CH12 audit completion

Question 1

What legislation must financial statements comply with during the audit review?

Answer 1

Companies Act 2006

Compliance with the Companies Act ensures that financial statements meet legal disclosure requirements.

Question 2

What tool should firms use to ensure compliance with the Companies Act and accounting standards?

Answer 2

Checklists

Checklists are typically included in ‘audit packs’ used by firms.

Question 3

What is a key question auditors should ask regarding the financial statements?

Answer 3

Do the financial statements make sense?

This involves assessing the logical consistency of the financial data presented.

Question 4

What are analytical procedures used for in the audit process?

Answer 4

Risk assessment and overall review

Analytical procedures help auditors form conclusions about financial statement consistency.

Question 5

What are the four aspects to consider when reviewing the work done in an audit?

Answer 5

• Whether the work was in-line with the audit plan
• Whether the right work has been done
• Whether enough work has been done
• Whether issues arising have been resolved

Each aspect ensures thoroughness and adherence to the audit plan.

Question 6

Fill in the blank: Analytical procedures must be used in the overall review at the end of the audit to assist the auditor when forming an overall conclusion as to whether the financial statements are ______.

Answer 6

consistent with the auditor’s understanding of the entity

This consistency is critical for a reliable audit opinion.

Question 7

True or False: The audit plan should remain static regardless of conditions encountered by the client.

Answer 7

False

The audit plan may need to be adjusted based on actual conditions encountered.

Question 8

What is the purpose of the audit partner’s consideration during the completion stage?

Answer 8

To evaluate compliance and coherence of financial statements

This is crucial for forming the audit opinion.

Question 9

What does ISA 450 (UK) require the auditor to evaluate?

Answer 9

The effect of identified misstatements and accumulated uncorrected misstatements on the financial statements

ISA 450 focuses on the implications of misstatements during the audit process.

Question 10

What should all misstatements be communicated to?

Answer 10

Management on a timely basis

Timely communication is crucial for management to address misstatements effectively.

Question 11

What should the auditor do after misstatements are communicated to management?

Answer 11

Request adjustments and review the adjustments made

This ensures that management takes appropriate action regarding identified misstatements.

Question 12

What should the auditor do if misstatements remain uncorrected?

Answer 12

Reassess materiality and determine if any unadjusted errors are material, individually or in aggregate

Reassessing materiality helps the auditor understand the impact of unadjusted errors on financial statements.

Question 13

What understanding must the auditor obtain from management regarding unadjusted errors?

Answer 13

Reasons for not adjusting

Understanding management’s rationale is essential for the auditor’s evaluation process.

Question 14

What must the auditor ensure regarding management’s acknowledgment of unadjusted errors?

Answer 14

That management acknowledges the unadjusted errors are immaterial in the management representation letter

This acknowledgment protects the auditor and clarifies management’s stance on the errors.

Question 15

Why is it important to consider the risks of unaudited figures from past periods?

Answer 15

Unaudited figures may be materially misstated, affecting current year profits.

This is particularly relevant for initial engagements where prior financial statements were not audited or were audited by a predecessor auditor.

Question 16

What does ISA 510 (UK) state regarding opening balances?

Answer 16

The auditor should obtain sufficient appropriate audit evidence about:
* Material misstatements in opening balances affecting current period financial statements
* Consistent accounting policies and adequate disclosure of changes.

Question 17

What are the steps an auditor should take to obtain evidence regarding opening balances?

Answer 17

The auditor shall:
* Determine whether prior period’s closing balances have been brought forward correctly
* Determine whether opening balances reflect appropriate accounting policies
* Perform specific audit procedures.

Question 18

Fill in the blank: The auditor must ensure that _______ accounting policies have been applied to the opening balances.

Answer 18

[consistent]

Question 19

True or False: The auditor is only concerned with the closing balances of the prior period.

Answer 19

False

Question 20

Procedures re opening bals

Answer 20

Question 21

What is the going concern assumption?

Answer 21

An entity is viewed as continuing in business for the foreseeable future with neither the intention nor necessity of liquidation.

Typically considered to be within 12 months from the date of the auditor’s report.

Question 22

What does ISA 570 Going Concern address?

Answer 22

It differentiates between the responsibilities of management and auditors regarding the going concern assumption.

Question 23

What is the management’s responsibility under the going concern assumption?

Answer 23

Management should assess the entity’s ability to continue as a going concern and ensure the correct basis of preparation is made.

Question 24

What should be done if directors intend to cease trading?

Answer 24

The financial statements should be prepared on a ‘break up’ basis.

Question 25

What is the auditor's responsibility regarding the going concern assumption?

Answer 25

To obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption.

Question 26

What risks must auditors consider during the planning stage?

Answer 26

The risks of the client not being a going concern.

Question 27

What specific tasks must auditors carry out at the completion stage?

Answer 27

Review future plans, financial forecasts, borrowing facilities, and minutes or correspondence with legal advisers.

Question 28

What is the break up basis?

Answer 28

A basis of preparation used when it becomes clear that the client cannot be considered to be a going concern.

Question 29

What happens to the financial statements if the break up basis is applied?

Answer 29

The financial statements will disclose the inability to be a going concern, and values will be adjusted to amounts expected to be realized.

Question 30

True or False: The auditor's role is to prepare the financial statements.

Answer 30

False.

Question 31

Fill in the blank: Management must ensure that the correct basis of _______ is made.

Answer 31

preparation

Question 32

What is a net liability position?

Answer 32

A financial condition where liabilities exceed assets. ## Footnote This position can indicate potential going concern issues.

Question 33

What are fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment?

Answer 33

Loans that are due soon with no viable options for renewal or repayment. ## Footnote This situation can signal financial distress.

Question 34

What does excessive reliance on short-term borrowings indicate?

Answer 34

Overdependence on short-term loans can lead to liquidity problems. ## Footnote This can create vulnerability to financial instability.

Question 35

What are indications of withdrawal of financial support?

Answer 35

Signs that investors or lenders are pulling out their financial backing. ## Footnote This can severely impact the entity's ability to operate.

Question 36

What are adverse key financial ratios?

Answer 36

Financial metrics that suggest poor performance or instability. ## Footnote Examples include low profitability ratios or high debt-to-equity ratios.

Question 37

What constitutes substantial operating losses?

Answer 37

Significant losses incurred during operations that threaten viability. ## Footnote Continuous losses can compromise the going concern status.

Question 38

What does inability to pay creditors on due dates signify?

Answer 38

Failure to meet debt obligations when they are due. ## Footnote This is a critical warning sign of financial distress.

Question 39

What does inability to comply with terms of loan agreements indicate?

Answer 39

Failure to meet the conditions set forth in loan contracts. ## Footnote This can lead to default and potential bankruptcy.

Question 40

What are management intentions to liquidate the entity or cease operations?

Answer 40

Plans by management to wind down business activities. ## Footnote Such intentions directly impact going concern assessments.

Question 41

What is the impact of loss of key management without replacement?

Answer 41

Loss of essential leadership can destabilize operations. ## Footnote This can lead to strategic misalignment and poor decision-making.

Question 42

What does loss of a major market, key customer(s), franchise, license, or principal supplier(s) indicate?

Answer 42

A significant reduction in business resources or revenue streams. ## Footnote This can jeopardize the entity's operational viability.

Question 43

What are labour difficulties?

Answer 43

Challenges related to workforce availability or disputes. ## Footnote This can hinder production and service delivery.

Question 44

What does shortages of important supplies refer to?

Answer 44

Insufficient availability of critical resources needed for operations. ## Footnote This can disrupt production and lead to financial losses.

Question 45

What is the emergence of a highly successful competitor?

Answer 45

The rise of a rival company that significantly outperforms the entity. ## Footnote This can threaten market share and profitability.

Question 46

What does non-compliance with statutory/regulatory requirements mean?

Answer 46

Failure to adhere to laws and regulations governing operations. ## Footnote This can result in legal penalties and operational restrictions.

Question 47

What are pending legal proceedings against the entity?

Answer 47

Lawsuits or legal actions that may threaten the entity's resources. ## Footnote Unfavorable outcomes can lead to financial strain.

Question 48

What are changes in law or regulation expected to adversely affect the entity?

Answer 48

New laws that may impose additional costs or operational hurdles. ## Footnote This can impact profitability and compliance.

Question 49

What does uninsured or underinsured catastrophes when they occur imply?

Answer 49

Events that cause significant loss without adequate insurance coverage. ## Footnote This can lead to severe financial repercussions.

Question 50

symptoms of gc problems

Answer 50

Question 51

implications for auditors report re gc

Answer 51

Question 52

Subsequent event timeline

Answer 52

Question 53

adjusting events - duties of the auditor

Answer 53

Question 54

What is the purpose of obtaining written representations from management according to ISA 580?

Answer 54

To obtain certain written representations as part of audit evidence because some forms of audit evidence are normally unavailable.

Question 55

What must management confirm in the written representation?

Answer 55

* Their responsibility to prepare the financial statements * They have provided all relevant information to the auditor * All transactions are recorded in the financial statements

Question 56

When are the written representations usually collated and finalized?

Answer 56

At the completion stage of the audit.

Question 57

Who should sign the representation letter before the auditors sign the auditor’s report?

Answer 57

The directors.

Question 58

True or False: If the representation letter is not signed by the directors, auditors have obtained all the evidence they required to sign the auditor’s report.

Answer 58

False.

Question 59

Fill in the blank: The auditor requires written representations from management because knowledge of the facts is confined to _______.

Answer 59

[management].