Auditing – Study Notes Chapter 23 Final Matters

CHAPTER TWENTY THREE

FINAL MATTERS
ICAP'S
ICAP'S STUDY
LO # LEARNING OBJCTIVE SYLLABUS
TEXT REFERENCE*
REFERENCE
PART A: WRITTEN REPRESENTATION
SECTION 2
LO 1 DEFINITION OF WRITTEN REPRESENTATION
(CHAPTER 15)
WRITTEN REPRESENTATION ABOUT MANAGEMENT’S SECTION 2
LO 2
RESPONSIBILITIES (CHAPTER 15)
SECTION 2
LO 3 WRITTEN REPRESENTATIONS ABOUT SPECIFIC ASSERTIONS
(CHAPTER 15)
SECTION 2
LO 4 WRITTEN REPRESENATION AS AUDIT EV IDENCE
(CHAPTER 15)
PART B: SUBSEQUENT EV ENTS
EVENTS OCCURRING BETWEEN DATE OF FINANCIAL SECTION 1
LO 5
STATEMENTS AND DATE OF AUDITOR’S REPORT (CHAPTER 15)
FACTS DISCOV ERED AFTER AUDITOR’S REPORT (REV ISION IN SECTION 1
LO 6
AUDITOR’S REPORT) (CHAPTER 15)
PART C: ADDITIONAL CONCEPTS
SECTION 4.3
LO 7 MANAGEMENT LETTER AND ITS CONTENTS
(CHAPTER 5)
LO 8 AUDIT CORRESPONDENCE N/A

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 Auditing – Study Notes Chapter 23 Final Matters

PART A – WRITTEN REPRESENTATION

LO 1: DEFINITION OF WRITTEN REPRESENTATION:

Written representation
A written statement by management provided to the auditor to confirm
certain matters or to support other audit evidence.

Form and Date of written representations:

Written representations shall be:
 in the form of a letter.
 addressed to auditor.
 dated as near as possible, but not after, the date of auditor’s report.

LO 2: WRITTEN REPRESENTATION ABOUT MANAGEMENT’S RESPONSIBILITIES :

About Financial Statements About Information Provided

Management has fulfilled its
Representation responsibility for the preparation of
required about financial statements in accordance
management’s with the AFRF, as agreed in the
responsibilities terms of the audit engagement.
a) Management has provided the auditor
with all relevant information and access,
as agreed in the terms of the audit
engagement, and
b) All transactions have been recorded in
financial statements.

LO 3: WRITTEN REPRESENTATIONS ABOUT SPECIFIC ASSERTIONS :

Following is a list of other representations which are either:
1. required by different ISAs or
2. requested by auditor to support other audit evidence

About Financial Statements About Information Provided

Significant assumptions and accounting We have disclosed to you the results of our
estimates are reasonable. (ISA 540) assessment of the risk that the financial
statements may be materially misstated as a
Related party relationships and result of fraud. (ISA 240)
transactions have been appropriately
accounted for and disclosed in accordance We have disclosed to you all information in
Representation with the requirements of AFRF. (ISA 550) relation to fraud or suspected fraud that we
required by are aware of and that affects the entity
different ISAs All events subsequent to the date of involving management, employees or others.
financial statements for which AFRF (ISA 240)
requires adjustment or disclosure, have
been adjusted or disclosed. (ISA 560) We have disclosed to you the identity of the
entity’s related parties and all the related-
party relationships and transactions of
which we are aware. (ISA 550)

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The effects of uncorrected misstatements

are immaterial, both individually and in We have disclosed to you all known
the aggregate, to the financial statements instances of non-compliance or suspected
as a whole. (ISA 450) non-compliance with laws and regulations
affecting financial statements. (ISA 250)
Additional e.g. about Plans or intentions that may e.g. about deficiencies in internal control
Representations affect carrying amount or classification of
requested by assets and liabilities
auditor

LO 4: WRITTEN REPRESENATION AS AUDIT EVIDENCE :

1. Like Inquiry, written representation is an audit evidence.
2. However, written representations, alone, do not provide sufficient appropriate audit
evidence about matters to which they deal.
3. It is only a supporting evidence and does not affect nature, timing and extent of other
evidence to be obtained.

If written representation is not provided:

If management refuses to provide written representation to auditor, the auditor shall inquire
reason for refusal.

Auditor shall:
 Re-evaluate the integrity of management.
 Reconsider the impact on other representations and audit evidence.
 Take appropriate actions, including considering effect on audit report.

If written representation is contradicted by other evidence:

Auditor should consider:
 whether additional audit procedures are needed to resolve contradiction.
 whether there is need to revise risk of material misstatement, including risk of fraud.
 if auditor has concerns about integrity of management, document those concerns and
consider withdrawing from the audit.

PART B – SUBSEQUENT EVENTS

LO 5: EVENTS OCCURRING BETWEEN DATE OF FINANCIAL STATEMENTS AND DATE OF

AUDITOR’S REPORT :
Auditor’s Responsibility:
Auditor’s responsibility is to perform audit procedures to obtain sufficient appropriate audit
evidence that all events subsequent to the date of the financial statements have been identified by
management and have been adjusted or disclosed, as appropriate.

For this purpose, auditor performs:

 Active Review of subsequent events (i.e. auditor actively searches for significant subsequent
events. This review is performed till date of auditor’s report)

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Auditing – Study Notes Chapter 23 Final Matters

 Passive Review of subsequent events (i.e. auditor does not search subsequent events
actively; rather he relies on information from management. This review is performed after
the date of auditor’s report but before financial statements are issued)

Auditor’s Procedures to fulfill responsibility:

Normal audit verification work:
Auditor may find information about subsequent events during his normal audit verification e.g.
 In the audit of receivables, cash receipts from customers after the balance sheet date in the
audit of receivables or bankruptcy of a debtor after balance sheet date.
 In the audit of liabilities, review of subsequent payments to identify unrecorded liabilities.
 In the audit of inventory, sale of inventory below cost after balance sheet date.

Procedures aimed specifically at identifying subsequent events:

To meet his responsibility, auditor shall perform following procedures:
1) Inquiring of management and TCWG as to whether any subsequent events have occurred
which might affect the financial statements (auditor may make specific inquiries relating to
events adjusting or non-adjusting events).
2) Obtaining an understanding of procedures established by management to identify
subsequent events.
3) Reading minutes of subsequent meetings of the entity’s owners, management and TCWG
and inquiring about matters discussed at any such meetings for which minutes are not yet
available.
4) Reading the entity’s subsequent interim financial statements, if any.
5) Requesting management to provide written representation that “all events subsequent to
the date of the financial statements requiring adjustment or disclosure have been adjusted
or disclosed”.

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LO 6: FACTS DISCOVERED AFTER AUDITOR’S REPORT (REV ISION IN AUDITOR’S REPORT):

If after the date of auditor’s report, auditor becomes aware a misstatement in financial statements
(e.g. an error/fraud in financial statements), auditor shall:
 Discuss with management to determine whether financial statements need amendment.
 If amendment is required, auditor shall inquire whether management agrees to amend
financial statements or not.

If management agrees to amend financial If management does not agree to

statements amend financial statements
Management’s Responsibilities: 1. If auditor’s report has not been
–Management shall amend financial statements before provided to entity, auditor shall
issuance. modify the opinion.
2. If auditor’s report has been
When financial Auditor’s Responsibilities: provided to entity, auditor shall
statements have Auditor shall: notify management and TCWG
not been issued –Carry out necessary audit procedures on the not to issue the financial
amendment. statements to third parties
–Provide a new audit report on the amended financial before the necessary
statements. amendments.
Management’s Responsibilities: Auditor shall take appropriate
–Management take necessary steps to ensure that users action to ensure that users are
do not rely on previously issued financial statements. informed not to rely on financial
–Management shall amend financial statements to re- statements.
issue them. These financial statements shall include an
additional note to explain the reason for the
amendment.

Auditor’s Responsibilities:
When financial Auditor shall:
statements have – Review the steps taken by management to ensure that
been issued users do not rely on previously issued financial
statements.
–Carry out necessary audit procedures on the
amendment.
–Provide a new audit report (on amended financial
statements) that shall include an Emphasis of Matter
Paragraph or Other Matter Paragraph, referring to the
 note in financial statements that explains reason
for the amendment in financial statements, or
 earlier report provided by the auditor.

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PART C – ADDITIONAL CONCEPTS

LO 7: MANAGEMENT LETTER AND ITS CONTENTS:

Management Letter is a document prepared by auditor which states internal control weaknesses
discovered during the audit. To provide value-added service to audit client, auditor also
communicate to management recommendations to overcome weakness.

Management Letter is normally issued at the conclusion of the audit engagement and contains
following elements:
 Internal Control Weakness
 Risk faced by entity because of weakness
 Suggestions by auditor to remove control weaknesses
 Management’s Response

LO 8: AUDIT CORRESPONDENCE:

Type of Letter By To Timing Brief Description

Before To discuss whether there is any professional
Professional Predecessor
Auditor Acceptance of reason because of which engagement should
Clearance Letter Auditor
audit client not be accepted.
At start of the Engagement Letter confirms acceptance and
Engagement Letter Auditor Management
engagement appointment of auditor
External To obtain information about entity from
Confirmation Letter Auditor During Audit
Parties outside parties.
It reminds management about their
Representation Near the end responsibility for preparation of financial
Management Auditor
Letter of the audit statements and for completeness of
information provided to auditor.
Members At the end of The audit report expresses opinion on
Audit Report Auditor
(or TCWG) the audit financial statements.
It includes:
–identified weaknesses in internal control,
Management
After the –risks because of weakness in internal
Letter/ Letter of Auditor Management
Audit Report control, and
weakness
–recommendations to improve internal
control.