Risks associated with topics

Question 1

EARP: Directors should…

Answer 1

1. Prepare FS on baisi of conditions existing at SFP date
2. Adjust SFP values for material PBSE
3. Disclose non-adjusting Events if criteria met

Question 2

EARP: when do you adjust SFP values

Answer 2

• if their an adjusting event
• if they indicate lack of going concern

Question 3

EARP: When do you disclose a non-adjusting event?

Answer 3

• If non-disclosure would be misleading
• If it represents window-dressing

Question 4

EARP: Adjusting events are…

Answer 4

• Material
• Exist but are unknown at SoFP date
• Need to adjust accounts to give a true and fair view

Question 5

EARP: Non-adjusting events are…

Answer 5

• Don’t exist until after SoFP date and to adjust would not be ‘true and fair’
• If material, consider disclosure

Question 6

EARP: Audit work to detect PBSE

Answer 6

• Auditors should review the PBS period as a whole, to ascertain whether they are matters to be reflected in the accounts/ referred to in the audit report

Question 7

EARP: For the period up to the signing the audit report, auditors should…

Answer 7

• review Board and Committee minutes
• enquire of solicitors
• review latest management accounts
• review client procedures for identification of PBSE
• ask management
• be aware of typical possibilities (known risk areas)

Question 8

Going concern per ISA 570

Answer 8

• a fundamental accounting concept that underlies the prep of FS of all UK companies
• assumed that a company will continue in operation for the ‘foreseeable future’ and there is no intention nor the need for liquidation or ceasing trading.

Question 9

GC: What happens if a company is not going concern?

Answer 9

• effect on FS is likely material & pervasive
• NCA & inventories are at realisable value
• prepayments have no future benefit
• new liabilities arise
• long-term liabilities are payable now

Question 10

GC: managements responsibilities when using going concern

Answer 10

Make an explicit assessment of the entity’s ability to continue as a going concern

Question 11

GC: Auditors responsibilities when using going concerns

Answer 11

Consider:
- appropriateness of management’s use of going concern basis
- whether there are material uncertainties about the entity’s ability to continue as a going concern that need to be disclosed in the financial statements
- determine implications in the audit report ( emphasis of matter or modified opinion)

Question 12

GC: Directors responsibilities

Answer 12

• consider all facts known at reporting date
• As a minimum: budget preparation, training estimates, CF forcast and analysis of company’s borrowing requirements

Question 13

GC: Directors conclusion in regards to going concern

Answer 13

• There are no material uncertainties that may cast significant doubt upon company’s ability to continue as a going concern
• There are material uncertainties relating to events that may cast doubt on going concern of entity.

Question 14

GC: Auditors responsibilities under an active approach

Answer 14

Postive audit procedures to gain assurance that:
- Going concern conclusion is appropriate
- Disclosure of going concern basis is adequate

Question 15

GC: How do auditors evaluate the evidence and look for warning signs

Answer 15

• Current/gearing ratios
• Reduced dividends
• Redundancies /restructuring
• Changes in markets/products

Question 16

GC: Auditors need to be knowledgeable about the company to effectively…

Answer 16

• Assess business/inherent (and control) risk
• Perform analytical procedures

Question 17

GC: Examples of audit procedures

Answer 17

1. review cash flow/profit forecasts
2. review underlying assumptions and sensitivity
3. review existence, adequacy and terms of borrowing facilities
4. check obligations and undertakings
5. obtain letter of representation