Chapter 10 COMPLETING THE AUDIT and POST AUDIT RESPONSIBILITIES After the fieldwork is almost complete, a seties of procedures are generally carried out to complete the audit. These procedures include: 1) Identifying subsequent events that may affect the financial statements under audit; 2) Identifying litigation and claims; 3) Obtaining written management representation; and 4) Performing wrap-up procedures. * Subsequent Events Subsequent events are those events or transactions that occur subsequent to the financial statement date that may affect the financial statements and the auditor’s report. For audit purposes, the auditor is only concerned with those events that occur subsequent to the financial statement date, but before the date of the auditor’s report. Subsequent events may be classified as cither requiring adjustment or disclosure in the financial statements. 1. Requiring Adjustment. those that provide further evidence of conditions that existed at the financial statement date such as: s of the recorded liability; or 7 Settlement of litigation tn ex: > Loss on uncollectible receivables as a result of customer's deteriorating financial condition. 433those that are indicative of Condition, sure- clo: statement date. For example: the financial s after the financial statement date Requiring Dis that arose after > Issuance of stocks of bond: > Loss on inventory due to fire that occurred in the subsequeny SS. period; or > Loss on unc ollectible receivable because of a major casualty suffered by that customer after the financial statement date, Procedures to identify subsequent events According to PSA 560, “The auditor should perform procedures designed to obtain sufficient appropriate evidence that all events up to the date of the auditor’s report that may require adjustment of, or disclosure in, the financial statements have been identified.” These procedures would ordinarily include: 1. Inquiring of management as to the occurrence of subsequent events; 2. Reviewing procedures management has established to ensure that subsequent events are identified; 3. Reading the minutes of board of directors and stockholder’ ‘meetings after the financial statement date; 4. Reading the latest available subsequent interim financial Statements as well as management teports such as budgets and forecasts; and 5. Inquiring of the entity’s i lawye : and assessments, ty’s lawyers concerning litigation, claims, 1G a a tesult of appl identifies subsequent Mine the above Procedures, the auditor events that require adjustment of, of 434disclosure in, the financial statements, the auditor should determine whether such event is appropriately reflected in the financial statements. In addition, the auditor should request management to provide a written representation that all subsequent events requiring adjustment or disclosure have been adjusted or disclosed in the financial statements in accordance with the applicable financial reporting framework. Subsequent Events Occurring After the Auditor's Report Date but Before the Financial Statements are Issued The auditor does not have any responsibility to perform procedures to identify subsequent events occurring after the date of the auditor’s report. During this period, it is the responsibility of the management to inform the auditor of events that may affect the financial statements. If the auditor becomes aware of an event occurring after the date of the report but before the issuance of the financial statements, the auditor should take the necessary actions to ascertain whether such event has been properly accounted for and disclosed in the financial statements. Failure on the part of the client to make appropriate amendments to the financial statements, where the auditor believes they need to be amended, will cause the auditor to issue either qualified or adverse opinion. In the event that the auditor’s report has been released to the entity, the auditor would notify those persons ultimately responsible for the overall direction of an entity not to issue the financial statements. If the financial statements are subsequently released, the auditor needs to take action to prevent reliance 0@ the auditor’s report. These steps will be discussed in the lacter section of this chapter. 435Effect of Subsequent Events on the Date of the Auditor's Report Generally, the auditor's report should be dated : 2 - completion of the essential audit procedures. The a ol . auditor's report is important because it is the date wl fen the auditor’s responsibility for subsequent events ends. This date informs the readers of the financial statements that the auditor has considered the effect of subsequent events that occurred up to the date of the report. A question regarding the dating of the report arises when subsequent events occur after the date of the auditor’s report, but before the issuance of the financial statements. It is to be emphasized that the auditor is not responsible to perform audit procedures to identify subsequent events after the date of the auditor’s report. During the period from the date of the auditor’s report, to the date the financial statements are issued, the responsibility to inform the auditor of facts which may affect the financial statements tests with management. If a material subsequent event tequiting adjustment to the financial statements occurs after the date of the auditor's report but before the issuance of the financial statements, the financial statements should be adjusted and the auditor’s report should bear the original date of the feport. The fact that the subsequent event required adjustment of the financial statements, simply means that the condition already existed as of the financial statement date and did not actually occur in the subsequent period, On the other hand, if a subsequent event tequiting disclosure occurs during this petiod, the auditor should consider the adequacy of disclosure and should date the teport either: 1. As of the date of the subsequent event; or 2. Dual date the report. 436When the auditor deci aocceal an to date the report as of the date of the the auditor's ‘ responsibili ane : sponsibility for the nase events 1s extended up to subsequent event date. ues the auditor will also have to extend the ao Event review procedures to identify other ne quent events which may have transpired from the original audit report date up to the new audit report date. If the auditor does not want to extend the subsequent event review procedures anymore, the: auditor may dual date the report. When dual dating the report, the auditor’s responsibility for subsequent events, occurring after the original date.of the report, is limited only to the specific event referred to in the note. The following is an illustration of a dual dater report: "February 14, 20X2, except as to Note Y, which is as of March 5, 20X2." As an alternative to dual dating, the auditor js also permitted, under PSA 560, to issue a report that includes an Emphasis of Matter paragraph or Other Matter paragraph stating that the auditor’s procedures on subsequent events, occurring after the original report date, are restricted solely to the specific event referred to in the relevant note to the financial statements. © Litigation and Claims .¢ entity may have a material effect he management’s responsibility to ill identify, evaluate, and account Litigation and claims involving th on the financial statements It is 1 adopt policies and procedures that wi 437™ for litigation and claims as a basis for the preparation of financial] statements in conformity with applicable financial reporting framework. PSA 501 requires the auditor to carry out procedurcs in order to become aware of litigation and claims involving the entity which may have a material effect on the financial statements. Some of the effective audit procedures that can be performed to litigation and claims include: > — Inquiry of management; »® Reading minutes of meetings and correspondence with lawyers, and » — Reviewing legal expense account In addition, the auditor should request management to provide watten representations that all known actual or possible litigation and claims have been disclosed to the auditor and that the effects have been properly accounted for and disclosed in accordance with the applicable financial reporting framework. & Letter of Inquiry The entity's management is the Primary source of information about litigation and claims. The auditor corroborates the information obtained from management by sending a letter of audit inquiry to external legal counsel with whom the client has Consulted concerning those matters, Direct communication with the entity’s legal counsel assists the auditor in obtaining sufficient appropriate audit evidence as to whether potentially material litigation and claims are known and whether management’s estimates of the financial implications are reasonable. In certain circumstances, the auditor may deem it necessary to meet with the entity’s external legal counsel to discuss the likely outcome of the litigation or claims. This may be the case where: 438, ‘the auditor determines that the matter is a significant risk; » The matter is complex; or : y There is disagre, . ~~ agtcement between management a ind 4 external legal counsel, : — Ordinarily, such meetin areal ‘88 tequire management's permission and are a representative of management in attendance. £3 Effect on the Auditor's Report Refusal by the management to give the auditor permission to communicate with the entity’s lawyer or the lawyer's refusal to reply to the auditor's letter of inquiry, would be considered a scope limitation that would result to either qualified or disclaimer of opinion on the financial statements. Written Management Representation PSA 580 requires an auditor to obtain sufficient appropriate audit evidence that the entity’s management: » Has acknowledged that it has fulfilled its responsibility for the preparation and presentation of fair financial statements; and » Has approved the financial statements. Such evidence is acquired by obtaining a written representation from management. The auditor shall request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned. Written fepresentations are normally requested from the entity’s chief executive officer and chief financial officer, or other equivalent Persons in entities that do not use such titles. Written Representations as Audit Evidence 439Written representations ate an important source of audit evidence. If management modifies or does not provide requested written representations, it may alert the auditor about other issues affecting the financial statements. Further, a request for written, rather than oral, representations may prompt management to consider the matter more rigorously, thereby enhancing the quality of evidence. Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which ther deal. Furthermore, the fact that management has provided reliable written representations does not affect the nature or the extent of other audit evidence that the auditor obtains about the fulfillment of management’s responsibilities, or about specific assertions. . Management written representations complement the audit evidence the auditor accumulates, but they do not substitute for the performance of audit procedures designed to obtain necessary evidence for the expression of an opinion. Form and Content of Written Representations The written representations shall be in the form of a representation letter from management. This letter shall include: > A representation that management has fulfilled its responsibility for the preparation and presentation of the financial statements as set out in the terms of the engagement, A representation that the financial statements are prepared and presented in accordance with the applicable financial reporting framework; 4407 A representation that management has provided the auditor with all relevant information agreed in the terms of the engagement, and that all transactions have been recorded and : reflected in the financial statements; y A representation that describes. management's anos as described in the terms of the engagement; an » Other representations required by other PSAs. Basic Elements of a Written Management Representation 7 The written representation should be addressed to the auditor; > The date of the written representations shall be as near as practicable to, but not after, the date of the auditor's report; and y The written representation should be signed by the appropriate level of management who has the primary responsibility for the financial statements. Ordinarily, written representation is signed by the chief executive officer and the chief financial officer or their equivalent because they are usually the ones responsible for the preparation and fair presentation of the financial statements Management's Refusal to provide Written Representations Written representations are an important source of audit evidence, If management modifies the requested written representations, it may alert the auditor to the possibility that one or more significant issues may exist provide written fepresentations ot When management does not here is sufficient doubt about the the auditor concludes that t 441,integrity of management; the auditor should consider these as scope limitation that would warrant a disclaimer of opinion. © Wrap-up Procedures Wrap-up procedures are those procedures done at the end of the audit that generally cannot be performed before the other audit work is complete. These include: 1. Final analytical procedures; ” 2. Evaluation of the entity’s ability to continue as a going concern, and 3. Evaluating audit findings and obtaining client's approval for the proposed adjusting entries. Final Analytical Procedures [As discussed in Chapter 5, analytical procedures ate required to be performed in the planning and overall review stages of the audit. The auditor should apply analytical procedures at or near the end of the audit when forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditor’s knowledge of business. Analytical procedures applied in the completion phase of the audit should focus on > Assessing the validity of the conclusions reached and evaluating the overall financial statement presentation; and > Identifying unusual fluctuations that were not previously identified. The conclusions drawn from the results of analytical procedures performed in final review stage of the audit are intended to cottoborate conclusions formed during the audit of individual components or elements of the financial statements. This assists the auditor to draw reasonable conclusions on which to base the auditor’s opinion. Additionally, the results of such analytical 442 “M4procedures may iden ; material miststement i 1 reviously unrecognized sk of A uch circumstances, th " consider the need 8, the auditor should accordingly. fo perform further audit procedures Evaluation of the enti Ie entity’s abili i i eee ty’ ity to continue as a going The going concern assumption is a fundamental principle in the preparation of the financial statements, An entity’s continuance as a going concern is assumed in the preparation of financial statements in the absence of information to the contrary. Management's responsibility IAS 1 contains an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concer. This assessment should take into account all available information for the foreseeable future, which should be at least, but is not limited to, twelve months from the financial statement date. Auditor’s responsibility ‘The auditor’s responsibility is to consider the appropriateness of management use of the going concern assumption in the preparation of the financial statements. For this purpose: 1. The auditor should consider whether there are events or conditions which may cast significant doubt on the entity's ability to continue as a going concern 2 In addition, the auditor should evaluate management's assessment of the entity’s ability to continue as a going concern. 443Examples of conditions or events chat may cast significant doubt about the going concern assumption include: Non-compliance with the tetms of loan agreements or other : starutory requirements Pending major legal or regulatory proceedings: > Changes in legislation or goverment policy expected to adversely affect the entity > Net lability or net current liability: » Substanual operating losses: » Inability to pay creditors on due dates: and » Loss of major market, franchise, license or principal supplier. When evaluating the entity’s gomg concer assumption, the auditor should remember that the conditions and events that mar indicate significant doubt about entity's continued existence can be mitigated by other factors For example, the effect of an entity’s not being able to make its normal debt repayments may be mitigated by management's plans to maintain adequate cash flows by alternative means such a ” Disposal of a 7 Rescheduling of loan repayments: or > Obtaining additional capital. Effect on the auditor’s report After the auditor has carried out che necessary audit procedures, obtained the required information, and considered the effects of che management plans, the auditor should determine whether the questions raised reyarding going concern have been satisfactorily resolved. 444If the use of the going concern assumption is appropriate and no material uncertainties exist, the auditor may issue an unmodified opinion on the financial statements. If there is a material uncertainty about the entity’s ability to continue as a going concern, the auditor’s report will depend on whether this going concern uncertainty is adequately disclosed. If the going concern uncertainty is adequately disclosed, the auditor should issue an unmodified opinion with a separate section "Material Uncertainty Related to Going Concern." This section should draw the readers to the disclosure that discusses the going concern uncertainty. If the auditor believes that the going concern uncertainty is not adequately disclosed, the auditor should express either qualified opinion or adverse opinion. If the going concern assumption is not appropriate, the financial statements should be prepared using other appropriate basis. Otherwise, the auditor should express an adverse opinion. \dditional guidance on the effect of going concern uncertainty on the auditor's report is discussed in Chapter 11. Evaluating audit findings and preparing a list of potential adjusting entries. After evaluating the evidence obtained, the auditor should decide whether to accept the financial statements as fairly stated or to Tequest management to revise the statements. Material misstatements discovered during the audit must be corrected by recommending appropriate adjusting entries. If management accepts all the adjusting entries proposed by the auditor, an unmodified report is issued on the financial statements. On the other hand, if management refuses to correct the financial statements for these material 445oe misstatements, the auditor should issue a qualified or an adverse opinion. ies: Events after the Financial Statements ‘ Post Audit Responsibi are Issued Ordinarily, the auditor does not have any responsibility to perform additional procedures after the financial statements are issued. However, when the auditor becomes aware that the report issued in connection with the financial statements may be inappropriate, the auditor must take steps to prevent future reliance on such report. Subsequent discovery of facts The auditor has no obligation to make any inquiry regarding previously issued financial statements unless the auditor becomes aware of a material fact, » which existed at the date of the auditor’s report; and » which, if known at that date, may have caused the auditor to modify the report. This is dangerous because users may be relying on misleading financial statements. When the auditor becomes aware of this type of information, the auditor should: 1. Discuss the matter with the appropriate level of management and consider whether the financial statements need revision; and 2. Advise management to take the necessary steps to ensure that the users of the previously issued financial statements are informed of the situation. If the management makes the appropriate revisions and disclosures to the users of the financial statements, the auditor should issue a new auditor's report that includes an emphasis of a matter paragraph to highlight the reason for the revision of the previously ‘issued financial statements. 446In the event that Management refuses to revise the financi statements or to inform the users about the newl a information, the auditor should notify those oe oe responsible for the direction of the entity about the aaa refusal and about his inte S intent to prevent users from rel auditor's report. 5 an £3 Subsequent discovery of omitted procedures Auditors are not required to review the working papers once the audit report is issued. However, CPA firm’s internal inspection program may disclose the omission of auditing procedures considered necessary at the time of the audit. In this situation, the auditor should follow these guidelines: 1. Assess the importance of the omitted procedure ‘An omitted procedure is considered important if such omission impairs the auditor's ability to support the previously issued opinion on the financial statements. Evaluating the impact of an omitted procedure would depend on the type of substantive evidence it would have produced; and whether there were other procedures performed that provide the same type of evidence as the procedure omitted. The results of other audit procedures, performed during the audit, may compensate for or make the omitted procedure less important. In determining whether there were other procedures applied that could compensate fot the omitted procedure, the auditor may: > Review the working papers; } Discuss the circumstances with the engagement personne and > Reevaluate the scope of the audit. 4472. Undertake to ap! ply the omitted procedures or the cofresponding alternative procedures. If the auditor determines that the omission of the procedures is important because it impairs the auditor's ability to support the previously issued opinion, and the auditor believes that there are persons currently relying, or likely to rely on the report, the auditor should promptly apply the omitted procedures or the corresponding alternative procedures. The result of applying the omitted procedure may indicate, whether or not, material misstatements exist . If, after applying the omitted procedures, the auditor determines that the financial statements ate materially misstated and that the auditor’s opinion was inappropriate, the auditor should discuss the matter with the management and, if necessary, should take steps to prevent future reliance on the report. 4