Audit 3 Flashcards
How do auditors evaluate misstatements in financial statements?
- estimate the amount of potential errors in financial statement components.
- If the estimated misstatements are below materiality levels, the financial statements are considered not materially misstated.
What key tasks do auditors perform at the end of the audit process?
- Post-balance sheet date work – Reviewing subsequent events.
- Audit of provisions and contingencies – Checking for possible liabilities.
- Final working sheet review – Ensuring accuracy and completeness.
- Going-concern review – Assessing whether the company can continue operating.
- Reviewing work of other auditors – Evaluating consistency in audit conclusions.
- Obtaining the management letter of representation – Formal confirmation from management about key financial matters.
What are auditors assessing in the post-balance sheet period?
Receivables/debtors collectability – Ensuring debts can be recovered.
Net Realisable Value (NRV) of inventory – Checking for possible write-downs.
Useful lives of non-current assets – Reviewing depreciation policies.
Potential unrecorded liabilities – Identifying any obligations not yet recorded.
What are subsequent events in an audit context?
Events occurring between the balance sheet date and the date when financial statements are authorised for issue.
What are the two types of subsequent events?
- Adjusting Events – Provide evidence of conditions that existed at the balance sheet date (e.g., bankruptcy of a major customer).
- Non-Adjusting Events – Relate to conditions arising after the balance sheet date (e.g., natural disasters, major acquisitions).
What are the key periods after the balance sheet date in an audit?
- Balance sheet date → Draft accounts completion – Auditors begin evaluating events.
- Draft accounts completion → Audit fieldwork completion – Further analysis of financial data.
- Audit fieldwork completion → Issuing of financial statements – Final checks and approvals.
- Issuance of financial statements → AGM – Shareholder review period.
- After the AGM – No further audit responsibility unless new information emerges.
What audit procedures are used to detect post-balance sheet events?
Review company procedures for identifying post-balance sheet events.
Examine minutes of meetings (Board, Audit Committee, Shareholders).
Analyse management accounts & accounting records for significant changes.
Review profit and cash flow forecasts for financial stability.
Consult legal advisors on possible liabilities.
Monitor known risk areas that could impact financial statements.
Review correspondence with third parties for undisclosed issues.
Obtain direct confirmations from third parties (e.g., banks, creditors).
Check public domain information (news reports, regulatory filings).
Conduct management interviews to confirm key issues.
What is the difference between a provision and a contingent liability?
Provision – Recognised when there is a legal or constructive obligation and a probable outflow of economic benefits.
Contingent Liability – Disclosed (but not recognised) if the obligation is uncertain or the outflow of benefits is not probable.
When should a company recognise a provision?
- When a legal or constructive obligation exists.
- When an outflow of economic benefits is probable.
- When the amount can be reliably estimated.
What are the auditor’s responsibilities regarding subsequent events?
- Active duty period – From balance sheet date until the audit report date.
- No active duty – After the financial statements are issued, unless new information emerges.
