AC 718-Auditing and Assurance

Chapter 18

Completion
and
Communication
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 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 in ensuring that the going
concern basis is appropriate
Explain the procedures in ensuring that all contingent
liabilities have been properly identified and disclosed
Describe and state the purpose of a management
representation letter
Indicate why analytical procedures are important in
undertaking the overall review of the financial statements
Identify the steps in evaluating audit findings
Indicate the appropriate communication with the entity at
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the conclusion of the audit
Auditor’s Responsibilities towards completion of audit

• Completing the fieldwork – make subsequent events review,

read minutes of meetings, obtain evidence concerning
litigation & claims, obtain client representation letter,
perform analytical procedures.

• Evaluating the findings – make final assessment of

materiality & audit risk, goin concern problems, make
technical review of financial stat., formulate opinion &
internal control report, make final review of working papers.

• Communicating with the client – communicate internal

control matters, matters pertaining to conduct of audit,
prepare management letter.

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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
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Enquiry of entity’s lawyers 4
 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
– whether new commitments, borrowings or guarantees have
been entered into
– 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, then 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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 Audit reporting dates
• Disclosing entity – within 3 months of its balance date.

• Other entities – within 4 months of balance date.

• Financial report must be distributed 21 days before

the AGM.

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The nature of completion and review procedures

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 Subsequent events

• Events that occur after the balance date but before

the date of the audit report.

• Auditor has a responsibility for ascertaining that mgt.

adequately discloses events occuring after balance
date but prior to time of completion.

• Subsequent period = events occuring between

balance date and date of the auditors report.

• Relevant period = financial statement period +

auditor’s reporting date.

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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
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

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 Subsequent events review

• AASB 110 (IAS 10) indicates that financial

reports should reflect the effects of certain
events occurring up to time of completion.

• Auditor’s responsibility to consider subsequent

events is extended up to the date on which the
auditor signs the audit report. Refer ASA 560 (ISA
560).

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 Date of the audit report

• Important because it establishes the date of the

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.

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Events between balance date and date of audit
report

• Auditor should date & sign the audit report.

• Auditor responsibility to report on the financial report
presented by mgt.
• The auditor has a responsibility (obligation) to apply
audit procedures sufficient to enable auditor to
determine whether all material Type 1and Type 2
events have been appropriately adjusted for (Type I) or
disclosed (Type II) in the financial report, relating to
subsequent events up to the date of the audit report.

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Types of events subsequent to balance date

• Two types of events may materially affect

financial reports. One requires adjustment of the financial
report, while the other requires disclosure only.

• The distinction between the 2 events rests on both their

nature & timing.

• These 2 types of events are:

1. Type 1 or adjusting events (Type I)
2. Type 2 or disclosing events (Type II)

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 Adjusting events

Adjusting events are those that:

– provide additional evidence about conditions that
were uncertain at reporting date
– 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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Type 1 or adjusting events

• Type 1 events require adjustment to the figures

contained in the bal/sht and income stat. and are
those events, both favourable and
unfavourable,that provide evidence of, or further
elucidate, conditions that existed at balance date.

• Financial effect of such events needs to

be brought to account (amounts in the
financial statements need to be adjusted).

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Examples of Type 1 (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.

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 Non-adjusting events

Non-adjusting events are those new conditions that

arose after reporting date, in 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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Type 2 or disclosing events

• Disclosure by way of footnote.

• 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.

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Examples of Type 2 (disclosing) events

• A fire or flood loss after balance date, not

fully covered by insurance

• Raising of additional shares or loan capital

after balance date

• Mergers and acquisitions after balance date

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Events subsequent to the date of the audit report

• Auditor has no responsibility to seek audit evidence to identify

such events.
• Mgt. has a responsibility to monitor events during that time
and to inform the auditor of any events that affect the financial
report.
• Where the 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 consider whether an amended
financial report should be issued.
• If financial report is amended, auditor should perform
procedures to enable preparation of an audit report on the
amended financial report.

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Events subsequent to the issue of the financial report

• If material events come up or are brought

to the auditor’s attention after financial report has
been sent to shareholders, auditor should discuss
matter with management.
• Where the decision is made to issue a new financial
report, the auditor should perform procedures
necessary to form an opinion on revised financial
report.

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Events subsequent to the issue of the financial report
(cont.)

• Auditor should take steps to prevent reliance on

superseded financial report and audit report.
• Auditor’s report on revised financial report
has a new date, refers to previous audit report, and
includes an emphasis of matter paragraph
(explanatory notes that explains reasons for the
revised financial report.

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Audit procedures after balance date

• Many audit procedures performed after balance

date as normal tests of balances.
• Examples are tests of subsequent transactions to
determine:
• proper cut-off and tests of valuation of assets
• Collectability of accounts receivable determined by
subsequent payment
• Search for unrecorded liabilities.

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 Performing analytical procedures

ASA 520 Analytical Procedures states,

– The auditor shall apply analytical procedures as risk
assessment procedures …
– … to obtain an understanding of the entity and its
environment and in the overall review at the end of
the audit
Involves the use of ratios and other comparative
techniques

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 Performing analytical procedures
Reasons for using analytical review in the overall review is
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
– gain assurance that the company will remain a going
concern for the relevant period
The procedures should be:
– applied to critical audit areas identified during the audit
– based on financial statement data after all audit
adjustments and reclassifications have been recognised
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Analytical procedures at or near completion

• Auditor is also required to apply analytical

procedures at or near completion of the
audit to:
• Assist in overall review of reasonableness
• Ensure financial report is consistent with auditor’s
knowledge of entity
• Corroborate conclusions formed during audit.

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Audit procedures near to date of audit report

• Identify subsequent events

• Review minutes, directors report.
• Obtain legal advice on litigation and claims involving the
company.
• Changes in legislation.
• Variations in foreign currency.
• Going concern problems.
• Sale of assets, issue of shares, fire, flood.
• Risks & contigencies
• Appropriateness of accounting policies.
• Proper accounting records.

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 Representation letters

• Two types of letters are commonly sought

towards completion of audit:

1. Solicitor’s representation letter (letter of general

enquiry).

2. Management’s 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 paragraph A5 – A7:
The auditor should obtain sufficient appropriate audit
evidence regarding:
– whether all material legal matters have been
identified
– the probability of any material revenue or expense
arising from such matters and the estimated
amount thereof

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

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Management representation letter

• A written representation letter, prepared

by auditor and signed by management, which
formally documents management responses to
inquiries made by auditor during audit, and also
clarifies management’s responsibilities.

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 Management representation letter

The objectives of such a letter are to:

confirm management’s responsibility for the

presentation of the financial statements

Support other audit evidence relevant to the financial

report or specific assertions in the report

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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.

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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.

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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:

1. Occurrence and rights and obligations

2. Completeness
3. Classification and understandability
4. Accuracy and valuation

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 Review of the financial report (cont.)

• 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 his or her 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 (i.e. represents a true and fair view).
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 Review of other information contained in annual
report
• The financial report is only part of an annual
report and it is this to which the audit report
relates. Other information in annual report
(e.g. directors’ report, chairperson’s statement) is not
covered by the audit report.

• Auditor should review this other information

to identify:
• Material inconsistencies with financial report
• Misstatements of fact.

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Appropriateness of the going concern basis

• 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)

• As well as assessing risk of going concern problems at

planning stage to help in planning the audit, 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.

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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.

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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
Inspecting other relevant documents for possible
guarantees
Obtaining a legal representation letter
Obtaining a management representation letter
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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.

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 Evaluating the findings
At this stage, the auditor’s objectives are:
– to ensure that the audit process has complied with
auditing standards
– to determine the type of audit opinion to
be expressed
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
– 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 an 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
– the potential effect of any significant risks and exposures
– 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: objectives:

- To communicate clearly 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
- Promote effective two-way communication

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