Subsequent Events F. REVIEW. 1. Subsequent Events 2. Going Concern 3. Written Representations 4. Audit Finalization and the Final Review

Transcription

1 F. REVIEW 1. Subsequent Events 2. Going Concern 3. Written Representations 4. Audit Finalization and the Final Review What are subsequent events? Subsequent Events Subsequent events are events occurring between the date of the financial statements and the date of the auditor's report, and facts that become known to the auditor after the date of the auditor's report. What are the two types of subsequent events? Those that provide evidence of conditions that existed at the year-end date (adjusting events) Those that are indicative of conditions that arose after the year-end date (nonadjusting events) Give examples of Adjusting events? Settlement of a court case Sale of inventory after year-end providing evidence of its NRV at year-end Fraud or error showing the accounts are incorrect Give examples of Non-adjusting events? Dividends declared after the year-end Fire causing destruction of major plant Announcement of a major restructuring Auditors have a responsibility to review subsequent events before they sign the auditor's report, and may have to take action if they become aware of subsequent events between the date they sign the auditor's report and the date the financial statements are issued. What are the audit procedures to test subsequent events? Inquire of management the status of items involving subjective judgement Inquire of management the status of items accounted for using preliminary or inconclusive data Inquire of management whether they are any new commitments, borrowings or guarantees Inquire of management whether there have been any sales or destruction of assets Inquire of management whether there have been any issues of shares/debentures or changes in business structure Inquire of management whether there have been any developments involving risky areas, provisions and contingencies Inquire of management whether there have been any unusual accounting

2 adjustments Inquire of management whether there have been any major events such as affecting going concern, or appropriateness of accounting policies for estimates Inquire of management whether there have been any litigations or claims Review management procedures for identifying subsequent events to ensure that such events are identified Read minutes of general board/committee meetings and enquire about unusual items Obtain written representation that all events occurring subsequent to the period end which need adjustment or disclosure have been adjusted or disclosed What are the responsibilities of directors after material subsequent facts are discovered after the date of the auditor s report but before the financial statements are issued? The financial statements are the responsibility of management o They should therefore inform the auditors of any material subsequent events o What are the responsibilities of auditors after material subsequent facts are discovered after the date of the auditor s report but before the financial statements are issued? The auditors do not have any obligations to perform procedures or enquires regarding the financial statements after the date of the report If the auditor becomes aware of a fact that had it know would have changed the report they should discuss the matter with management, determine whether the financial statements need amendment Inquire how management intends to address the matter in the financial statements If amendments are necessary the auditors must carry out audit procedures on the changes made, and provide a new auditor s report If amendments are necessary but management does not make the changes and if the audit report has not yet been provided the auditor shall modify the opinion If amendments are necessary but management does not make the changes and the audit report has been provided the auditor shall notify those charged with governance no to issue the financial statements before amendments; but if the financial statements are issued anyway, the auditor shall then take action to seek to prevent reliance on the auditor s report What responsibility do auditors have regarding facts discovered after the financial statements have been issued? Auditors have no obligations to perform procedures or make enquiries regarding the financial statements after they have been issued. If the auditor becomes aware of a fact that had the auditor known it at the date of the report that might have caused the auditor to amend the auditor s report then the auditor shall discuss the matter with management and those charged with governance. Like wise they will determine whether the financial statements need amendment and if so, inquire how management intends to address the matter in the financial statements. If management amends the auditors shall carry out procedures necessary on the amendments, review management actions and ensure that recipients of issued financial statements are informed. They shall also issue a new or amended audit report. If management does not take the necessary steps they will seek to prevent future reliance on the report.

3 Going Concern What is the going concern assumption? Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. The entity is viewed as being able to realise its assets and discharge its liabilities in the normal course of business. What are the objectives of auditors regarding the going concern? To obtain sufficient appropriateness audit evidence regarding the appropriateness of management s use of the going concern assumption To conclude whether a material uncertainty exists related to events or conditions that create significant doubt about the entity s ability to continue operating as a going concern To consider the implications for the auditor s report What are events are conditions that may cast doubt about the going concern assumption? Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment Excessive reliance on short-term borrowings to finance long-term assets Withdrawal of financial support by creditors Negative operating cash flows Adverse key financial ratios Substantial operating losses Significant deterioration in the value of assets used to generate cash flows Arrears or discontinuance of dividends Inability to pay creditors on due dates Inability to comply with terms on loan agreements Change from credit to cash-on-delivery transactions with suppliers Inability to obtain financing from essential new product development or other essential investments Management intentions to liquidate or cease operations Loss of key management without replacement Loss of a major market, key customers, licence, or principal suppliers Labour difficulties Shortage of important supplies Emergence f a highly successful competitor Non-compliance with statutory requirements Pending legal or regulatory proceedings against the entity Changes in law or regulations that may adversely affect the entity Uninsured or under-insured catastrophes when they occur What are the procedures for gathering audit evidence to determine the entity s ability to continue as a going concern? Requesting management to make its assessment on the company s going concern Evaluate management s plans for future action

4 Evaluate the reliability of underlying data used to prepare a cash flow forecast Evaluate the reliability of assumptions used to prepare a cash flow forecast Consider whether any additional facts or information have become available since the date management made its assessment Request written representations from management and those charge with governance about plans for future action and the feasibility of these plans Analyse and discuss with management: o Cash flow forecast o Profit forecast o Other relevant forecasts o Interim financial statements Review the terms of debentures and loan agreements to determine whether they have been breached Read minutes of the meetings of shareholders, the board of directors and important committees for reference to financial difficulties Inquire of the entity s lawyer regarding litigation and claims Confirm whether they exist a legally enforceable arrangement to provide or maintain financial support with related and third parties and assess whether these can be met Consider the entity s position concerning unfulfilled customer orders Review events after the period-end for items affecting the entity s ability to continue as a going concern What are written representations? Written Representations Written representations are written statements by management provided to the auditor to confirm certain matters or to support the other audit evidence. Why are written representations necessary? To confirm management s responsibilities Where they are required by other ISAs Support other audit evidence What sort of information is included in the written representation? That management has fulfilled its responsibility for the preparation of the financial statements That financial statements are prepared and presented in accordance with the applicable financial reporting framework That management has provided the auditor with all relevant information agreed in terms of the audit engagement That all transactions have been recorded and are reflected in the financial statements Audit Finalization and the Final Review At the end of the audit process the auditors will undertake an overall review of the financial statements. This review of the financial statements, in conjunction with the conclusions

5 drawn from the other audit evidence obtained, give the auditors a reasonable basis for their opinion on the financial statements. A senior member of the audit team with appropriate skills and experience should carry out this review. The auditor will consider whether compliance with accounting regulations has been followed. The auditors should review for consistency and reasonableness and this can be done using analytical procedures as to whether the financial statements are consistent with the auditor s understanding of the entity. What is a misstatement? A misstatement is a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. It can arise from error or fraud. What are factual misstatements? Factual misstatements are misstatements about which there is no doubt. What are judgemental misstatements? Judgemental misstatements are misstatements arising from management s judgement concerning accounting estimates or accounting policies. What are projected misstatements? Projected misstatements are misstatements based on the auditor s best estimate of misstatements arising from sampling populations. Auditors are required to communicate all misstatements accumulated during the audit with the appropriate level of management on a timely basis and to request management to correct those misstatements. If management refuses, the auditor must establish the reasons why and consider this when evaluating whether the financial statements as a whole are free from material misstatement. THE END.