Week 11 Flashcards
(33 cards)
Engagement wrap-up
Auditor finalises any open items before issuing audit report.
Any remaining audit procedures are assigned, due date set for completion.
Audit partner determines if procedures executed as planned and all relevant matters have been considered appropriately.
The goal in evaluating audit evidence is to decide, after considering all the relevant data obtained, whether.
The assessments of the risk of material misstatement at the assertion level are appropriate.
Sufficient evidence has been obtained to reduce the risk of material misstatement in the financial report to an acceptably low level.
When misstatements or control deviations found in planned procedures, consider:
Reason for the misstatement or deviation.
Impact on risk assessments and other planned procedures.
Need to modify or perform further audit procedures.
Need to revise materiality level due to:
New information, e.g. client obtained new loan with more restrictive debt covenants.
Change in auditor’s understanding of the entity and its operations.
New circumstances, e.g. significantly lower profit.
Going concern
Going concern assumption underpins accounting on the basis that the entity will be able to:
realise its assets
discharge its liabilities in the normal course of business.
Management must assess going concern:
On basis of 12 months from directors’ report.
Use information available at time of assessment.
Judgements affected by size and complexity of entity, nature and condition of its business, degree to which business affected by external factors.
Subsequent events:
Events that occur between year-end and the date of auditor’s report, and facts discovered after date of auditor’s report.
Type 1 subsequent events
Type 1 subsequent events — adjusting events:
Can affect estimates in financial report, or indicate that going concern assumption is not appropriate.
Accounting treatment:
Adjust financial report for the effect of these events, where material.
Type 2 subsequent events
Type 2 subsequent events – non-adjusting events:
Do not result in changes to amounts in the financial report.
Might be so significant to require disclosure.
Do not require accounts to be adjusted.
Type 1 subsequent events — adjusting events:
Examples:
Bankruptcy of customer after year-end which would be considered when evaluating provision for doubtful debts.
Amount received for insurance claim in negotiation at year-end.
Deterioration in operating results after year-end that means going concern not appropriate.
If the auditor becomes aware of Type 1 event after the date of the auditor’s report BUT before the financial report is issued, the auditor:
Considers whether the financial report needs changing.
Discusses the matter with the client.
Takes action appropriate in the circumstance.
Type 2 subsequent events – non-adjusting events:
Examples:
Uninsured loss of assets due to fire, flood, subsequent to year-end.
Purchase of a business, issuance of shares or debt subsequent to year-end.
Procedures used when conducting a subsequent events review:
The usual examinations of transactions after year-end are performed as part of the substantive tests of certain account balances.
In contrast, the subsequent events review is concerned only with significant events occurring subsequent to the balance sheet date that may require adjustment to or disclosure in the financial report.
Procedures used when conducting a subsequent events review:
list
gaining an understanding of, and evaluating reading minutes of meetings reading and analysing the latest extending any analytical procedures enquiring or extending assessing continued
Examples of enquiries of management on specific matters include:
new commitments sales of assets the issue of new shares change of ownership assets have been seized
The auditor to modify auditor’s report, the auditor should:
consider whether the financial report needs revision
discuss the matter with the client
consider whether the actions taken are appropriate in the circumstances.
Misstatements
Misstatements are differences between a reported financial report item and the correct reporting as required by standards.
Differences could relate to item’s amount, classification, presentation or disclosure.
Misstatements can be unintentional (error) or due to fraud.
Auditor evaluates whether misstatements need to be corrected.
Quantitative and qualitative considerations:
Risk of additional misstatements remaining undetected.
Effects of identified misstatements on client’s compliance with debt covenants.
Whether it is an error or judgmental misstatement.
Turnaround effect on current year’s financial report of misstatements identified in previous year.
Current year misstatements:
Auditor prepares schedule of uncorrected differences in order to assess overall effect on financial report and on individual items or balances.
Consider effect on future years’ reports.
Prior year misstatements:
May be immaterial in previous year, could be material this year (ASA 450; ISA 450).
Consider potential turn around.
E.g. understating payables last year due to cut-off error turns-around this year.
To form an opinion:
Evaluate audit evidence obtained
Evaluate effects of unrecorded misstatements and qualitative aspects of entity’s accounting
Evaluate whether financial report properly prepared and presented according to standards
Evaluate fair presentation of financial report
Conditions leading to modified audit report:
Significant uncertainty exists that should be brought to the reader’s attention.
A limitation of scope of the engagement exists.
There is a disagreement with those charged with governance regarding the application of accounting policies or the adequacy of financial report disclosure.
Modifications to the audit report
Auditor may need to modify audit opinion to express a qualified, adverse or disclaimer of opinion.
Or add an emphasis of matter or other matter paragraph.
Emphasis of matter:
Does not affect auditor’s opinion.
Applies when resolution of a matter is dependent on future actions or events not under direct control of the entity, but that may affect the financial report, and the matter is disclosed in the financial report.
E.g. going concern uncertainty.
Could also apply if information in annual report is materially inconsistent with financial report.
