditing
subsequent
events:
Procedures
Procedures
Enquiring of directors if they are aware of
any subsequent events that require
adjustment in the financial statements.
Enquiring into management's
procedures/systems for the identification of
subsequent events.
Inspection of minutes of members’ and
directors’ meetings.
Reviewing accounting records including
budgets, forecasts and interim
information.
Obtaining, from management, a letter of
representation that all subsequent events have
been considered in the preparation of the
Auditing subsequent events:
Procedures (continued)
Procedures (continued):
Inspection of correspondence with legal
advisors.
Enquiring of the progress with regards to
reported provisions and contingencies.
‘Normal’ post reporting period work
performed in order to verify year end
balances:
checking after date receipts from receivables
inspecting the cash book for payments/receipts that
were not accrued for at the yearend
Going
Reminder:
The
going
concern
concept
According to IAS1 financial statements
should be prepared on the basis that the
company is a going concern unless it is
inappropriate to do so.
Going concern is defined in IAS1 as the
assumption that the enterprise will continue
in operational existence for the foreseeable
future.
Generally the period is a minimum of twelve
months from the yearend; in some
jurisdictions (e.g. the United Kingdom) the
period is a minimum of twelve months from
the date the financial statements are
Problems
with
auditing
going
concern
Consideration of the ‘foreseeable future’
involves making a judgement about future
events, which are inherently uncertain.
Uncertainty increases with time and
judgements can only be made on the basis of
information available at any point –
subsequent events can overturn that
judgement.
There may be circumstances in which it is
appropriate to look further ahead. This
depends on the nature of the business and
Financial
reporting
treatment
Whether or not a company can be classed as
a going concern affects how its financial
statements are prepared.
Financial statements are prepared on the
basis that the reporting entity is a going
concern.
IAS1 states that an entity should prepare its
financial statements on a going concern basis,
unless
management intends to liquidate the entity or to cease
trading or
Financial
reporting
treatment
Where the assumption is made that the
company will cease trading, the financial
statements are prepared using the breakup
basis under which:
The basis of preparation and the reason
why the entity is not regarded as a going concern are disclosed
There are no long term assets or liabilities Assets are recorded at likely sale values Inventory and receivables are likely to
require more provisions
Additional liabilities may arise (severance
Financial
reporting
treatment
Where there is any significant doubt over
the future of a company, the directors
should include disclosures in the financial
statements explaining:
the nature of and circumstances surrounding the
doubts
the possible effect on the company
Where the directors have been unable to
assess going concern in the usual way (e.g. for
less than one year beyond the date on which
they sign the financial statements), this fact
should be disclosed.
Where the financial statements are
prepared on a basis other than the going
concern basis, the basis used should be
Responsibilities
of
directors
re
GC
It is the directors’ responsibility to assess the
company’s ability to continue as a going concern
when they are preparing the financial
statements.
If they are aware of any material uncertainties
which may affect this assessment, then IAS 1
requires them to disclose such uncertainties in the
financial statements.
When the directors are performing their
assessment they should take into account a
number of relevant factors such as:
current and expected profitability debt repayment
Responsibilities
of
auditor
re
GC
ISA 570 Going Concern states that the auditor
needs to consider the appropriateness of
management’s use of the going concern
assumption.
The auditors need to assess the risk that the
company may not be a going concern.
The auditor will also need to obtain
sufficient appropriate evidence that the
company is a going concern.
The auditor must conclude whether there
are any material uncertainties regarding
going concern.
Where there are material uncertainties, the
auditor must ensure that the directors have made
sufficient disclosure of such matters in the notes
Audit
procedures
to
test
GC
Assess the state of the industry in which the
client operates.
Compare results with any loan covenants
that exist.
Consult management about future intentions (and
obtain representations if required)
Review correspondence with major customers,
suppliers and banks for evidence of disputes.
Review post year end management accounts to
analyse trend in performance.
Consider whether directors have taken relevant
factors into consideration in their GC review.
Review cash flow forecasts produced by
management for evidence or expensed
Written
ISA
580
Written
Representations
A written representation is: a written
statement by management provided to the
auditor to confirm certain matters or to
support other audit evidence.
Auditors gather written
representations from management for:
General Matters
General
matters
For general matters
Required by ISA 580.
The written representation provides the
auditor with:
Confirmation fulfilled responsibility for preparation
of financial statements in accordance with Financial Reporting framework.
Confirmation that all relevant information has been
provided to auditor.
Confirmation that all transactions have been
Other
matters
For other matters, the written
representation provides the auditor
with:
Confirmation that appropriate a/c policies
have been selected.
Confirmation of adherence to reporting
framework on specific matters e.g. assets pledged as collateral.
Confirmation that any internal control
Reliability
of
written
representations
Representations from management are a source
of audit evidence.
They cannot be used instead of other (better)
evidence which the assurance
providers expect to exist.
But, may be the only available form of evidence in
certain circumstances.
Relatively unreliable as evidence (client
generated).
Corroborative evidence will always be sought, but
may not always be available.
If a representation appears to be contradicted by
other evidence: the circumstances should be
investigated, and the reliability of other
representations made by management should be
If management won’t provide a
written representation
If management outright refuse to produce a
written representation or
They do not provide representation on one
or more areas requested by the auditor
The auditor should discuss the matters with
management.
Re-consider the integrity of the company
management – this may have an impact on the reliability of other audit evidence given.
The auditor may consider the impact on the auditor
report (more detail next lecture).
If the representation is inconsistent with other
evidence obtained or if management refuse to sign the written representation. The auditor should
What
are
misstatements?
A misstatement is a difference between the
client’s treatment of an item within the FSs
and what the auditor believes the correct
treatment of that item to be.
Differences that the client accepts and
changes are called ‘corrected misstatements’
– these don’t cause any problems.
However, if the client does not correct for the
difference, this is called an ‘uncorrected
misstatement’ – these require further
Uncorrected
misstatements
All uncorrected misstatements must be
documented within the audit file, and at the
end of the audit they must be communicated
to the client (required by ISA 540).
In management’s representation letter,
management must acknowledge these
uncorrected misstatements and state that
they do not believe their impact to be material
to the FSs.
If the auditor perceives the differences
to be material, this may impact the
Overall
review
Financial statemen ts review Audit evidenc e review Other completio n procedur esThe overall review should be performed by the Engagement Partner – s/he will sign the audit opinion and takes ultimate responsibility for the audit.
Reviews are also significant for a firm's appraisal system and development of staff. Additionally they are an important
Overall
review
(continued)
Financial statemen ts review Audit evidenc e review Other completio n procedur esMust comply with
• The relevant framework
• Law
• GAAP
• Other relevant
regulations
• Is information within
annual report consistent
Overall
review
(continued)
Financial statemen ts review Audit evidenc e review Other completio n procedur es• The audit evidence gathered must support the opinion
given.
• Was sufficient and appropriate evidence gathered? • Was the audit work performed in accordance with
relevant laws / standards?
• What issues were there? Were these resolved?
• Have matters been noted that may impact future year
audits?
• Was the original audit plan followed?
• Was is changed to allow for changing
circumstances?
Overall
review
(continued)
Financial statemen ts review Audit evidenc e review Other completio n procedur es• Final analytical review performed
• Auditor independence assessed
• May require second partner review
(only if required)
• Subsequent events review
• Going concern review
Summary
of
learning
objectives
You should now be able to:
Explain the purpose of, auditor's responsibilities
regarding, and procedures involved in a
subsequent events review.
Explain the responsibilities of auditors and
management regarding going concern, and the
procedures to be applied in performing going
concern reviews.
Discuss the purpose of, quality of and procedure for
obtaining
written representations.
Explain the auditor's responsibilities in relation to
opening balances and comparative information.
Understand the appropriate actions in respect of
misstatements.
Explain the significance of uncorrected
misstatements, and describe auditor's procedures
