Completion and review

Question 1

What is completion and review?

Answer 1

Before the auditor can actually sign the audit report, there are a number of procedures to consider:

• Consideration of opening balances and comparatives
• Subsequent events review
• Going concern review
• Obtaining written management representations
• Consideration of misstatements
• Audit file review

Question 2

What are opening balances?

Answer 2

ISA 510 Initial Engagements – Opening Balances requires that when auditors take on a new client, they must ensure that:

Opening balances do not contain material misstatements;
Prior period closing balances have been correctly brought forward or, where appropriate, restated; and
Appropriate accounting policies have been consistently applied, or changes adequately disclosed.

Question 3

What should be considered with opening balances?

Answer 3

Considerations:
Were the previous financial statements audited?
If the previous financial statements were audited, was the opinion modified?
If the previous opinion was modified, has the matter been resolved since then?
Were any adjustments made as a result of the audit? If so, has the client adjusted their accounting ledgers as well as the financial statements?

If auditors are unable to satisfy themselves with regard to the preceding period, they will have to consider modifying the current audit report.

Question 4

What procedures should be taken in relation to opening balances?

Answer 4

Where the prior method was audited by another auditor or unaudited, the auditors will need to perform additional work to be satisfied with the opening position.
Such work would include:

Consulting the client’s management
Reviewing records and accounting and control procedures in the preceding period
Consulting with the previous auditor and reviewing (with their permission) their working papers and relevant management letters
Substantive testing of any opening balances where the above procedures are unsatisfactory
Some evidence of the opening position will also usually be gained from the audit work performed in the current period.

Question 5

What are comparatives?

Answer 5

ISA 710 Comparative Information – Corresponding Figures and Comparative Financial Statements requires that comparative figures comply with the identified financial framework and that they are free from material misstatement.
IASC’s Framework for the Preparation and Presentation of Financial Statements and IAS 1 Presentation of Financial Statements both require that financial statements show comparatives.
2 categories of comparatives:
Corresponding figures where preceding period figures are included as an integral part of the current period financial statements; and
Comparative financial statements where preceding period amounts are included for comparison with the current period.

Question 6

What are comparative financial statements?

Answer 6

Sufficient appropriate evidence should be gathered to ensure that comparative financial statements meet the requirements of an applicable financial reporting framework.

This involves evaluating whether:
Accounting policies are consistently applied; and
Comparative figures agree to the prior period financial statements.

Question 7

What is a subsequent events review?

Answer 7

Definition:
Subsequent events are events occurring and facts discovered between the period end and the date the financial statements are authorised for issue.

Auditors must take steps to ensure that any such events are properly reflected in the financial statements
This is done by events after the reporting period review

Question 8

What are adjusting events?

Answer 8

Adjusting
Events providing additional evidence relating to conditions existing at the balance sheet date.
They require adjustments in the financial statements.

Examples
Trade receivables going bad
Credit notes relating to sale invoices in the year end
Inventory at the year end sold lower than cost

Question 9

What are non-adjusting events?

Answer 9

Non-adjusting
Events concerning conditions which arose after the statement of financial position date, but which may be of such materiality that their disclosure is required to ensure that the financial statements are not misleading.

Examples:
Take over
Legal issues after the year end
A fire happening after the B/S date which had no impact on the inventory because it was sold prior to the fire

Question 10

What are subsequent events?

Answer 10

Details the responsibilities of the auditors with respect to subsequent events and the procedures they can use.
Auditors are responsible for performing these procedures right up until the day that they sign the audit report.
After this date they can relax a little but whilst they no longer have to perform procedures they must act if they are aware of any significant subsequent events

Question 11

What are the audit procedures for subsequent events?

Answer 11

Depends on many variables, such as the nature of transactions and events and the availability of data and reports.
Typical procedures:
Enquire into management’s procedures/systems for the identification of subsequent events
Inspection of minutes of members; and directors’ meetings
Reviewing accounting records including budgets, forecasts and interim information
Enquiring of directors if they are aware of any subsequent events that require reflection in the year end account.
Obtaining, from management, a letter of representation that all subsequent events have been considered in the preparation of the financial statements
Inspection of correspondence with legal advisors
Enquiring of the progress with regards to reported provisions and contingencies
‘Normal’ post reporting period work performed in order to verify year-end balances:
- checking after date receipts from receivables
- inspecting the cash book for payments/receipts that were not accrued for at the year-end; and
- checking the sales price of inventories

Question 12

What is going concern?

Answer 12

Defined in IAS1 as the assumption that the enterprise will continue in operational existence for the foreseeable future.
Any consideration involving the ‘foreseeable future’ involves making judgement about future events, which are inherently uncertain.
Uncertainty increases with time and judgements can only be made on the basis of information available at any point – subsequent events can overturn that judgement.
Period that management (and auditor) is required to consider is usually defined by financial reporting standards as a minimum of 12 months from year-end.
May be appropriate to look further ahead, depending on nature of business and associated risks.

Question 13

What is the significance of going concern?

Answer 13

Affects how the financial statements are prepared.
Usually prepared on basis that the reporting entity is a going concern.

IAS1 states that ‘an entity should prepare its financial statements on a going concern basis, unless
- The entity is being liquidated or has ceased trading, or
- The directors have no realistic alternative but to liquidate the entity or to cease trading’.

Question 14

What is breakup basis?

Answer 14

Where assumption made that company will cease trading, the financial statements are prepared using the break-up basis under which:

Assets are recorded at likely sale values
Inventory and receivables are likely to require more provisions,
Additional liabilities may arise (severance costs for staff, the costs of closing down facilities, etc.).

Question 15

What are the directors responsibilities in regards to going concern?

Answer 15

To assess the company’s ability to continue as a going concern when they are preparing the financial statements.
If they are aware of any material uncertainties which may affect this assessment, then IAS 1 requires them to disclose such uncertainties in the financial statements.
When the directors are performing their assessment they should take into account a number of relevant factors such as:
- Current and expected profitability
- Debt repayment
- Sources (and potential sources) of financing

Question 16

What are the auditors responsibilities in regards to going concern?

Answer 16

ISA 570 Going Concern states that the auditor needs to consider the appropriateness of management’s use of the going concern assumption.
Auditor needs to assess the risk that the company may not be a going concern.
Where there are going concern issues, the auditor needs to ensure that the directors have made sufficient disclosure of such matters in the notes to the financial statements.

Question 17

What are the audit procedures regarding going concern?

Answer 17

Assess state of the industry in which client operates
Compare results with any loan covenants that exist
Consult management about future intentions (and obtain written representations as necessary)
Review correspondence with major customers, suppliers and the bank for evidence of disputes
Review post year-end management accounts to analyse trends in performance
Consider whether directors have taken all relevant factors into consideration in their going concern review
Review cash flow forecasts produced by management for evidence of expected improvement/deterioration in the coming year

Question 18

What are indicators of going concern problems?

Answer 18

Typical indicators include:
Net current liabilities or net liabilities overall.
Borrowing facilities not agreed or close to expiry of current agreement
Defaulted loan agreements
Unplanned sales of non-current assets
Missing tax payments
Failure to pay staff
Negative cash flow
Inability to obtain credit from suppliers
Major technology changes
Legal claims
Loss of key staff
Over-reliance on a small number of products, staff or customers

Question 19

What are going concern disclosures?

Answer 19

Where there is any significant doubt over the future of a company, the directors should include disclosures in the financial statements explaining:
- The nature and circumstances surrounding the doubts
- The possible effect on the company
Where the directors have been unable to assess going concern in the usual way (eg for less than one year beyond the date on which they sign the financial statements), this fact should be disclosed.
Where financial statements are prepared on a basis other than the going concern basis, the basis should be disclosed.

Question 20

What are the reporting implications of going concern?

Answer 20

Going concern problems?
No – no impact on audit report

Yes – Appropriate basis used?
No – modify audit opinion

Yes – Adequate disclosure given?
No – modify audit opinion
Yes – Unmodified opinion + ‘Emphasis of Matter’

Question 21

What are written representations?

Answer 21

A written statement by management provided to the auditor to confirm matters or to support other evidence (ISA 580 Written Representations). The purpose of obtaining this form of evidence is:

1. To obtain representations that management, and those charged with governance, have fulfilled their responsibility for the preparation of the financial statements, including:
   - Preparing the financial statements in accordance with an applicable financial reporting framework
   - Providing the auditor with all relevant information and access to records
   - Recording all transactions and reflecting them in the financial statements
2. To support other audit evidence relevant to the financial statements if determined necessary by the auditor or required by ISA’s.
   This may be relevant where the auditor deems that other, more reliable forms of evidence are not available to them. Examples include:
   - Plans or intentions that may affect the carrying value of assets or liabilities
   - Confirmation of values where there is a significant degree of estimation or judgement involved
   - Formal confirmation of the directors’ judgement on contentious issues
   - Aspects of laws and regulations that may affect the financial statements, including compliance.

Question 22

How are written representations obtained?

Answer 22

Audit team assembles list of items for which seek management representations.
During completion the auditors will write to the client confirming the issues.
Client must formally document, and sign, a response and send it to the auditor.
May take any of the following forms:
- A letter from the client to the auditors responding to the necessary points.
- A letter from the auditors to management setting out the necessary points, which management signs in acknowledgement and returns to the auditors.
- Minutes of a meeting where representations were made orally, which can be signed by management.

Question 23

What is important with regards to the quality and reliability of written representation?

Answer 23

Internal source of evidence, therefore subject to bias and tend to focus on contentious areas of financial statements.
Therefore potentially unreliable forms of audit evidence.
They do not, on their own, constitute appropriate evidence.
ISA 580 – should only be sought to support other audit evidence.
Auditor must consider reliability in terms of:
Inconsistencies with other forms of evidence
Concerns about the competence, integrity, ethical values or diligence of management.

Question 24

What are additional matters requiring written representation?

Answer 24

The following issues may also be documented in a written representation:
Directors have assessed the risk of fraud and consider it to be low
Directors are not aware of any actual, or suspected, instances of fraud
All related parties have been identified and transactions with them disclosed
Directors consider the aggregate of all uncorrected misstatements to be immaterial
Directors have considered all subsequent events in preparing the financial statements
Directors have considered all possible events, matters and contingencies in performing their going concern review

Question 25

What is the overall review of evidence?

Answer 25

Responsibility of engagement partner to perform a review of audit documentation (including a discussion with the engagement team) in order to satisfy themselves that sufficient appropriate evidence has been obtained to support audit opinion.
Considerations?
Reviews also significant for a firm’s appraisal system and development of staff.
Important element of any monitoring system, implemented to identify and rectify deficiencies in a firm’s practices that could lead to poor quality work.

Question 26

What is evaluation of misstatements?

Answer 26

ISA 450 Evaluation of Misstatements Identified During the Audit.
All misstatements should be communicated to management on a timely basis, unless trivial.
Management to correct all misstatements identified during the audit.
Auditors should try and obtain an understanding of management’s reasons for refusing to adjust any misstatements.
Auditor should obtain written representation from management.