12-1Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Chapter 12

Completion and Review

12-2Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

The nature of completion and review procedures

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Date of the Audit Report

• Important because it establishes date of auditor’s responsibility for knowledge of events that should be reflected in the financial report.

• Audit report should be dated when it is actually signed, and no earlier than date of directors’ declaration.

• Ensures financial report was completed and formally accepted by officers of company prior to auditor expressing an opinion.

Learning Objective 1:

12-4Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Audit procedures after balance date

• Many audit procedures performed after balance date as normal tests of balances, e.g.:

– cutoff tests;– collectability of accounts receivable determined by

subsequent payment; and– search for unrecorded liabilities.

12-5Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Analytical procedures after balance date

• Auditor is also required to apply analytical procedures at or near completion of the audit to:

– assist in overall review of reasonableness of financial report;

– ensure financial report is consistent with auditor’s knowledge of entity; and

– corroborate conclusions formed during audit.

12-6Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Subsequent Events Review

• AASB 110 (IAS 10) indicates that financial reports should reflect the effects of certain events occurring up to time of completion (defined as date of directors’ declaration or approval of financial report by owners or controlling management).

• Auditor’s responsibility to consider subsequent events is extended up to the date on which auditor signs the audit report. Refer AUS 706/ASA 560 (ISA 560).

Learning Objective 2:

12-7Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Types of Events Subsequent to Balance Date

• Two types of events may materially affect financial reports. These are:

– Type 1 or adjusting events– Type 2 or disclosing events.

12-8Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Type 1 or Adjusting Events

• Events, both favourable and unfavourable, that provide evidence of, or further elucidate conditions that existed at balance date.

• Financial effect of such events need to be brought to account (amounts in the financial statements need to be adjusted).

12-9Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Examples of Adjusting Events

• Subsequent collection of a material account receivable that has been treated as uncollectable at balance date.

• A commercial assessment or legal determination, subsequent to balance date, that establishes definitively a claim that was in existence, but of an uncertain amount, at balance date.

12-10Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Type 2 or Disclosing Events

• Do not relate to a condition that existed at balance date;• Include both favourable and unfavourable events that

create new conditions, as distinct from any condition that might have existed at balance date;

• If material, disclose in the notes to the accounts.

12-11Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Examples of Type 2 Events

• A fire or flood loss after balance date, not fully covered by insurance;

• Raising of additional shares or loan capital after balance date; and

• Mergers and acquisitions after balance date.

12-12Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Events Between Balance Date and Date of Audit Report

• The auditor has a responsibility to apply audit procedures sufficient to enable auditor to determine whether all material Type 1 and Type 2 events have been appropriately adjusted for (Type 1) or disclosed (Type 2) in the financial report, up until the date of the audit report.

12-13Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Events subsequent to the date of the audit report

• Auditor has no responsibility to seek audit evidence to identify such events.

• Where auditor becomes aware of events that have a material effect on financial report and the report has not yet been issued (sent to shareholders), auditor should discuss the matter with management and seek to have an amended financial report issued.

12-14Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Events subsequent to the issue of the financial report

• If material events come up or are brought to auditor’s attention after financial report has been sent to shareholders, auditor should discuss matter with management.

• Where decision made to issue new financial report, auditor should perform procedures necessary to form an opinion on revised financial report.

• Auditor should take steps to prevent reliance on superseded financial report and audit report.

12-15Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Representation Letters

• Two types of letters are commonly sought towards completion of audit:

– Solicitor's– Management

Learning Objective 3:

12-16Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Solicitors’ representation letter

• Auditor should obtain letter from solicitors consulted by the client during the year to obtain evidence on existence, completeness, valuation and presentation of legal issues identified during audit.

• All enquiries of legal representatives of clients, and their responses to these enquiries (representations) will be documented in this representation letter.

• Example representation letter contained at Exhibit 12.2 (pp. 570-571)

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Management representation letter

• A written representation letter, prepared by auditor and signed by management, which formalises management responses to inquiries made by auditor during audit, and also clarifies management’s responsibilities.

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Reliability of management representation letter

• Limited in its reliability as audit evidence, and is usually used to corroborate other evidence (should not replace other evidence gathered by auditor).

• Might be the only (primary) evidence available to support management’s intentions of future actions.

• Example contained at Exhibit 12.3 (pp. 574-575).

12-19Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Review of working papers and financial report

• Undertaken at end of the engagement as a final check to ensure that all significant matters and problems have been identified, considered and satisfactorily resolved.

• Must consider size and nature of errors, as they might affect risk assessment and audit testing.

• Immaterial errors identified during audit may be considered material when aggregated, and thus require adjustment.

Learning Objective 4:

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Review of the financial report

In considering presentations and disclosures for each account balance and related note disclosures, the auditor must gather evidence to support the following assertions:

(i) Occurrence and rights and obligations - disclosed events, transactions and other matters have

occurred and pertain to the entity;(ii) Completeness - all disclosures that should have

been included in the financial report have been included(iii) Classification and understandability – financial;

information is appropriately presented and described and disclosures are clearly expressed;

(iv) Accuracy and valuation - financial and other information is disclosed fairly and at appropriate amounts.

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Review of the financial report(Cont.)

• Having collected evidence on other assertions related to account balances and classes of transactions, auditor will ensure that disclosures are fairly represented.

• Auditor will further ensure that the financial information is appropriately classified and is understandable.

• Auditor should also ensure that their name is not associated with misleading information.

• Auditor should finally ‘step back’ and ensure that the view presented by the financial report and all associated information is consistent with the underlying state of affairs.

12-22Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Review of other information contained in annual report

• Other information in annual report is not part of the financial report and is not covered by the audit report, e.g. directors’ report.

• Auditor should review other information to identify:– Material inconsistencies with financial report; and– Misstatements of fact

• Auditor who identifies a material inconsistency or misstatement of fact needs to determine whether the audited financial report or the other information needs to be amended.

12-23Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Appropriateness of the Going Concern Basis

• As well as assessing risk of going concern problems at planning stage, AUS 708/ASA 570 (ISA 570) requires auditor to assess once more at final review stage in order to confirm appropriateness of going concern principle as a basis for preparing financial report.

• If not clear that going concern basis is appropriate, additional audit procedures might be necessary.

Learning Objective 5:

12-24Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Assessing going concern at completion stage

• Additional procedures include:– Review events occurring after balance date– Analyse latest interim financial report– Read minutes of meetings– Review terms of loan agreements– Consider information from entity’s solicitors

12-25Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger SimnettSlides prepared by Roger Simnett

Comfort Letters

• Auditor needs to confirm arrangements made with third parties concerning provision of additional finance to support audited entity, and the capacity of the third party to provide promised support.

• Often a parent entity will support subsidiary in financial difficulty:

– Letter of support: parent agrees to provide financial assistance to subsidiary for fixed period.

– Letter of subordination: parent agrees not to demand repayment of financial debts owed by subsidiary.