FINAL PROCEDURES

1
 OBJECTIVES
• Overall review
• Aggressive earnings management
• Other information in the annual report
• Going concern
• Post balance sheet events
• Representations by management

2
 OVERALL REVIEW
• Compliance with accounting regulation
• Accounting policies
• Clerical accuracy
• Consistency and reasonableness
• Uncorrected misstatements

3
 COMPLIANCE WITH
REGULATION
• Companies Act

• Stock Exchange regulation

• Accounting standards

• Accounting policies

4
 ACCOUNTING POLICIES
• Consistency with prior years
• Industry practice
• Substantial authoritative support.
• Substance over form
• Departures from accounting standards
– True and fair view
– Disclosure
• Disclosure
5
CLERICAL ACCURACY

6
 CONSISTENCY AND
REASONABLENESS

• Consistency with audit evidence

• New factors
• Analytical review
• Influences on presentation

7
 UNCORRECTED
MISSTATEMENTS
• Accumulate during audit
• Consider whether plan needs to be
revised.
• Communicate with management
• Understand reasons for not adjusting
accounts
• Evaluate impact

8
 CLASSIFICATION OF
MISSTATEMENTS

•Factual

•Judgemental

•Projected

9
 FACTORS IN ASSESSING
MISSTATEMENTS
• Compliance with regulation
• Compliance with debt covenants
• Incorrect selection or application of accounting policies
• Change in earnings or trends
• Impact on ratios
• Impact on segment information
• Increases management compensation
• Impact on communications to users
• Relates to specific parties
• Affects other information
10
 AGGRESSIVE EARNINGS
MANAGEMENT

Occurs when companies deliberately

manipulate revenues and/or expenses in
order to inflate or deflate figures relating to
profits and earnings per share.

11
 ACTIONS BY AUDITORS
• Understand pressures on directors
• Be aware of potential indicators.
• Act with greater scepticism when indicators
present
• Greater emphasis on broader factors influencing
materiality
• Robust attitude when requesting adjustments
• Open communication
• Adequate disclosures
12
 OTHER INFORMATION
• Chairman’s report
• Operating and financial review
• Corporate governance report
• Directors’ report
• Financial summaries, ratios etc.

13
 AUDITORS DUTY
• Corporate governance report
• Directors report
• Other

14
 AUDIT PROCEDURES
• Include duties in engagement letter.
• Read other information
• Agree relevant parts of Directors report to
accounts and audit working papers.
• Normal audit procedures should identify
misstatements:
– Enquiry of directors
– Review of board minutes
– Attendance at audit committee meetings
• Discuss any misstatements or inconsistencies.
• Document results and conclusions
15
 UNRESOLVED
INCONSISTENCIES

Which is wrong?

Accounts Qualify

Directors report & Explain in audit report

Corporate gov.

Other information Further action required

16
 INCONSISTENCY IN OTHER
INFORMATION
• Consult with qualified third party.
• Fact or judgement?
• Legal advice
• Consider reporting
– Emphasis of matter paragraph
– Speak at AGM
• Consider refusing to issue audit report
• Consider resignation
17
 GOING CONCERN
The enterprise is able to continue in
operational existence for the foreseeable
future. The income statement and the
balance sheet assume no intention or
necessity to liquidate or curtail significantly
the scale of the operation.

18
 DIRECTORS’ DUTY
• Assess risks.

• Prepare the accounts on a going concern basis unless

– the entity is being liquidated or has ceased trading or
– There is no realistic alternative but to liquidate the entity or
cease trading.

• Disclose:
– Whether company is a going concern
– Any material uncertainties.
– If the period considered is less than one year from the date of
approval of the accounts

19
 AUDITORS’ DUTY
• Do the accounts show a true and fair view?

• Have required disclosures been made?

Listing Rules require:

• Review of documentation
• Consistency with knowledge
• Disclosures adequate

20
 AUDIT PROCEDURES
• Preliminary assessment at planning stage
• Discussion with directors
• Review board minutes
• Review budgets
• Are borrowing limits and credit facilities adequate?
• Possible exposure to contingent liabilities
• Is directors assessment sufficient?
• Be aware of indicators during audit
• Perform additional procedures as necessary
• Obtain written representations
• Review disclosures
21
 AUDIT REPORT
Low risk, adequate disclosure No mention

Low risk, inadequate disclosure Other matter

High risk, adequate disclosure Emphasis of matter

Non disclosure of limited period Disclose

Inadequate disclosures Qualify – except for

Not a going concern

• On a going concern basis • Adverse opinion
• On a break up basis • Unqualified
22
 EVENTS AFTER THE BALANCE
SHEET DATE
Adjusting event
Post balance sheet events which provided additional
evidence of conditions existing at the balance sheet date.

Non Adjusting event

Post balance sheet events which concern conditions which
did not exist at the balance sheet date.

Events to be disclosed:
– Events indicating going concern is not applicable
– Where non‑disclosure would mislead users
– Reversal of window dressing
23
 AUDITORS DUTY

Balance Accounts Auditor AGM

sheet date approved signs report

Period per
IAS 10

Active work to identify events Remain No

receptive duty

24
 IDENTIFICATION OF EVENTS
• Normal audit procedures
• Client procedures
• Enquire of management.
• Review board minutes of post year end
meetings
• Review management accounts and other
records for the post balance sheet period.
• Review forecasts and budgets for new period.
• Calculate relevant ratios
• Consider relevant information from third parties

25
 ACTION ON DISCOVERY
• Discuss with directors
• Consider whether accounts require
amendment
• Consider implications for audit report

26
 INAPPROPRIATE ACTION BY
DIRECTORS
Action will depend on when event
discovered:
– Inform directors in writing of concerns
– Speak at AGM
– Seek legal advice
– Statement on vacation of office

27
 REPRESENTATIONS BY
MANAGMENT
Oral evidence:
• Corroborate with independent sources
• Ensure no conflict with other evidence
• Consider whether source is well informed
on matter
• Obtain confirmation in writing

28
 REQUIRED CONTENT
• Management has fulfilled its responsibility
for the preparation of the financial
statements

• Management has provided the auditor with

all relevant information and access

• All transactions have been recorded and

are reflected in the financial statements.
29
 OTHER CONTENT
• Directors responsibility for internal controls
• Aggregate uncorrected errors not material
• Completeness of post balance sheet
events & contingent liabilities
• Appropriateness of valuation and
measurements judgements
• Future plans and intentions
• Confirmation that suitable enquiries were
made.
30
 FAILURE TO PROVIDE
• Agree at early stage
• Include in engagement letter
• Discuss reasons with directors
• Put understanding in writing and ask
directors to confirm
• Qualification of audit report

31
SUFFICIENCY AND RELIABILITY
• Written evidence
• Internal
• Not taken seriously by management

Increasing reliability
• Refer to specific matters
• Criminal offence to mislead auditors
• Ask signatory what assurance they obtained
• Specialised manager can make representations
to board

32
 CASES

• Barings Futures Singapore v Deloitte Touche

Singapore (2002)

• PricewaterhouseCoopers disciplinary hearing re

Transtec (2006)
33