OVERVIEW
Objective
¾
To describe review procedures and the auditor’s responsibilities for matters principally of disclosure including subsequent events and going concern.¾ IAS 10
¾ ISA 560
¾ Before auditor’s report
¾ Before financial statements issued
¾ After financial statements issued AUDIT
COMPLETION
COMPARATIVES INFORMATION OTHER SUBSEQUENT EVENTS
¾ Reporting framework
¾ Auditor’s responsibility
¾ Reporting
¾ Examples
¾ Auditor’s responsibility
¾ Material inconsistency
¾ Material misstatements
INITIAL ENGAGEMENTS –
OPENING
GOING CONCERN
¾ Audit objectives
¾ Definition
¾ Matters to consider
¾ Procedures
¾ Audit conclusions
¾ Documentation
¾ Checklist
¾ Analytical procedures
¾ Other tools
¾ Need for review
¾ Review: techniques & types
1
AUDIT COMPLETION
1.1
Need for documentation
¾
All critical matters, particularly those requiring exercise of judgement, must be fully documented, particularly regarding: going concern;
provisions and contingencies; and subsequent events.
¾
Key decisions on these areas are subject to negotiation and discussions withmanagement which should be adequately documented together with the conclusions reached.
1.2
Completion checklists
¾
Designed to be used by the audit engagement partner to ensure that all relevant audit procedures have been completed before the audit opinion is signed.¾
All off-the-shelf and most bespoke audit systems include one.¾
Although useful as an aide-memoire they do not avoid problems of time pressure.¾
It is important that enough time is allocated to the completion of the audit for checkliststo be used constructively and to allow for a thorough and honest assessment of the adequacy of the audit work performed and the evidence gathered. .
1.3
Analytical procedures
¾
At this stage ratio trend analysis is most likely to be used to assess the reasonableness of the figures and other date presented.¾
Any expectations will be more refined than at the planning stage, in the light of work undertaken, therefore significant variations are likely to require further work.1.4
Other tools
1.4.1
“Points for partner”
¾
A completion summary recording significant points and issues that have come up during the course of the audit and how they have been dealt with.¾
This schedule draws together in one place all matters that the audit partner needs to be aware of and enables a final decision to be taken on:1.4.2
Disclosure checklists
¾
Although the financial statements are the responsibility of management, they are often mistaken for the final product of the audit.¾
However, even if errors are not significant in terms of understanding the financial statements or complying with statute and accounting standards (eg IFRSs) they can be embarrassing for the client and the auditors.¾
Disclosure checklists are widely used to critically review the final accounts for disclosure and presentation points before they are released.1.5
Need for review
¾
Part of the quality control process (examined in Paper P7 Advanced Audit and Assurance).¾
Helps ensure that: work carried out in accordance with the audit plan;
all material and contentious issues have been properly dealt with; the auditor’s report is consistent with work performed; and audit work supports the audit opinion; and
ethical matters have been considered for audit re-acceptance.
¾
Provides an opportunity for auditors and firms to stand back and assess the way in which particular audits, or audits in general, are conducted.1.6
Review techniques
¾
There are two principal techniques: discussion between reviewers and the other people involved in the audit; and review of documentation.
¾
Neither technique in isolation can provide absolute assurance that an audit has been properly performed, but together they can provide reasonable assurance that audits have been conducted in accordance with auditing standards, other regulatory requirements, and the firm’s own standards.1.7
Types of review
¾
Reviews conducted before the auditor’s report is signed include: day-to-day review and discussion of the work done as the audit progresses, performed by senior audit team members (on the work of their assistants) and audit managers (on the work of the seniors);
the audit engagement partner’s review prior to the signing of the auditor’s report; independent second partner review for high risk clients, eg where the audit report
2
INITIAL ENGAGEMENTS
−
OPENING BALANCES
[ISA 510]
2.1
Audit objectives
¾
Opening balances do not contain misstatements that materially affect the current reporting period’s financial statements¾
Prior reporting period’s closing balances have been correctly brought forward or restated (when appropriate)¾
Appropriate accounting policies are consistently applied (or changes properly accounted for and adequately disclosed).2.2
Definition
“Opening balances” − account balances which exist at the beginning of the reporting period. Based upon the closing balances at the end of the prior reporting period and reflecting effects of:
¾
transactions of prior reporting periods¾
accounting policies applied in the prior reporting period.2.3
Matters to consider
¾
Accounting policies followed: Appropriate? Consistently applied? Adequately disclosed?
¾
Whether prior reporting period’s financial statements were audited − if so whether auditor’s report modified.¾
Nature of accounts and risk of misstatement in the current reporting period’s financial statements.¾
Materiality of opening balances relative to the current reporting period’s financial statements.2.4
Procedures
2.4.1
Prior reporting period audited by another auditor
¾
Review predecessor auditor’s working papers, if available.¾
Consider professional competence and independence of predecessor auditor.2.4.2
Prior reporting period’s auditor’s report modified
2.4.3
Other audit procedures
¾
Current reporting period’s audit procedures will provide some evidence. For example: the collection (payment) of opening accounts receivable (payable) providesevidence of the existence, rights and obligations, completeness, cutoff and valuation of the opening balances;
sales at the beginning of the reporting period provide evidence concerning the net realisable value of inventory.
¾
Additional work to confirm inventory, where necessary, may include: Observing a current physical inventory count; Reconciling it back to the opening quantities; and
Testing valuation of opening items, gross profit and cutoff.
¾
Additional work, where necessary, to confirm opening non-current assets and liabilities may include: Examining underlying records (e.g. fixed asset registers);
Third party confirmation (e.g. for long-term debt and investments).
2.5
Audit conclusions and reporting
¾
Insufficient appropriate audit evidence will give rise to qualified opinion or disclaimer of opinion.¾
Opening balances containing misstatements which could materially affect the current reporting period’s financial statements will result in a qualified opinion or an adverse opinion.¾
Inconsistent accounting policies not properly accounted for and adequately disclosed ⇒ a qualified opinion or an adverse opinion.¾
Prior reporting period auditor’s report modified E.g. scope limitation on opening inventory in prior reporting period ⇒ no need to qualify or disclaim in current period
3
COMPARATIVES
[ISA 710]
3.1
Reporting frameworks
3.1.1 Corresponding figures
3.1.2 Comparative financial statements
¾
Amounts and other disclosures for the preceding reporting period are included as part of the currentreporting period financial statements, and are intended to be read in
relation to the amounts and other disclosures relating to the current reporting period.
¾
They do not stand alone.¾
Amounts and other disclosures of the preceding reporting period are includedfor comparison with the current reporting
period financial statements, but do not form
part of the current reporting period
financial statements.
¾
They are capable of standing alone.3.1.3 Essential audit reporting difference
¾
Auditor’s report only refers to current reporting period financial statements of which the corresponding amounts are in integral part.¾
Auditor’s report refers to each reporting period that financial statements are presented.3.2
Auditor’s responsibilities
¾
Ordinarily limited to ensuring correct reporting and appropriate classification.¾
Involves the auditor assessing whether: accounting policies are consistent; figures agree.
3.3
Reporting
3.3.1
Corresponding figures
3.3.2
Comparative financial statements
¾
Are not specifically identified because auditor’s opinion is on currentreporting period financial statements as a whole, including corresponding figures.
¾
Are specifically identified because the auditor’s opinion is expressed3.3.3 Prior reporting period modification
¾
Resolved − current report does not ordinarily refer to (but may include an emphasis of matter paragraph).¾
Different opinions can be expressed with respect for financial statements of one or more reporting periods.¾
UnresolvedCurrent period modified
Current period not
modified ⇒ also modified
corresponding figures
⇒ modified regarding corresponding
figures
4
OTHER INFORMATION IN DOCUMENTS CONTAINING
AUDITED FINANCIAL STATEMENTS
[ISA 720]
On which the auditor has no obligation to report, in documents containing audited financial statements (e.g. annual reports).
4.1
Examples
¾
Report by management or board of directors on operations¾
Financial summaries or highlights¾
Employment data¾
Planned capital expenditures¾
Financial ratios¾
Names of officers and directors¾
Selected quarterly data.Commentary
4.2
Auditor’s responsibility
Statutory or contractual No obligation
¾ Auditor reports specifically on other
information. ¾ However, credibility of audited financial statements may be undermined by inconsistencies.
¾
Access to other information − needs to be timely.4.3
Material inconsistencies
¾
Exists when other information contradicts that contained in audited financial statements.¾
May raise doubt about audit conclusions and, possibly, the auditor’s opinion.¾
May be:¾
If amendment refused express qualified or adverse opinion¾
Consider emphasis of matter paragraph not issuing auditor’s report withdrawing from engagement obtaining legal advice
In audited financial statements In other information
4.4
Material misstatements of fact
4.4.1
Meaning
Exist when other information, not related to matters appearing in audited financial statements, is incorrectly stated or presented.
4.4.2
Procedures
¾
Discuss with management.5
SUBSEQUENT EVENTS
5.1
Events after the reporting period
[IAS 10]
¾
Those events, both favourable and unfavourable, that occur between the end of the reporting period and the date on which the financial statements are authorised for issue.Event
End of reporting
period statements Financial
authorised
Two types
“Adjusting” “Non-adjusting” Provide further
evidence of conditions
existing at the end of the
reporting period.
Indicative of conditions that arose
after the end of the
reporting period.
⇒ Disclosure (a) Nature of event (b) Estimate of financial
effect, or statement that estimate cannot be made.
5.2
Auditing definition
[ISA 560]
Both events occurring between the reporting period end and the date of the auditor’s report, and facts discovered after the date of the auditor’s report.
5.3
Audit procedures
−
Before date of auditor’s report
Event
End of the
reporting period statements Financial authorised
Date of auditor’s
report
Financial statements issued
¾
Review management’s procedures to ensure subsequent events identified.¾
Read minutes of meetings of shareholders/board of directors/audit committees etc held after the reporting period end.¾
Inquire about matters discussed at meetings for which minutes are not yet available.¾
Read latest available interim financial statements, budgets, cash flow forecasts,management reports, etc.
¾
Examples of inquiries of management on specific matters: Have new commitments, borrowings or guarantees been entered into? Have sales of assets occurred or are any planned?
Is the issue of new shares or debentures or an agreement to merge or liquidate being planned?
Have any assets been appropriated by government or destroyed (e.g. by fire or flood)?
What developments are there regarding risk areas and contingencies? Have any unusual accounting adjustments been made/contemplated
Have events occurred (or are likely to occur) which will call into question the appropriateness of accounting policies used (e.g. concerning the validity of the going concern assumption)?
¾
When aware of events which materially affect the financial statements − consider whether they are properly accounted for and adequately disclosed.5.4
Audit procedures
−
After date of auditor’s report but before financial
statements issued
Event
End of the
reporting period statements Financial authorised
Date of auditor’s
report
Financial statements
issued
Responsibility to inform auditor rests with management.
¾
Consider whether financial statements need amendment.¾
Discuss with management.¾
For example:If financial statements
amended not amended * * when auditor thinks they
should be
Extend audit
procedures and issue Express a qualified or adverse opinion.
¾
If financial statements subsequently released, take action to prevent reliance on auditor’s report (will depend on the legal rights and obligations and legal advice).5.5
Audit procedures
−
After financial statements issued
Event
End of reporting
period Financial statements authorised auditor’s Date of report
Financial statements issued
¾
Auditor has no obligation to make any inquiry.¾
When aware of a fact which existed at the date of the auditor’s report and which, if known at that date, may have caused the auditor to modify the auditor’s report, the auditor should: consider whether financial statements need revision; discuss matter with management;
FOCUS
You should now be able to:
¾
discuss the importance of the overall review of evidence obtained;¾
explain the significance of unadjusted errors;¾
explain them purpose of a subsequent events review;