Ch-7 Completion and review Flashcards
Objectives of auditor in accordance with SA 560 - subsequent events
The objectives of the auditor are to: -
(a) Obtain sufficient appropriate audit evidence about whether 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 are appropriately reflected in those financial statements and
(b) Respond appropriately to facts that become known to the auditor after the date of the auditor’s report, that, had they been known to the auditor at that date, may have caused the auditor to amend the auditor’s report.
Audit procedures relating to events occurring between the date of the financial statements and the date of the auditor’s report
The auditor shall take into account the auditor’s risk assessment in determining the nature and extent of such audit procedures, which shall include the following: -
(a) Obtaining an understanding of any procedures management has established to ensure that subsequent events are identified.
(b) Inquiring of management and, where appropriate, those charged with governance as to whether any subsequent events have occurred which might affect the financial statements.
(c) Reading minutes, if any, of the meetings, of the entity’s owners, management and those charged with governance, that have been held after the date of the financial statements and inquiring about matters discussed at any such meetings for which minutes are not yet available.
(d) Reading the entity’s latest subsequent interim financial statements, if any.
What should the auditor do about the facts which become known to the auditor after the date of the auditor’s report but before 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, when, after the date of the auditor’s report but before the date the financial statements are issued, 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 the auditor to amend the auditor’s report, the auditor shall:
(a) Discuss the matter with management and, where appropriate, those charged with governance.
(b) Determine whether the financial statements need amendment and, if so,
(c) Inquire how management intends to address the matter in the financial statements.
If management amends the financial statements, the auditor shall:
(a) Carry out the audit procedures necessary in the circumstances on the amendment.
(b) Unless the circumstances in succeeding para apply: -
(i) Extend the audit procedures, already referred, to the date of the new
auditor’s report and
(ii) Provide a new auditor’s report on the amended financial statements.
when management does not amend the financial statements in circumstances where the auditor believes they need to be amended, then: -
(a) If the auditor’s report has not yet been provided to the entity, the auditor shall modify the opinion as required by SA 705 and then provide the auditor’s report or
(b) If the auditor’s report has already been provided to the entity, the auditor
shall notify management and, unless all of those charged with governance are involved in managing the entity, those charged with governance, not to issue the financial statements to third parties before the necessary amendments have been made. If the financial statements are nevertheless subsequently issued without the necessary amendments, the auditor shall take appropriate action, to seek to prevent reliance on the auditor’s report.
Give examples of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
Financial events or conditions
* Net liability or net current liability position
* Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets
* Indications of withdrawal of financial support by creditors
* Negative operating cash flows indicated by historical or prospective financial statements
* Adverse key financial ratios
* Substantial operating losses or significant deterioration in the value of assets used to generate cash flows
* Arrears or discontinuance of dividends
* Inability to pay creditors on due dates
* Inability to comply with the terms of loan agreements
* Change from credit to cash-on-delivery transactions with suppliers
* Inability to obtain financing for essential new product development or other essential investments
Operating events or conditions
* Management intentions to liquidate the entity or to cease operations
* Loss of key management without replacement
* Loss of a major market, key customer(s), franchise, license, or principal supplier(s)
* Labour difficulties
* Shortages of important supplies
* Emergence of a highly successful competitor
Other events or conditions
* Non-compliance with capital or other statutory or regulatory requirements, such as solvency or liquidity requirements for financial institutions
* Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy
* Changes in law or regulation or government policy expected to adversely affect the entity
* Uninsured or underinsured catastrophes when they occur
Audit procedures when events or conditions are identified that may cast significant doubt on the entity’s ability to continue as a going concern ARE
These procedures shall include: -
(a) Where management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting management to make its assessment.
(b) Evaluating management’s plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management’s plans are feasible in the circumstances.
(c) Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor in considering the future outcome of events or conditions in the evaluation of management’s plans for future actions:
(i) Evaluating the reliability of the underlying data generated to prepare the forecast; and
(ii) Determining whether there is adequate support for the assumptions underlying the forecast.
(d) Considering whether any additional facts or information have become available since the date on which management made its assessment.
(e) Requesting written representations from management and, where appropriate, those charged with governance, regarding their plans for future actions and the feasibility of these plans.
Give examples of audit procedures when events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as going concern
- Analysing and discussing cash flow, profit and other relevant forecasts with management
- Analysing and discussing the entity’s latest available interim financial
statements - Reading the terms of debentures and loan agreements and determining whether any have been breached
- Reading minutes of the meetings of shareholders, those charged with governance and relevant committees for reference to financing difficulties
- Inquiring of the entity’s legal counsel regarding the existence of litigation and claims and the reasonableness of management’s assessments of their outcome and the estimate of their financial implications
- Confirming the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assessing the financial ability of such parties to provide additional funds
- Evaluating the entity’s plans to deal with unfilled customer orders
- Performing audit procedures regarding subsequent events to identify those that either mitigate or otherwise affect the entity’s ability to continue as a going concern
- Confirming the existence, terms and adequacy of borrowing facilities
- Obtaining and reviewing reports of regulatory actions
- Determining the adequacy of support for any planned disposals of assets
Read page 7.21 and 7.22
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SA 450 Evaluation of Misstatements Identified during the Audit
step 1 - Accumulation of misstatements identified during the audit.
step 2 - Communication and correction of misstatements - The auditor shall request management to correct those misstatements. If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor shall obtain an understanding of management’s reasons for not making the corrections and shall take that understanding into account when evaluating whether the financial statements as a whole are free from material misstatement.
step 3 - Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess materiality determined in accordance with SA 320 to confirm whether it
remains appropriate in the context of the entity’s actual financial results.
step 4 - The auditor shall request a written representation from management and, where appropriate, those charged with governance whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole.
Documentation regarding misstatements identified during audit
The audit documentation shall include: -
(a) The amount below which misstatements would be regarded as clearly trivial;
(b) All misstatements accumulated during the audit and whether they have been corrected; and
(c) The auditor’s conclusion as to whether uncorrected misstatements are
material, individually or in aggregate, and the basis for that conclusion.
Objectives of auditor In accordance with SA 580 - Written representation
(a) To obtain written representations from management and, where appropriate, those charged with governance that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor;
(b) To support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representations, if determined necessary by the auditor or required by other SAs; and
(c) To respond appropriately to written representations provided by management and, where appropriate, those charged with governance, or if management or, where appropriate, those charged with governance do not provide the written representations requested by the auditor.
Why Written representations about management responsibilities are necessary?
Audit evidence obtained during the audit that management has fulfilled its responsibilities regarding preparation of financial statements and about information provided and completeness of transactions is not sufficient without obtaining confirmation from management that it believes that it has fulfilled those responsibilities. This is because the auditor is not able to judge solely on other audit evidence whether management has prepared and presented the financial statements and provided information to the auditor on the basis of the agreed acknowledgement and understanding of its responsibilities.
when can auditor ask management to reconfirm its acknowledgement and understanding of those responsibilities in written representations.
This is particularly appropriate when: -
* Those who signed the terms of the audit engagement on behalf of the entity no longer have the relevant responsibilities;
* The terms of the audit engagement were prepared in a previous year ;
* There is any indication that management misunderstands those responsibilities; or
* Changes in circumstances make it appropriate to do so.
Other written representations besides management’s responsibility of Preparation of the financial statements and Information provided and completeness of transactions are -
. They may include representations about the following: -
* Whether the selection and application of accounting policies are appropriate; and
* The auditor may consider it necessary to request management to provide a written representation that it has communicated to the auditor all deficiencies in internal control of which management is aware.
* Whether matters such as the following, where relevant under the applicable financial reporting framework, have been recognized, measured, presented or disclosed in accordance with that framework: -
o Plans or intentions that may affect the carrying value or classification of assets and liabilities;
o Liabilities, both actual and contingent;
o Title to, or control over, assets, the liens or encumbrances on assets, and assets pledged as collateral; and
o Aspects of laws, regulations and contractual agreements that may affect the financial statements, including non-compliance.
Doubt as to the reliability of Written representations
the auditor shall determine the effect that such concerns may have on the reliability of representations and audit evidence in general.
In particular, if written representations are inconsistent with other audit evidence, the auditor shall perform audit procedures to attempt to resolve the matter. If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical values or diligence of management, or of its commitment to or enforcement of these, and shall determine the effect that this may have on the reliability of representations and audit evidence in general.
If the auditor concludes that the written representations are not reliable, the auditor shall take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in accordance with SA 705, having regard to the requirement of disclaimer of opinion.
