14. Reporting On An Audit Engagement (Development)

Question 1

Do As have to report significant deficiencies in internal control?

Answer 1

YES

Question 2

Examples of things to consider judging internal control deficiencies

Answer 2

1. The likelihood of material misstatements
2. Susceptibility to loss or fraud
3. Size of the item in the financial statements
4. Volume of activity
5. Importance of the controls to the financial reporting process.

Question 3

Is the auditor required to carry out specific testing on internal controls for the purposes of communication with those charged with governance

Answer 3

NO

Question 4

A report to those charged with governance/management will include:

Answer 4

1. A covering letter
2. An appendix
   Setting out the deficiencies, consequences and recommendations

Question 5

Exam technique: Potential audit report modification

Answer 5

1. Describe and classify the issue
2. Discuss materiality
3. Identify the appropriate opinion
4. Describe the modifications to the audit report.

Question 6

Audit report: Scenario: The company is a going concern and there are no material uncertainties regarding going concern.

Answer 6

Unmodified opinion

Include ‘Conclusions relating to going concern’ section

Question 7

Audit report: Scenario: The company is not a going concern but the directors have prepared the financial statements on the going concern basis

Answer 7

Material and pervasive misstatement

Do not include the ‘Conclusions relating to going concern’ section

Instead, issue an adverse opinion

Question 8

Audit report: Scenario: The company is not a going concern. The directors have prepared the financial statements on the break-up basis, with adequate disclosure of the basis of preparation

Answer 8

The financial statements are not misstated

Do not include the ‘Conclusions relating to going concern’ section

Unmodified opinion

An emphasis of matter paragraph is used to highlight:
a. the alternative basis of preparation
b. reasons for doing so
c. the disclosure

Question 9

Audit report: Scenario: The going concern status of the company is uncertain and the directors have made adequate disclosure of the uncertainty

Answer 9

The financial statements are not misstated

Do not include the ‘Conclusions relating to going concern’ section

Unmodified opinion

A separate section is included in the auditor’s report under the heading ‘Material uncertainty related to going concern’ to:
a. draw attention to the disclosure note
b. state that the material uncertainty may cast significant doubt on the entity’s ability to continue as a going concern
c. state that the auditor’s opinion is not modified in this respect

Question 10

Audit report: Scenario: The going concern status of the company is uncertain and the directors have not made adequate disclosure of the uncertainty.

Answer 10

The financial statements are misstated

Do not include the ‘Conclusions relating to going concern’ section

This could be considered material or pervasive

Qualified (‘except for’) opinion or adverse opinion

Explain in the ‘Basis for qualified/adverse opinion’ section that the material uncertainty exists and it is not disclosed adequately

Question 11

Assessing going concern: Should the auditor consider the period used by management in their assessment?

Answer 11

YES

ISA states the requirement is to consider the period of 12 months from the date of approval of the financial statements

IAASB requirement is to consider the period of 12 months from the end of
the reporting period

Question 12

What must A do if management have considered a shorter period than 12m for going concern?

Answer 12

Ask to extend

If they refuse, it will be discussed with those charged with governance

If the assessment is not extended, the auditor should consider whether they have sufficient appropriate audit evidence to conclude on going concern and consider the impact this will have on the audit report.

Question 13

OBT: Going concern: Additional requirement where C is applying UKCGC

Answer 13

Perform necessary procedures to identify if any material inconsistencies exist between the auditor’s knowledge and the annual report/Board statements.

Question 14

Audit report: Other information: Examples

Answer 14

Management or director’s reports/commentaries

Chairman’s statement

Corporate governance statement

Internal control/risk assessment reports.

Question 15

The issue for A with Other Info

Answer 15

The volume of other information often outweighs the financial statements. The risk for the auditor is that somewhere in the other pages of the annual report, there might be a comment that is inconsistent with the financial statements. This could undermine
the credibility of the financial statements and the auditor’s report.

Question 16

OBT: Contents of ‘Other Information’ para (Audit report)

Answer 16

Management is responsible for the other information

The auditor’s opinion does not cover the other information

The auditor is responsible for reading the other information

A statement that there is nothing to report, or details of any material misstatement in the other information.

Question 17

What should A do if it identifies an inconsistency between the other information and the financial statements?

Answer 17

Discuss the matter with management

Conclude whether a material misstatement exists in either the financial statements or the other information.

Question 18

What A should do if material misstatement in Other Info

Answer 18

Ask management to correct the other
information

If they fail to do so, use the ‘Other
information’ section of the auditor’s report to describe the uncorrected misstatement

Question 19

Where is most climate info disclosed?

Answer 19

In other information within the annual
report

Or outside annual report, e.g. sustainability report

Which can often sit outside the audited financial statements.

In the UK, the relationship between other information and other legally required disclosures (e.g. those relating to a strategic report), must be considered. The auditor would (most likely) deal with this at the same time

Question 20

CA: What should auditors report on in relation to Other Info?

Answer 20

1. Whether the information contained in the directors’ report and strategic report is consistent with the financial statements
2. If the directors’ report and strategic report have been prepared in accordance with applicable legal requirements
3. Whether any material misstatements have been identified (where a directors’ report or strategic report are a legal
   requirement)

This opinion is included in a section of the auditor’s report entitled ‘Opinion on other matters prescribed by the Companies Act 2006’.

Question 21

A response if CA Other info inconsistencies are identified

Answer 21

1. Discuss the matter with management
2. If the inconsistency is not resolved, disclose/highlight in the auditor’s report

Question 22

Exam: What to do if material issues in statutory Other info? (Impact on audit report)

Answer 22

1. Amend the ‘Other information’ section
2. Modify the ‘Opinion on other matters as prescribed by Companies Act 2006’
3. Consider the type of opinion to give (e.g. qualified ‘except for’)
4. Explain the misstatement under subheading ‘Matters on which we are required to report by exception’

Question 23

Summary: Audit reporting: Strategic report/ Directors report
(section 4.3)

Answer 23

Opinion on other matters
prescribed by the Companies
Act 2006

Give an opinion on whether they
are:
a. properly prepared re CA06,
and
b. consistent with the financial
statements.

Matters on which we report by
exception
a. say if directors/strategic
report contain a material
misstatement.

Question 24

Summary: Other information
(section 4.2)

Answer 24

Everything except the financial statements, audit report, directors/strategic reports
a. e.g. chairman’s report/statement, corporate governance report.
b. Separate paragraph in the audit report

Other information
Say if:
a. inconsistent with the financial statements, or our audit knowledge, or
b. materially misstated (as far as
we can see)