ACCA P7 (INT) Advanced Audit & Assurance - Study Text - 2010 (Emile Woolf Publishing)
Подождите немного. Документ загружается.
Chapter 9: Evaluation and review
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 225
‘An entity shall adjust the amounts recognised in its financial statements to reflect
adjusting events after the reporting period.’
Disclosures for non-adjusting events after the reporting period
Non-adjusting events after the reporting period are treated differently. A non-
adjusting event relates to conditions that did not exist at the end of the reporting
period; therefore the financial statements must not be updated to include the effects
of the event. IAS 10 states quite firmly: ‘An entity shall not adjust the amounts
recognised in its financial statements to reflect non-adjusting events after the
reporting period’.
However, IAS 10 goes on to say that if a non-adjusting event is material, a failure by
the entity to provide a disclosure about it could influence the economic decisions
taken by users of the financial statements. For material non-adjusting events IAS 10
therefore requires disclosure of:
the nature of the event, and
an estimate of its financial effect, or a statement that such an estimate cannot be
made.
This information should be disclosed in a note to the financial statements.
The role of the auditor: ISA 560
The work of the external auditor in this area is covered by ISA 560 Subsequent events.
The objectives of the auditor, per ISA 560, are to:
obtain sufficient, appropriate evidence about whether events occurring between
the date of the financial statements and the date of the audit report are
appropriately reflected in those financial statements, and
respond appropriately to facts that became known to him after the date of the
audit report that, had they been known to him at that date, may have caused
him to amend his report.
This means that audit procedures must be planned and performed so as to consider
all significant transactions occurring after the reporting period. This means that the
audit work does not stop with events only up to the end of the reporting period.
There are two key dates after the reporting period: the date of the audit report and
the date that the financial statements are issued.
Before the issue of the audit report, the auditor should actively look for
significant subsequent events.
After the issue of the audit report (and up to the time that the financial
statements are issued), the auditor has to consider the impact of any significant
subsequent events that come to his attention. However, he does not have to
look for these events actively.
Paper P7: Advanced audit and assurance (International)
226 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
4.2 Audit work to check compliance with IAS 10
Audit work to check compliance with IAS 10 can be divided into three phases:
from the end of the reporting period to the date of the audit report
from the date of audit report to the date that the financial statements are issued
after the financial statements have been issued.
4.3 Events occurring after the reporting period and up to the date of the
audit report
Between the end of the reporting period and the date of the audit report, the auditor
is required to obtain sufficient appropriate evidence that all events that require
adjustment of or disclosure in the financial statements have been identified.
Normal audit verification work
The auditor may find sufficient evidence of subsequent events in the course of
normal audit verification work. Where this is the case he is not required to perform
additional audit procedures. Such normal audit verification work will include
looking at sales, invoices and cash transactions after the year-end in order to verify
items in the statement of financial position at the year end. For example:
The audit of receivables will consider whether receivables at the end of the
reporting period are collectable. Cash receipts after the year-end may indicate a
significant non-payment, suggesting the need to write off a debt as ‘bad’.
The audit of inventory procedures includes a review of the net realisable value
of inventory. Sales of inventory after the year-end may indicate that some
inventory in the statement of financial position is over-valued (because
subsequent events have shown that its NRV was less than cost).
A search for unrecorded liabilities may discover the existence of some
unrecorded liabilities, from invoices received after the reporting period but
relating to the period covered by the financial statements.
A review of the entity’s cash position at the end of the reporting period may find
that a cheque from a customer, recorded as part of the bank balances, was
dishonoured after the reporting period.
Procedures aimed specifically at identifying subsequent events
The auditor should also actively look for ‘subsequent events’, up to the time that he
prepares the audit report. Taking into account his risk assessment of this area, he
should:
obtain an understanding of management’s procedures for identifying
subsequent events
enquire of management as to whether any subsequent events have occurred
which might affect the financial statements
read the entity’s latest subsequent financial statements
read minutes of shareholders’ meetings, meetings of the board of directors and
senior management meetings held after the date of the financial statements and
Chapter 9: Evaluation and review
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 227
enquire about matters discussed at any such meetings where minutes are not yet
available
obtain written representations in respect of subsequent events.
4.4 Facts discovered after the date of the audit report and before the
financial statements are issued
Even after the date on which the audit report is signed, the auditor retains some
degree of responsibility for events of which he becomes aware, up to the time that
the financial statements are issued. He is not required, during this period, to actively
look for subsequent events. His level of responsibility is therefore much reduced
compared with the period before the signing of the audit report.
If the auditor becomes aware of a fact that, had it been known to him at the date of
the report, may have caused him to amend his report then he must:
discuss the matter with management,
determine whether the financial statements need amending, and
enquire how management intend to address the matter in the financial
statements.
If the financial statements are amended, the auditor is required to:
carry out the necessary audit procedures on the amendment(s), and
extend his review of subsequent events up to the date of the new audit report.
(In some jurisdictions management are not prevented from restricting their
amendments to the effects of the subsequent event. In such cases ISA 560 permits
the auditor to restrict his extended review of subsequent events to that amendment
only. In such a case the auditor must draw attention to this restriction in an
emphasis of matter paragraph or other matter paragraph (covered in a later
chapter)).
If management do not amend the financial statements for the subsequent event, but
the auditor feels that an amendment should be made, the auditor should take the
following action.
If the audit report has not yet been provided to the entity, modify his opinion as
appropriate.
If the audit report has been provided to the entity:
− instruct management not to issue the financial statements before the
necessary amendments have been made
− if they do so, take appropriate action to prevent reliance on the audit
report, after taking legal advice.
Paper P7: Advanced audit and assurance (International)
228 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
4.5 Facts discovered after the financial statements have been issued
As above, the auditor has no obligation to perform audit procedures or make
enquiries regarding the financial statements after they have been issued. However,
if he becomes aware of a fact that, had it been known to him at the date of his
audit report, may have caused him to amend his report then he should:
discuss the matter with management
determine how the financial statements need amending, and
enquire how management intend to address the matter in the financial
statements.
If the financial statements are amended, the auditor is required to:
carry out the necessary audit procedures on the amendment
extend his review of subsequent events up to the date of the new audit report (as
above)
review the steps taken by management to inform anyone who received the
original financial statements and audit report of the situation
issue a new audit report, containing an emphasis of matter paragraph or other
matter paragraph (covered in a later chapter). This should refer to a note in the
revised financial statements that explains in more detail the reason for the re-
issue of the financial statements.
Chapter 9: Evaluation and review
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 229
Going concern: ISA 570
Introduction
Going concern: duties of the directors
Going concern: duties of the auditor (ISA 570)
5 Going concern: ISA 570
5.1 Introduction
The going concern assumption means that the income statement/statement of
comprehensive income and statement of financial position are prepared on the
assumption that the entity will continue in operational existence for the
foreseeable future.
If the entity is not a going concern, there will be significant implications for the
financial statements. For example:
the distinction between ‘current’ and ‘non-current’ for both assets and liabilities
ceases to have any meaning: all assets and liabilities become ‘current’
all assets must be carried in the statement of financial position at their net
realisable value, and
there may be additional liabilities.
The auditor needs to be satisfied that the going concern assumption is appropriate
to the financial statements under audit. This will involve an investigation of the
financial and operating position of the client before the end of the reporting period.
If this review indicates that the going concern assumption may not be appropriate,
further investigation will be needed.
5.2 Going concern: duties of the directors
In preparing the financial statements, the directors must satisfy themselves (in
accordance with IAS 1) that the going concern basis is appropriate. In some
countries, there is a requirement for large companies (listed companies) to disclose
the fact that, in the opinion of the directors, the company is a going concern.
It is therefore the responsibility of management to make the going concern
assessment.
5.3 Going concern: duties of the auditor (ISA 570)
The work of the external auditor on the going concern status of an entity is covered
by ISA 570 Going concern. Key points from ISA 570 are set out below.
Paper P7: Advanced audit and assurance (International)
230 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
The objectives of the auditor in this area, according to ISA 570, are to:
obtain sufficient appropriate evidence about the appropriateness of
management’s use of the going concern assumption in the preparation and
presentation of the financial statements
conclude whether a material uncertainty exists that may cast significant doubt
on the entity’s ability to continue as a going concern, and
determine the implications for the audit report (covered a later chapter).
This is a subjective area where judgement is usually required to assess the
uncertainties surrounding the assumptions that were made by management in
reaching their conclusion about the going concern status of the entity.
ISA 570 requires that the auditor must perform risk assessment procedures to
consider whether there are events or conditions that may cast significant doubt on
the entity’s ability to continue as a going concern.
If management has already performed such an assessment, the auditor must:
discuss this assessment with management
determine whether the assessment identified any relevant events or conditions,
and, if so
determine management’s plans to address them.
If management has not yet performed such an assessment, the auditor must:
discuss with management the basis for the intended use of the going concern
assumption, and
enquire of them whether events or conditions exist that may cast significant
doubt on the entity’s ability to continue as a going concern.
In evaluating management’s assessment the auditor must consider the same time
period. If management looked less than 12 months into the future, the auditor
should ask management to make a re-assessment looking at least 12 months into the
future. The auditor must also enquire if management is aware of any relevant
events or conditions beyond this time period.
Factors that raise questions about the going concern assumption
The auditor should remain alert throughout the audit process for factors or events
that may indicate that the going concern status could be questionable/doubtful.
Factors that may cast doubt on the going concern status of the company include the
following:
Recurring operating losses.
A heavy dependence on short-term finance for long-term assets.
Working capital deficiencies (such as a large bank overdraft, or exceptionally
low levels of inventory).
High gearing (a high ratio of debt capital to equity).
Chapter 9: Evaluation and review
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 231
Loan interest payments are in arrears.
Excessive or obsolete inventory.
A deterioration in the entity’s relationships with its banks (evidenced, perhaps,
in written correspondence).
Increased use of lease and hire purchase finance, in place of purchasing assets.
Use of out-of-date technology.
A low level of current sales orders.
The entity relies very heavily on the success of one product
There are legal proceedings in progress that may jeopardise the entity’s ability to
continue in business.
A loss of key management or staff.
A loss of a key customer or supplier
A significant increase in the level of competition in the market.
Going concern assumption: audit procedures
Where events or conditions have been identified that may cast significant doubt on
the entity’s ability to continue as a going concern the auditor must obtain sufficient
appropriate evidence to determine whether in fact a material going concern
uncertainty does exist. He does this by performing additional audit procedures.
Discussion with management. Management should be asked to explain the
reasons why they consider the going concern assumption to be valid. They
should also be asked about their future plans for the business. If the entity is
expecting to make a loss next year, the possible implications of this for the going
concern assumption should be discussed extensively.
Obtain a cash flow forecast. A cash flow forecast should be obtained from the
entity and this should also be discussed with management. The assumptions in
the forecast should be checked and, if appropriate, challenged. If there is a
forecast of a cash shortage, the auditor should discuss with management their
plans for obtaining the additional financing that will be required.
Review the sales order book. If this indicates a decline in sales orders, the issue
should be discussed with management.
Review ageing receivables. Check a list of ageing receivables and assess the
average time to pay. If customers are taking longer to pay, this may have
adverse implications for operational cash flow.
Consider whether planned capital expenditure by the entity may be insufficient
to support the business as a going concern in the future.
If a key senior employee has left the business entity in the recent past, the
possible implications (for example, the possibility of losing key customers with
the loss of the key employee) should be discussed.
Litigation. If the company is involved in continuing litigation, and faces the
possibility of having to pay a large amount of money to settle the dispute, the
implications should be discussed.
Information from the client entity’s bank. If the client entity is expecting to rely
on continuing financial support from its bank (for example, a continuation of its
Paper P7: Advanced audit and assurance (International)
232 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
bank overdraft facility) the bank should be asked to confirm that the finance will
remain available.
After discussing the issues with management, the auditor should obtain a letter
of representation from management confirming their opinion that the entity is a
going concern.
The financial statements are the responsibility of management, and if the auditor
considers that the going concern assumption is invalid whereas management
consider it to be valid, the options available to the auditor are to:
discuss the matter with management, having carried out audit procedures to
obtain more evidence
try to persuade management to change their mind and prepare the financial
statements on a different basis (a break up basis), and
if management does not agree to change its view, consider making a qualified
audit report.
Unless all those charged with governance are also involved in managing the entity,
the auditor must communicate to those charged with governance any events or
conditions that may cast significant doubt on the entity’s ability to continue as a
going concern. Such communication must include the following:
Whether the events or conditions constitute a material uncertainty.
Whether the use of the going concern assumption is appropriate.
Whether the related disclosures in the financial statements are adequate.
If there is a significant delay in the approval of the financial statements, which the
auditor believes is due to events or conditions related to the going concern
assessment, he must:
perform the additional audit procedures listed above
consider the effect of this delay on his conclusions.
The audit work relating to the going concern status is summarised below.
Audit stage Audit procedures
Planning and
assessment
Consider whether circumstances exist which cast doubt
on the going concern status.
If management have already carried out their
assessment, review and evaluate that assessment.
Review management’s plans to deal with any problems
identified.
If the auditor has identified problems not identified by
management, ask management to prepare appropriate
plans which the auditor then reviews.
Seek written representation regarding the plans/going
concern status.
Chapter 9: Evaluation and review
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 233
Assess whether there are any material uncertainties
relating to the going concern status of the entity.
Detailed audit
procedures to
assess the going
concern status
These might include the following:
Reviewing cash flow, profit and funding forecasts,
normally for at least one year from the end of the
reporting period.
Analysing interim or management accounts.
Reviewing loan agreements and other relationships with
providers of finance.
Reviewing minutes of board meetings.
Reviewing current and future order levels and
relationships with customers.
Reviewing operating plans and the availability of future
resources.
The impact of the going concern status on the audit report is dealt with in a later
chapter.
Paper P7: Advanced audit and assurance (International)
234 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP