M A Wahab Akanda FCA

Wahab.akanda12@gmail.com

Chapter 12

Audit Completion

There are three phases to the audit:

• Planning
• Evidence gathering
• Completion

The completion phase should be relatively smooth:

• If the work has been well planned
• If the staff have been well briefed and well trained
• If the staff execute the plan efficiently and on time

There are two components of the completion phase:

• The financial statements themselves; and
• The work which has been done to support the opinion

The Financial Statements

When considering the financial statements at the completion stage, the partner
responsible for signing the audit report is interested in the answers to three questions:
• Do the financial statements comply with the provisions of the Companies Act
1994?
• Do the financial statements make sense?
• Has the audit report been drafted properly?

The work done to support the opinion

The review of the work done has four aspects to it:

• Whether the work done was aligned with the audit plan
• Whether the right work has been done
• Whether enough work has been done
• The issues arising

Financial Statement Review

1. Do the financial statements comply with the provisions of the

Companies Act 1994?

Determining this ought to be relatively simple – every firm should use a checklist
to ensure that the financial statements comply with the disclosure requirements
of the Companies Act and relevant accounting standards. Such checklists usually
form a part of the “audit packs” which firms use.

The nature of financial statements these days is incredibly complex. For

company’s accounts, be aware that:

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 • There are a large number of financial reporting standards applicable to
financial statements.
• The Companies Act itself is a substantial document which determines the
format to be used in financial statements and the disclosures to be made
on the face of the income statement and balance sheet and in the
reporting notes.
• The director’s report and other information released with the financial
statements need to be consistent with the financial statements, so the
auditor must read that information and resolve inconsistencies.

2. Do the financial statements make sense?

Analytical procedures must be used in the overall review at the end of the audit.

The steps for carrying out analytical procedures at this stage of the audit are
very similar to those used as part of the risk assessment process at the planning
stage, but they happen in a rather different way:
• Interpretation
• Investigation
• Corroboration

Interpretation

The person carrying out analytical procedures, reads through the financial
statements and interprets them, considering the absolute figures themselves and
relevant ratios.

Investigation

When analytical procedures are used as risk assessment procedures or as a

substantive procedure, the aim is to identify potential problems. The problems
are then investigated during fieldwork by making enquiries and gathering audit
evidence.

At the completion stage the reviewer will expect to find the answers to the issues
raised by the review on the audit file.

Corroboration

From a practical point of view, it is worth to remembering the following:

• For the smaller client the working papers supporting the final analytical
procedures may well be simply an update of the work done at the
planning stage.
• For the larger client the review becomes a much more specific exercise.
• The financial statements used for the analytical procedures need to
incorporate any adjustments made as a result of the audit.
• Any problems identified by the procedures, which indicate that the
financial statements should be amended, need to be auctioned.

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Other matters

At the completion stage the reviewer has to consider the issues which have been raised
by the audit and what the firm’s response in the audit report should be.

At this stage the reviewer needs to consider:

• Is the impact of the errors and misstatements uncovered during the audit likely
to be material?
• Are there matters of principle where the auditor disagrees with the client?

The second of these questions can cause severe difficulties for the audit firm in
exercising its professional judgment.

1. Opening balances and comparatives

It may seem odd to consider opening balances and comparatives at the

completion stages of the audit, but the auditor needs to consider whether there
is sufficient evidence to support their reliability. If the opening balances are
misstated this will mean that the profits for the current year may also be
misstated.

Normally where the audit engagement is continuing from previous years, this will
not cause a problem, but for a new client there are questions of professional
judgment about the reliability of the previous year’s accounts, which in turn leads
to questions about the quality of work of the previous auditors.

Where the client was not subject to audit in previous years, the auditor will again
have to consider the risks of unaudited figures from past periods being materially
misstated.

The work to be done may include:

• Checking receipts from opening receivables.
• Verifying opening payables in the light of payments made during the
current period.
• Reconciling from an inventory figure which has been audited back to the
opening position.

2. Going Concern

The going concern concept is fundamental to the way in which financial

statements are prepared and has been so for a very long time indeed.

If the going concern concept is not appropriate basis on which to prepare the
financial statements, the implications will be very serious, as almost all of the
normal assumptions made will be called into question.

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 Work to be done

As a result, the risks of the client not being a going concern will need to be
considered and planned for at the planning stage, and at the completion stage,
certain specific tasks will have to be carried out.

This will include:

• Consideration of all areas of the balance sheet to see whether there are
indications that the going concern concept may be inappropriate such as:

➢ Significant receivables unable to pay

➢ Lines of inventory and WIP where net realizable value may be less
than cost
➢ Material non-current assets which are no longer usable
➢ Deferred development expenditure which is irrecoverable against
relevant revenues
➢ Investments (in subsidiaries and other companies) which have lost
value
• Review of future plans for the business including financial forecasts
and projections, to ensure that it is probable that the company will be
able to continue to trade for at least the forthcoming year (that is, not
less than 12 months from the balance sheet date).
• Review of the company’s borrowing facilities and other sources of
finance to ensure that they will be adequate for the forthcoming year and
those conditions and covenants imposed by the lenders will not be
breached.
• Review of the minutes and other information such as correspondence
with legal advisors, for indications of potential going concern
problems.

A list of possible symptoms of going concern is given in ISA 570. They are as follows:

Financial Indications:

• Net liabilities or net current liability position;

• Necessary borrowing facilities have not been agreed;
• Fixed-term borrowing approaching maturity without realistic prospects of renewal
or repayment, or excessive reliance on short-term borrowings;
• Major debt repayment falling due where refinancing is necessary to the entity’s
continued existence;
• Major restructuring of debt;
• Indications of withdrawal of financial support by creditors;
• Negative operating cash flows indicated by historical or prospective financial
statements;
• Adverse key financial ratios;
• Substantial operating losses or significant deterioration in the value of assets
used to generate cash flows;

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 • Major losses or cash flow problems which have arisen since the balance sheet
date;
• Arrears or discontinuance of dividends;
• Inability to pay creditors on due dates;
• Inability to comply with terms of loan agreements;
• Reduction in normal terms of credit by suppliers;
• Change from credit to cash on delivery transactions with suppliers;
• Inability to obtain financing for essential new product development or other
essential investments;
• Substantial sale of fixed assets not intended to be replaced;

Operating Indications:

• Loss of key management without replacement;

• Loss of key staff without replacement;
• Loss of major market, franchises, license or principal supplier;
• Labor difficulties or shortages of important supplies;
• Fundamental change in the market or technology to which the entity is unable to
adapt;
• Excessive dependence on a few product lines where the market is depressed;
• Technical developments which render a key product obsolete;

Other Indications:

• Non-compliance with capital or other statutory requirements;

• Pending legal proceedings against the entity that may, if successful, result in
judgments that could not be met;
• Changes in legislation or government policy;
• Issues which involve a range of possible outcomes so wide that an unfavorable
result could affect the appropriateness of the going concern basis;

ISA 570 also says that the auditors have to discuss the going concern issue with the
client’s management, to test the assumptions they have made to ensure that they are
justified, to obtain written representations from management about the things they are
intending to do in the future to ensure that the going concern basis is appropriate and
to review that disclosures made in the financial statements relating to going concern are
sufficient to give a true and fair view. If, in making their assessment, the directors have
used a period of less than a year from the date of approval of the financial statements
and have not disclosed that fact in the financial statements, the auditors should do so in
the auditor’s report.

The break-up basis

If it becomes clear that the client cannot be considered to be a going concern, the
financial statements will need to disclose this and the basis for preparing them will
change to the “break-up” basis.

This means that values will have to be adjusted to the amounts expected to be realized.

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Implications for the audit report

If the going concern assumption is appropriate but a material uncertainty exists about
the ability of an entity to continue as a going concern and the uncertainty is adequately
disclosed in the financial statements, the auditor should express an unqualified opinion
but modify the report by adding an emphasis of matter paragraph.

If the financial statements fail to give a true and fair view because it is inappropriate to
use the going concern basis, the auditor should express an adverse opinion.

Subsequent events

A review of events after the balance sheet date is both a sensible thing to do and
according to ISA 560, compulsory.

ISA 560 recognizes the two different types of subsequent event according to IAS 10:
• Adjusting events and
• Non-adjusting events

It also recognizes three time periods and recommends the following

responses:

Period Audit Response

Up to the date of the • Carry out audit procedures outlined in ISA 560;
audit report • Consider whether the appropriate amendments/
disclosures have been made in the financial statements;
• Consider whether there is a need to amend the audit
report;
Between the date of No responsibility for further work in this period, but if the auditor
the audit report and becomes aware of the material facts:
the date of the • Discuss with management;
financial statements • Take appropriate action;
are issued
After the financial No responsibility for further work in this period, but if the auditor
statements are becomes aware of the material facts:
issued • Discuss with management;
• Take appropriate action;
Where the relevant fact did not exist at the date of the auditors’
report there are no statutory provisions for revising the financial
statements:
• Discuss with management whether to withdraw the
financial statements;
• Take advice on possibility of withdrawing audit report;

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Audit Procedures testing subsequent events up to the date of the auditors’
report

Enquires of management

• Status of items involving subjective judgment/ accounted for using

preliminary data;
• Whether there are any new commitments, borrowings or guarantees;
• Where there have any:
➢ Sales or destruction of assets;
➢ Issues of shares/ debentures or changes in business structure;
➢ Developments involving risk areas, provisions and contingencies;
➢ Unusual accounting adjustments;
➢ Major events (e.g. going concern problems) affecting
appropriateness of accounting policies for estimates;

Other procedures

• 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;
• Review latest accounting records and financial information and budgets
and forecasts;
• Obtain evidence concerning any litigation or claims from the company’s
solicitors (only with client permission);