Audit Report And Opinions, Subsequent Events And Going Concern

Question 1

Audit completion and reporting

Answer 1

-drawing a conclusion on the results of the testing on the financial statements and the audit evidenced gathered

1. True & Fair
2. Accord with GAAP
3. Accord with CA06

Question 2

Reaching audit opinion

Answer 2

Auditor needs to consider
-are the financial statements compliant with the companies act 2006
-do the financial statements make sense
-has the audit report been properly drafted

When revising the audit work carried out, consideration will need to be given to
-whether the work done was in line with the audit plan
-whether sufficient work has been done
-whether the right type of work has been done
-any issues arising
-> sufficient appropriate evidence

At final review stage auditor will need to consider
-free from material misstatement
-any disagreement

Question 3

Errors discovered by the auditor

Answer 3

-all errors should be documented and management should be informed of all mistake,easy and request that they should be corrected
-any uncorrected errors should be considered in therms of their materiality
-auditor should obtain written representations from management that the effect of uncorrected misstatements is not material
-appropriateness of going concern basis of accounting

Question 4

Unmodified audit report

Answer 4

Where the auditor is satisfied that the evidence obtained is sufficient and appropriate and supports the view presented in the financial statements prepared by the company’s management

Question 5

Modified audit report

Answer 5

Where the auditor wishes to highlight something, but wheee the audit opinion is not affected- an emphasis of matter paragraph or other matter paragraph (modification to the report, not a modification to the audit opinion)

Where the auditor is either not satisfied with the sufficiency or appropriateness of the evidence that has been obtained, compared with what could reasonably be expected, or has issue with the content of the financial statements and there is an impact on the audit opinion (modification to the audit opinion)

Question 6

Emphasis of matter paragraph

Answer 6

-modified audit report, unmodified audit opinion
-paragraph included in the auditors report that refers to a matter appropriately presented or discloses in the financial statements that, in the auditors judgement is of such importance that it is fundamental to users understanding of the financial statements
-fundamental

Question 7

Other matter paragraph

Answer 7

-modified auditors report, unmodified opinion
-paragraph included in the auditors report that refers to a matter other than those presented or disclosed in the financial statements (outside the financial statements) that in the auditors judgement is relevant to users understanding of the audit, the auditors responsibilities or the auditors report
-relevant

Question 8

Modified audit opinion

Answer 8

1. Type of modification depends on whether the matters preventing the auditor from giving an unmodified opinion are material or pervasive
   -if the matters are neither the auditor will give an unmodified audit opinion
2. Material but nit pervasive - except for qualification
3. Pervasive if
   -the effects are not confined to specific elements, accounts or items of the financial statements
   -if so confined, represent or could represent a substantial proportion of the financial statements
   -in relation to disclosures are pervasive to users understanding of the financial statement
4. A matter is so material or pervasive if either
   -destroys the truth and fairness of the financial statements (disagreements)
   -makes it impossible to form an opinion on the financial statements (scope limitation)

Question 9

Reasons for a modification to the audit opinion

Answer 9

1. Everything else is fine except for one material matter
2. The auditor disagrees with an aspect or aspects of the financial statements that are material and pervasive
3. The scope of the auditors work has been limited which means that they have been unable to obtain all the audit evidence needed in relation to a matter which is material and pervasive

Question 10

Qualified except for opinion

Answer 10

-modified audit report and modified audit opinion
-issued on the financial statements of a company due to a material misstatement or deficiency in the financial statements
-material but not pervasive misstatement or scope limitation

Question 11

Adverse opinion

Answer 11

-modified audit report and modified opinion
-issued on the financial statement of a group or company when the financial statements are materially misstated and such misstatements have a pervasive effect on the financial statements
-adverse opinion given if financial statements fundamentally digger from GAAP
-material and pervasive misstatement

Question 12

Disclaimer of opinion (single element)

Answer 12

-modified audit report and do not express an opinion
-single element of the financial statements
-material and pervasive scope limitation

Question 13

Disclaimer of opinion- multiple events

Answer 13

-modified audit report and do not express an opinion
-multiple elements of the financial statements
-material and pervasive scope limitation

Question 14

Inherent uncertainty

Answer 14

-applies to the outcome of any figure in or note to the financial statements that is contingent upon the future events and which is not capable of reasonable estimation at the date of the auditors report. Uncertainties present a special problem for the auditor because evidence of their resolution does not exist prior to completing the audit
-based on available evidence, the auditor is responsible for determining whether the uncertainties are properly accounted for and properly disclosed. Auditors are not expected to predict the outcome of the uncertainties.

Question 15

Subsequent events ISA 560

Answer 15

The auditor is responsible for their audit work up to the date of the auditor’s report.

Active duty
-between the year end and the date of the audit report to look out for all material events affecting the financial statements

Passive duty
-after signing the audit report to act if they become aware of anything that may affect their audit opinion and discuss with management the need to issue amended financial statements
-if financial statements already issues and management refuse to reissue, may have to take steps to prevent users relying on the financial statements

Question 16

Two types of subsequent events ISA 10

Answer 16

1. Those that provide additional evidence of conditions that existed at the reporting date or those that indicate that it is not appropriate to apply the going concern basis of accounting (adjusting events)
2. Those that are indicative of conditions that arose after the reporting date (non-adjusting events). Disclose the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made.

Question 17

Subsequent events review

Answer 17

-> enquiries of management
-> review post year end management accounts, budgets, and cash flow forecasts
-> review of post year end board minutes
-> review how management assess subsequent events and ask if any have been found
-> obtain a management representation letter confirming this
-> check post year end cash received to ensure year end receivables are received
-> check post year end sales to ensure net realisable value (NRV) of inventory is as expected

Question 18

What is the going concern concept (IMPORTANT)

Answer 18

-assumption that the entity will continue in operational existence for the foreseeable future (12 months from date of approval of the financial statements)
-entity must prepare its financial statements under the going concern basis of accounting, unless inappropriate to assume the company will continue in business
-hence assumed entity has no intention or need to liquidate the business
-if it did intent to, financial statements should be prepared on the break up basis
1. This values assets at their sale value / NRV
2. Debts may not be recovered (write off to P&L)
3. Liabilities all closure expenses included
4. P&L account included all closure expenses

-> depreciation = based on useful life concept, signalling that companies assume business will continue for indefinite time
-> prepayment of expenses = companies will pay expenses because they believe that they will continue operations in future
-> non current assets and liabilities = as these are not expected to be realised within 12 months

Question 19

Managements responsibility

Answer 19

-managements responsibility to make assessment of whether going concern basis is appropriate when they are preparing financial statements
-three factors to take into consideration
1. Degree of uncertainty associated with the outcome of an event or condition increases significantly the further into the future an event or condition or the out of occurs
2. The size and complexity of the entity, including the nature and condition of its business and the degree to which its affected by external factors affect the judge,ent regarding the outcome of events or conditions
3. Any judgement about the future is based on information available at the time at which the judgement is made. Subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made

Question 20

IAS 1- preparation of financial statements

Answer 20

-overall requirements for financial statements

Question 21

Matters directors should consider when assessing the entity as a going concern (IMPORTANT)

Answer 21

1. Nature of the business
2. Riskiness of the company/industry
3. External influences
4. Budgets/forecasts
5. Can a lost key customer or key supplier be replaces?
6. Overdraft limit/loan?

Question 22

Auditors responsibility

Answer 22

-IAS 570 to obtain sufficient appropriate audit evidence about the appropriateness of managements use of the going concern basis of accounting in the preparation of the financial statements
-to conclude whether there is a material uncertainty about the entity’s ability to conclude as a going concern

Question 23

Why is it important for auditor to be confident that a company is a going concern (IMPORTANT)

Answer 23

-fundamental underlying assumption
-accepted basis of preparation, must prepare under going concern accounting basis unless is inappropriate to do so
-assumption continue in operation for foreseeable future (12 months)
-if it is nit then balance sheet and P&L need amending to break up basis
-high risk that auditor will be sued or suffer damages reputation if wrong

Question 24

Going concern and audit report

Answer 24

Not a going concern but prepared on going concern basis should have an adverse opinion

Question 25

Explain impact on balance sheet and profit and loss account of not using the going concern basis (IMPORTANT)

Answer 25

-have to use break up basis
-assets at net realisable value
-debts may nit be recovered
-liabilities all re closure included
-P&L accounting includes all closure expenses