Order 1150246: Auditing and Assurance Services
Chapter 18
Completing the audit
Prepared by Dr Phil Saj
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Learning objectives
Describe the auditor’s responsibilities with respect to events occurring after the end of the financial year.
Explain the different types of accounting treatments for events occurring after the end of the financial year.
Explain the procedures for ensuring that the going concern basis is appropriate.
Explain the procedures for ensuring that all contingent liabilities have been properly identified and disclosed.
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Learning objectives
Describe and state the purpose of a management representation letter.
Indicate why analytical procedures are important for undertaking the overall review of the financial statements.
Identify the steps in evaluating audit findings.
Indicate the appropriate communication with the entity at the conclusion of the audit.
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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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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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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 period
Subsequent 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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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