SESSION 9 COMPLETION AND REVIEW Learning Objectives: Discuss the overall review of evidenced obtained. Explain the significance of unadjusted differences. Explain the purpose of subsequent events review and discuss the procedures to be undertaken in performing a subsequent events review. Define and discuss the significance of the concept of going concern. Explain the importance of and the need for going concern reviews. Explain the purpose of and procedures for obtaining management representation. Discuss the quality and reliability of management representations as audit evidence. Audit finalisation Include the followings: Accounting policies: Appropriate and suitable Consistent Industry standard Disclosed Departures from accounting standard justified The substance of transaction is reflected Compliance with the Companies legislation requirements: Presentation Disclosures Overall review: The financial statements reflect the results of all other tests.
The financial statements reflect the auditor s knowledge of the business. Results of analytical procedures make sense. The financial statements are free from management bias. ISA 710 COMPARATIVES Comparatives financial statements where amounts and other disclosures for the preceding period are included for comparison with the financial statement of the current period, but do not form part of the current period financial statement. If the previous year s figure should be adjusted and the particular of the adjustments and the reason for it shown in the notes. These figure form the opening position from which the present year s figure are derived for example, the opening stock is a component of the cost of sales figure. The auditor must be assured that the opening figure have been properly brought forward. Accounting policies must be applied consistently from year to year. Corresponding amounts must be shown and the auditor must seek evidence that they are properly shown. Audit procedures: If the auditor was the auditor of the preceding accounts and issued an unqualified report then he/she should: Consider whether his/her audit of the current period has revealed any matter casting doubt on the previous year s figure. Satisfy him/herself that the balance have been properly brought forward and incorporated in the books. Satisfy himself that the preceding period s figures have been properly and consistently classified and disclosed as comparatives figures. Satisfy himself that consistent accounting policies have been applied. If the preceding accounts are audited by another audit firm and the current auditor should consider additional work. Consultations with the management. Review the client records, working papers and accounting and control procedures for the preceding period especially the opening balance. Consider whether work on present year s accounts provides also evidence regarding opening balance. Completion and Review Page 2 of 7
If there is insufficient evidence on opening balance the auditor should consider performs some substantive tests on the opening balance. ISA 560 Subsequent Events (Events after balance sheet date) The auditor should consider the effect of subsequent events on the financial statement and on the auditor s report. Events both favourable and unfavourable, which occurs between the Balance sheet date and the date on which the financial statements are approved by the directors. There are two type of Post Balance Sheet events: 1. Adjusting events are Post Balance sheet events which provide additional evidence of conditions existing at the Balance sheet date. Following are example of adjusting events: Allowances for stock and Provision for Bad debts. Affect of changes in taxation Dividend receivable from Subsidiary companies. Proposed dividends 2. Non Adjusting events are Post Balance sheet events which concern condition which did not exist at the Balance sheet date. Following are example of non adjusting events: Issue of share capital Loan ISA 570 GOING CONCERN Merger or acquisition Changes in business activities Government action such as Nationalisation The purpose of this International Standard on Auditing (ISA) is to establish standards and provide guidance on the auditor s responsibility in the audit of financial statements with respect to the going concern assumption used in the preparation of the financial statements, including considering management s assessment of the entity s ability to continue as a going concern. Since financial statements are prepared on the assumption of going concern, it is essential for the auditor to give positive consideration to the applicability of the going concern basis at the planning stage and throughout the audit. Completion and Review Page 3 of 7
Management s Responsibility The going concern assumption is a fundamental principle in the preparation of financial statements. Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading. International Accounting Standard (IAS) 1 (Revised 2003), Presentation of Financial Statements, state: When preparing financial statements, management shall make an assessment of an entity s ability to continue as a going concern. Financial statements shall be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. Management s assessment of the going concern assumption involves making a judgment, at a particular point in time, about the future outcome of events or conditions which are inherently uncertain. The following factors are relevant: Operational problems: Trading loss Forced reduction in operation Loss of key suppliers or customers Litigation with customers and suppliers Increased competitions Dependence on one product. Financial problems: Net current liabilities Funding operations from overdue VAT/PAYE Excess borrowing to finance daily obligations Loan defaults Cancellation of capital projects In ability to pay debts as and when due Refusals to renew/extend overdraft limits Personnel problems: Loss of key personnel Prolonged industrial disputes Completion and Review Page 4 of 7
If such indicators are detected, the auditor should seek evidence to support the going concern assumption: Profit and cash flow projection covering the period at least 12 months from the date the directors approve the financial statements. Orders received and contract signed Holding company or bank supports. Directors supports. Audit Procedures (Tests) For Going Concern: ISA 570 requires that the auditor, when forming an opinion as to whether financial statements gives a true and fair view should consider the entity s ability to continue as a going concern and any relevant disclosure in the financial statements. Assess the adequacy of the means by which the directors have satisfied themselves that the adoption of the going concern basis is appropriate. Examined all relevant evidences available to support the going concern status. Review the director s business review and their assessment of the future. Assess the systems or other means by which the directors have identified warnings of future risks and uncertainties. Examine budgets and other future plans and assess the reliability of such budgets by references to past performances. Examine management accounts and other reports of recent activities. Obtain confirmation of existing bank borrowing facilities and suppliers credits. Review the board minute for any discussion of going concern matters. Enquire of the director s plan for resolving any issue that may threaten the going concern of the company. Consider obligations undertakings guarantee with lenders, suppliers and group companies for giving or receiving support. Impact on the audit report: Based on the audit evidence obtained the auditor should determine if in the auditor s judgement a material uncertainty exists related to events or conditions that alone or in aggregate may cast significant doubt on the entity s ability to continue as a going concern. Completion and Review Page 5 of 7
If there is a significant level of concern but company is still a going concern, then issue an unqualified audit report but with explanatory paragraph in the basis of opinion section. Highlight the existence of material uncertainty relating to the event or condition that may cast significant doubt on the entity s ability to continue as going concern and draws attention to the note in the financial statement that discloses the matter. If adequate disclosure is not made in the financial statements the auditor should express a qualified or adverse opinion as appropriate. The report should include reference to the fact that there is a material uncertainty that may cast significant doubt about the entity s ability to continue as a going concern. If in the auditor s judgement the entity will not be able to continue as a going concern, the auditor should express an adverse opinion if the financial statements have been prepared on a going concern basis. If disclosure in the financial statement regarding going concern is inadequate then issue a qualified audit opinion based on disagreement. ISA 580 MANAGEMENT REPRESENTATIONS Throughout the audit, management will make representations to the auditors both on specific and general matters. To reduce the possibility of misunderstandings between the auditors and management these representations should be confirmed in writing. Where the representations are material to the financial statements the auditors must: 1. Seek corroborative audit evidence. 2. Evaluate whether the representations are reasonable and consistent with other audit evidence 3. Consider whether the individuals making the representations can be expected to be well informed in these particular matters. Representations are not a substitute for other audit evidence and only where other audit evidence is unavailable, such as where knowledge of the facts is confined to management or where the matter is one of judgement or opinion, can management representations be considered sufficient audit evidence. Common categories of matters included in the letter of representation Confirmation of responsibility for, and approval of, the financial statements. Confirmation that all of the accounting records, and all related documentation (such as minutes of management and shareholder meetings) have been made available, and that company transactions have been properly reflected therein. Completion and Review Page 6 of 7
Confirmation of the expected outcome of legal claims. Confirmation of company plans in relation to certain tax provisions. Confirmation of the completeness of disclosure of related party transactions. Confirmation that there have been no post-balance sheet events that require revisions to the financial statements. Completion and Review Page 7 of 7