Part Four Completion and Communication Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Chapter 12 Completion and review Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

The nature of completion and review procedures Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 1: Date of the audit report Important because it establishes the date of the auditor’s responsibility for knowledge of events that should be reflected in the financial report. Audit report should be dated when it is actually signed, and no earlier than date of directors’ declaration. Ensures financial report was completed and formally accepted by officers of the company prior to the auditor expressing an opinion. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Audit procedures after balance date Many audit procedures performed after balance date as normal tests of balances, for example: Cutoff tests Collectability of accounts receivable determined by subsequent payment Search for unrecorded liabilities. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Analytical procedures at or near completion Auditor is also required to apply analytical procedures at or near completion of the audit to: Assist in overall review of reasonableness of financial report Ensure financial report is consistent with auditor’s knowledge of entity Corroborate conclusions formed during audit. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 2: Subsequent events review AASB 110 (IAS 10) indicates that financial reports should reflect the effects of certain events occurring up to time of completion (defined as date of directors’ declaration or approval of financial report by owners or controlling management). Auditor’s responsibility to consider subsequent events is extended up to the date on which the auditor signs the audit report. Refer ASA 560 (ISA 560). Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Types of events subsequent to balance date Two types of events may materially affect financial reports: Type 1 or adjusting events Type 2 or disclosing events. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Type 1 or adjusting events Events, both favourable and unfavourable, that provide evidence of, or further elucidate, conditions that existed at balance date. Financial effect of such events needs to be brought to account (amounts in the financial statements need to be adjusted). Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Examples of Type 1 (adjusting) events Subsequent collection of a material account receivable that has been treated as uncollectable at balance date. A commercial assessment or legal determination, subsequent to balance date, that establishes definitively a claim that was in existence, but of an uncertain amount, at balance date. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Type 2 or disclosing events Do not relate to a condition that existed at balance date. Include both favourable and unfavourable events that create new conditions, as distinct from any condition that might have existed at balance date. If material, disclose in the notes to the accounts. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Examples of Type 2 (disclosing) events A fire or flood loss after balance date, not fully covered by insurance Raising of additional shares or loan capital after balance date Mergers and acquisitions after balance date Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Events between balance date and date of audit report The auditor has a responsibility to apply audit procedures sufficient to enable auditor to determine whether all material Type 1 and Type 2 events have been appropriately adjusted for (Type 1) or disclosed (Type 2) in the financial report, up until the date of the audit report. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Events subsequent to the date of the audit report Auditor has no responsibility to seek audit evidence to identify such events. Where the auditor becomes aware of events that have a material effect on financial report and the report has not yet been issued (sent to shareholders), he or she should discuss the matter with management and consider whether an amended financial report should be issued. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Events subsequent to the issue of the financial report If material events come up or are brought to the auditor’s attention after financial report has been sent to shareholders, auditor should discuss matter with management. Where the decision is made to issue a new financial report, the auditor should perform procedures necessary to form an opinion on revised financial report. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Events subsequent to the issue of the financial report (cont.) Auditor should take steps to prevent reliance on superseded financial report and audit report. Auditor’s report on revised financial report has a new date, refers to previous audit report, and includes an emphasis of matter paragraph (discussed in Ch 13). Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 3: Representation letters Two types of letters are commonly sought towards completion of audit: Solicitor’s Management Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Solicitors’ representation letter Auditor should obtain letter from solicitors consulted by the client during the year to obtain evidence on existence, completeness, valuation and presentation of legal issues identified during audit. All inquiries of legal representatives of clients, and their responses to these inquiries (representations) will be documented in this representation letter. Example representation letter contained at Exhibit 12.2 (pp. 570–1). Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Management representation letter A written representation letter, prepared by auditor and signed by management, which formally documents management responses to inquiries made by auditor during audit, and also clarifies management’s responsibilities. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Reliability of management representation letter Limited in its reliability as audit evidence, and is usually used to corroborate other evidence (should not replace other evidence gathered by auditor). Might be the only (primary) evidence available to support management’s intentions of future actions. Example contained at Exhibit 12.3 (pp. 574–5). Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 4: Review of working papers and financial report Undertaken at end of the engagement as a final check to ensure that all significant matters and problems have been identified, considered and satisfactorily resolved. Must consider size and nature of errors, as they might affect risk assessment and audit testing. Immaterial errors identified during audit may be considered material when aggregated, and thus require adjustment. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Review of the financial report In considering presentations and disclosures for each account balance and related note disclosures, the auditor must gather evidence to support the following assertions: Occurrence and rights and obligations — disclosed events, transactions and other matters have occurred and pertain to the entity. Completeness — all disclosures that should have been included in the financial report have been included. Classification and understandability — financial information is appropriately presented and described and disclosures are clearly expressed. Accuracy and valuation — financial and other information is disclosed fairly and at appropriate amounts. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Review of the financial report (cont.) Having collected evidence on other assertions related to account balances and classes of transactions, auditor will ensure that disclosures are fairly represented. Auditor will further ensure that the financial information is appropriately classified and is understandable. Auditor should also ensure that his or her name is not associated with misleading information. Auditor should finally ‘step back’ and ensure that the view presented by the financial report and all associated information is consistent with the underlying state of affairs (i.e. represents a true and fair view). Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Review of other information contained in annual report The financial report is only part of an annual report and it is this to which the audit report relates. Other information in annual report (e.g. directors’ report, chairperson’s statement) is not covered by the audit report. Auditor should review this other information to identify: Material inconsistencies with financial report Misstatements of fact. Auditor who identifies a material inconsistency or misstatement of fact needs to determine whether the audited financial report or the other information needs to be amended. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Learning objective 5: Appropriateness of the going concern basis As well as assessing risk of going concern problems at planning stage to help in planning the audit, ASA 570 (ISA 570) requires auditor to assess once more at final review stage in order to confirm appropriateness of going concern principle as a basis for preparing financial report. If not clear that going concern basis is appropriate, additional audit procedures might be necessary. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Assessing going concern at completion stage Additional procedures include: Review events occurring after balance date Analyse latest interim financial report Read minutes of meetings Review terms of loan agreements Consider information from entity’s solicitors. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett

Comfort letters Auditor needs to confirm arrangements made with third parties concerning provision of additional finance to support audited entity, and the capacity of the third party to provide promised support. Often a parent entity will support subsidiary in financial difficulty: Letter of support: parent agrees to provide financial assistance to subsidiary for fixed period. Letter of subordination: parent agrees not to demand repayment of financial debts owed by subsidiary. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 3r by Grant Gay and Roger Simnett Slides prepared by Roger Simnett