Lecture 11, Chapter 18, Completing the audit

1. Chapter 18
Completing the audit
Prepared by Dr Phil Saj
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2. Learning objectives
1. Describe the auditor’s responsibilities with respect to
events occurring after the end of the financial year.
2. Explain the different types of accounting treatments for
events occurring after the end of the financial year.
3. Explain the procedures for ensuring that the going
concern basis is appropriate.
4. Explain the procedures for ensuring that all contingent
liabilities have been properly identified and disclosed.
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3. Learning objectives
5. Describe and state the purpose of a management
representation letter.
6. Indicate why analytical procedures are important
for undertaking the overall review of the financial
statements.
7. Identify the steps in evaluating audit findings.
8. Indicate the appropriate communication with the
entity at the conclusion of the audit.
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4. Review of subsequent events
The auditor shall consider the effect of
subsequent events on the financial report and
on the auditor’s report (ASA 560.5)
Subsequent events consist of:
events occurring between the end of the period
and the date of the auditor’s report
facts discovered after the date of the auditor’s
report.
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5. Review of subsequent events
The auditor needs to assess whether it is an
event on which he or she has a responsibility to
act.
If the auditor has the responsibility, there is a
need to consider the appropriate accounting
treatment.
The following slide shows the timeline in respect
of subsequent events.
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6. Review of subsequent events
End of the reporting
period 30 June
Auditor’s report
signed 1 August
Financial statements
issued 15 August
Subsequent events
Post audit periodSubsequent period
Period Auditors have a responsibility to discover and evaluate subsequent events.
Period Auditors have a responsibility to examine only events that come to their
attention.
Period Auditors have a responsibility to examine only events that come to their
attention and that existed at the date of the auditor’s report.
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1
3
3
2
1
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7. Auditing procedures
Review of procedures that management has established
to ensure that subsequent events are identified.
Review of the minutes of the meetings of shareholders,
those charged with governance, audit and executive
committees held after the reporting date etc.
Review of the entity’s latest available interim financial
statements.
Also, as considered necessary and appropriate, budgets,
cash flow forecasts and other related management reports.
Enquiry of entity’s lawyers.
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8. Auditing procedures
Inquiring of management as to whether any
subsequent events have occurred that may affect
the financial statements, including:
the current status of items that were
accounted for on the basis of preliminary
or inconclusive data; and
whether new commitments, borrowings or
guarantees have been entered into.
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9. Auditing procedures
whether sales of assets have occurred or are planned.
whether the issue of new shares or debentures, or an
agreement to merge or liquidate has been made or is
planned.
whether any major assets have been destroyed, for
example, by fire or flood.
whether there have been any material developments
regarding risk areas and contingencies.
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10. Auditing procedures
In situations where management does not
amend the financial statements when the
auditor believes it is necessary, the auditor
should consider issuing a modified audit report.
This is required by ASA 705 Modifications to the
Opinion in the Independent Auditor’s Report
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11. Accounting considerations
AASB 110 Events after the Reporting Period,
classifies events after reporting date into two
categories:
Adjusting events; or
Non-adjusting events.
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12. Adjusting events
Adjusting events are those that:
provide additional evidence about conditions
that were uncertain at reporting date; or
provide evidence about a condition that
existed at reporting date, that the entity was
unaware of.
The related assets and liabilities should be
adjusted to reflect the additional evidence.
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13. Non-adjusting events
Non-adjusting events provide information
concerning conditions that arose after reporting
date, for which no adjustment should be made.
Disclosure by way of a note to the financial
statements (nature and financial effect of the
event) may be required if material.
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14. Considering the appropriateness of
the going concern assumption
When planning and performing audit
procedures and in evaluating the results
thereof, the auditor shall consider the
appropriateness of management’s use of the
going concern assumption in the preparation of
the financial report (ASA 570).
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15. Considering the appropriateness of
the going concern assumption
Indications of a going concern problem may be
financial, such as material operating losses;
operating, such as the loss of key management
personnel; or other, such as a change in
legislation.
The period to be considered by such
assessment extends to the expected date of the
auditor’s report for the succeeding financial
reporting period.
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16. Review for contingent liabilities
Contingency is an existing condition, or set of
circumstances that involves uncertainty as to a
possible gain (contingent asset) or loss
(contingent liability), that will be resolved when
one, or more, future event(s) occurs or fails to
occur.
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17. Audit procedures to ascertain the
existence of contingent liabilities
Review of minutes of meetings of the board,
sub-committees of the board and any
shareholders’ meetings.
Review of contracts, loan agreements, leases
and correspondence with government agencies.
Review of income tax liability, tax returns and
associated correspondence.
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18. Audit procedures to ascertain the
existence of contingent liabilities
Inspecting other relevant documents for
possible guarantees.
Obtaining a legal representation letter.
Obtaining a management representation letter.
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19. Communication with the entity’s
legal representative
ASA 502 Audit Evidence–Special Consideration for
Litigation and Claims states in paragraphs A5–A7:
The auditor should obtain sufficient appropriate
audit evidence regarding:
whether all material legal matters have
been identified; and
the probability of any material revenue or
expense arising from such matters and
the estimated amount thereof.
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20. Management representation letter
ASA 580 Written Representations requires the
auditor to obtain appropriate representations from
management.
The objectives of such a letter are to:
Confirm management’s responsibility for the
presentation of the financial statements; and
Support other audit evidence relevant to the
financial report or specific assertions in the
report.
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21. Performing analytical procedures
ASA 520 Analytical Procedures states,
The auditor shall design and perform analytical
procedures near the end of the audit that
assist the auditor when forming a conclusion
as to whether the financial report is consistent
with the auditor’s understanding of the entity.
Involves the use of ratios and other comparative
techniques.
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22. Performing analytical procedures
The reasons for using analytical review in the overall
review are to:
corroborate conclusions formed during the audit on
individual elements of financial information;
assist in arriving at the overall conclusion that the
financial information as a whole, is consistent with
the knowledge of the entity’s business; and
gain assurance that the company will remain a
going concern for the relevant period.
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23. Performing analytical procedures
The procedures should be:
applied to critical audit areas identified
during the audit; and
based on financial statement data after all
audit adjustments and reclassifications
have been recognised.
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24. Evaluating the findings
At this stage of the audit, the auditor’s objectives
are:
to ensure that the audit process has
been undertaken in accordance with
the auditing standards; and
to determine the type of audit opinion to
be expressed.
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25. Evaluating the findings
To meet these objectives the auditor:
makes the final assessment of materiality and
audit risk;
undertakes the technical review of the financial
statements;
undertakes the final review of the working
papers; and
formulates an opinion and drafts the auditor’s
report.
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26. Communicating with the entity
ASA 260.9 states that the auditor shall
communicate audit matters of governance
interest arising from the audit of the financial
report with those charged with governance of
the entity.
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27. Communication of audit matters
Matters which would normally be communicated are:
the general approach and overall scope of the
audit;
the selection of, or changes in, significant
accounting policies and practices that have, or
could have, a material effect on the entity’s
financial report; and
the potential effect of any significant risks and
exposures.
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28. Communication of audit matters
Matters to be communicated include:
audit adjustments;
material uncertainties that may cast doubt on
the entity’s ability to continue as a going
concern;
disagreements with management;
expected modifications to the auditor’s report; &
any other matters agreed on in the terms of the
audit engagement.
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29. Communicating with the entity
ASA260 para. 9 states that the objectives are:
To communicate clearly the responsibilities of
the auditor in relation to the financial report
audit, and an overview of the planned scope
and timing of the audit;
obtain information relevant to the audit from
those charged with governance
provide timely observations arising from the
audit; and
promote effective two-way communication.
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