FINANCIAL REPORTING

ISSUES & THE AUDITOR

Completion of the Audit

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Objectives:

 Explain the considerations &

procedures that are applicable to the
last step in the audit process
 Understand the reasons for the

auditor to consider and perform such

procedures

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Introduction
 Timing for performance of the procedures
performed at end of audit after completion
of work & draft fin. stats. received.
 Reasons for performance

- To ensure adequate audit evidence

was obtained to justify opinion on the
statements & to limit audit risk
- To form an opinion and issue an
audit report

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Introduction…
 Persons responsible for completion of
audit procedures:
staff with necessary experience &
competence to exercise professional
judgment, namely audit seniors,
managers & partners

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Characteristics of procedures
 They don’t apply to specific transactions
classes or account balances
 Not concerned directly with the truth &

fairness of the presentation & disclosure

of fin stats, including the notes
 Performed after the balance sheet date
 Involve many subjective audit judgments
 Performed by senior experienced

auditors

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Groups of the matters
1. Auditing accounting estimates [ISA540]
2. Related parties [ISA 550]
3. Subsequent events [ISA 560]
4. Going concern [ISA 570]
5. Management representations [ISA 580]
6. Others (information issued with the
audited statements)

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AUDIT OF ACCOUNTING
ESTIMATES
[ISA 540]

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Objectives:
 To establish standards & provide
guidance on the audit of accounting
estimates in fin stats.
 For auditor to obtain sufficient

appropriate audit evidence about

whether accounting estimates, in the
fin stats, whether recognized or
disclosed, are reasonable.

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Definition:
 ‘an approximation of a monetary
amount in the absence of a precise
means of measurement’
 Term used for an amount measured at

a fair value where there is estimation

uncertainty, as well as for other
amounts that require estimation

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Examples:
 Allowances to reduce stocks and
debtors
 Provisions to allocate the cost of fixed

assets over their estimated useful lives

 Accrued revenue
 Deferred tax
 Provision for a loss from a lawsuit

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Audit procedures
 Reviewing & testing the process used
by management
 Evaluation of data & consideration of

assumptions
 Testing of calculations
 Comparison of previous estimates

with actual results

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Audit procedures…
 Consideration of management’s
approval procedures
 Use of an independent estimate
 Review of subsequent events
 Evaluation of results of audit

procedures

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RELATED PARTIES
ISA 550

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Objectives:
 Provides guidance on auditor’s
responsibilities & audit procedures
regarding related parties & transactions
with such parties
 To recognize fraud risk factors, if any,

arising from related party relationships &

transactions that are relevant to the
identification & assessment of the risks
of material statement due to fraud.

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Definition:
 Situation arises where one of the
parties is in a position to control or
exercise significant influence over the
other party or where both
undertakings are under common
control, such that any transactions
between the company & a related
party are not necessarily at arms
length.

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Examples:
 Directors [including other group
undertakings]
 Major shareholders [>10% voting

rights]
 Immediate family members of any of

above
 Undertakings owned or controlled by

any of the above

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Audit Procedures:
 Review minutes of directors’ for details of
contracts entered into involving possible
commitments & contingencies
 Review prior year w/papers for names of

known related parties

 Review the entity’s procedures for

identification of related parties

 Inquire as to the affiliation of directors &

officers with other entities

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Management representation:
 Auditor to obtain a written
representation from management
concerning:
1. completeness of information
provided regarding identification of
related parties
2. adequacy of disclosures in the fin
stats.
 If not adequate auditor to modify audit

report appropriately
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SUBSEQUENT EVENTS
[ISA 560]

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Objectives:
 To establish standards & provide guidance
on the auditor’s responsibility regarding
subsequent events
 Audit evidence about whether events

occurring between the date of the fin stats

& date of auditor’s report that require
adjustment of, or disclosure in, the fin stats
are appropriately reflected in those fin stats
in accordance with the applicable financial
reporting framework.

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Definition:

 Events occurring between the date of

the fin stats & the date of the auditor’s
report, & facts that become known to
the auditor after the date of the
auditor’s report.

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Events occurring between the date of the
fin stats & the date of the auditor’s report:
 Identification covering period to date
of auditor’s report or as near as
practicable:
 Reviewing management procedures
 Reviewing minutes of shareholders’ &

directors’ meetings
 Considering information from other

sources, including matters that are

public knowledge
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Action in respect of events
discovered:
 Ensure that such events properly
accounted for & disclosed in the
financial statements
 Written management representation

confirming adjustment or disclosure

done

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Facts discovered after the date of the auditor’s
report but before the fin stats are issued [can
still change the auditor’s report]
 Has no obligation to perform procedures in

respect of the fin stats.

 If material fact becomes known to the auditor

after date of auditor’s report but before the

date of issue of fin stats., auditor shall:
- discuss matter with management, need
of amendment & management’s
intention
- If management amends, auditor to carry
out audit procedures necessary

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Facts discovered after the fin stats
have been issued:
 Auditor has no duty to make any enquiries
 If there are facts affecting his report;

consider changing & discuss with

management
 If management changes; audit amended

stats & issue a new audit report

 If management refuses to change; inform

them about steps to limit reliance by 3rd

parties on report

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 GOING CONCERN
[Effective date 15 December 2009]
[570]

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Objectives:
 To establish standards & provide
guidance on auditor’s responsibilities
regarding the appropriateness of the
going concern assumption as a basis
for the preparation of the financial
statements

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Definition:
 Concept accepts that an entity will
continue in operational existence for
the foreseeable future.
 The income statement & balance sheet

are prepared on the assumption that

no intention exists to liquidate or
curtail significantly the scale of
operations.

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Management’s responsibility
 Considerwhether the going concern
assumption is appropriate & then
preparing the financial statements
accordingly

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The auditor’s responsibility
 Toconsider whether uncertainty exists
that may cause the fin stats to be
misstated.
Fin stats should reflect the predictable
position
foreseeable future refers, but not
limited to, 1 year after the balance
date

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The auditor’s consideration of the
concept
 During review & evaluation phase,
auditor considers going concern
concept by evaluating management’s
assessment of the ability of the entity
to continue as a going concern.

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Factors which may cause concern as to the
entity’s ability to continue as a going
concern:

Financial indicators:
 Net current assets/liability position
 Adverse key financial ratios
 Negative cash flows or substantial

losses
 Inability to pay creditors on due dates

or difficulty in complying with loan

agreements
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Factors which may cause concern as to the
entity’s ability to continue as a going concern…

Operating indicators:
 Loss of key management without

replacement
 Loss of major markets, franchises or

licenses
 Loss of major suppliers or shortage of

supplies
 Labour difficulties

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Factors which may cause concern as
to the entity’s ability to continue as
a going concern…

Other indicators:
 Pending legal proceedings against the

entity
 Non-compliance with statutory

requirements
 Changes in legislation that may

adversely affect the entity

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Procedures to assess applicability
of the going concern:
 Discuss with management future plans,
i.e., sale of assets/financial lease instead
of purchase, expenses deferred/reduced
etc.
 Analyze & discuss cash flow/profit

projections
 Read minutes of management &

shareholders’ meetings for indications of

financial problems

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Consider the effect on the auditor’s
report
 Going concern problem: unmodified
report
 Uncertainty about going concern:

disclosed – unqualified with emphasis

of matter par.
 Certainty of non-applicability of the

going concern: disagreement –

qualified report [adverse opinion]

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 MANAGEMENT
REPRESANTATIONS
[ISA 580]

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Objectives:
 Toprovide guidance on the use of
management representations as audit
evidence, the procedures to be
applied in evaluating & documenting
management representations & the
action to be taken if management
refuses to provide appropriate
representations.

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Definition:
 Written representation – a written
statement by management provided to
the auditor to confirm certain matters
or to support other audit evidence
 Management – management & those

charged with governance. Responsible

for the preparation & fair presentation
of the financial statements

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Audit procedures:
 Request written representations from
management with appropriate
responsibilities for the fin. Stats. &
knowledge of matters concerned.
 That it has fulfilled its responsibility

for the preparation of the fin stats in

accordance with the applicable
financial reporting framework

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Audit procedures:….
 Description of management’s
responsibilities in the written
representations
 Date of representations shall be as

near as practicable to, but not after,

the date of the auditor’s report on the
fin. stats.

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Doubt as the reliability of written
representation:
 If
representations are not reliable,
auditor to take appropriate actions,
including determining the possible
effect on audit opinion [possible
modification]

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OTHER INFORMATION ISSUED
WITH THE AUDIT STATEMENTS
The auditor’s responsibilities relating to other
information in documents containing audited
financial statements [ISA 720]

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Objectives:
 Provide guidance on the auditor’s
consideration of other information, on
which the auditor has no obligation to
report, in documents containing
audited financial statements.

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Definition:
 Other information – financial & non-
financial information (other than fin
stats & auditor’s report thereon) which
is included, either by law, regulation
or custom.

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Examples:
 Report by management or the board
of directors, financial summaries or
highlights, employment data, financial
ratios, planned capital expenditures
etc.

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Audit procedures
 Auditor to read the other information to
identify material inconsistencies, if any,
with the audited financial statements.
 Auditor to make appropriate

arrangements with management to

obtain the other information prior to the
date of the auditor’s report.

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Audit procedures…
 If auditor identifies a material
inconsistency, he should determine
whether the audited fin stats needs to
be amended.
 If auditor becomes aware that the other

information include a material statement

of fact, he should discuss the matter
with management & take appropriate
action, i.e., notifying management and
obtaining legal advise

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END

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