Chapter 12
Completion and Review
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-1
The nature of completion and
review procedures
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-2
Learning Objective 1:
Date of the Audit Report
Important because it establishes date of 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 company prior to auditor
expressing an opinion.
•
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-3
Audit procedures after balance date
•
Many audit procedures performed after balance date as
normal tests of balances, e.g.:
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–
–
cutoff tests;
collectability of accounts receivable determined by
subsequent payment; and
search for unrecorded liabilities.
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-4
Analytical procedures after balance date
•
Auditor is also required to apply analytical procedures
at or near completion of the audit to:
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–
–
assist in overall review of reasonableness of financial
report;
ensure financial report is consistent with auditor’s
knowledge of entity; and
corroborate conclusions formed during audit.
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-5
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 auditor signs the audit
report. Refer AUS 706/ASA 560 (ISA 560).
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-6
Types of Events Subsequent to
Balance Date
•
Two types of events may materially affect financial
reports. These are:
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–
Type 1 or adjusting events
Type 2 or disclosing events.
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-7
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 need to be brought to
account (amounts in the financial statements need to be
adjusted).
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-8
Examples of 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  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-9
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  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-10
Examples of Type 2 Events
•
A fire or flood loss after balance date, not fully covered
by insurance;
• Raising of additional shares or loan capital after
balance date; and
• Mergers and acquisitions after balance date.
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-11
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  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-12
Events subsequent to the date of
the audit report
•
Auditor has no responsibility to seek audit evidence to
identify such events.
• Where auditor becomes aware of events that have a
material effect on financial report and the report has not
yet been issued (sent to shareholders), auditor should
discuss the matter with management and seek to have
an amended financial report issued.
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-13
Events subsequent to the issue of
the financial report
If material events come up or are brought to auditor’s
attention after financial report has been sent to
shareholders, auditor should discuss matter with
management.
• Where decision made to issue new financial report,
auditor should perform procedures necessary to form
an opinion on revised financial report.
• Auditor should take steps to prevent reliance on
superseded financial report and audit report.
•
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-14
Learning Objective 3:
Representation Letters
•
Two types of letters are commonly sought towards
completion of audit:
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–
Solicitor's
Management
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-15
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 enquiries of legal representatives of clients, and their
responses to these enquiries (representations) will be
documented in this representation letter.
• Example representation letter contained at Exhibit 12.2
(pp. 570-571)
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-16
Management representation letter
•
A written representation letter, prepared by auditor and
signed by management, which formalises management
responses to inquiries made by auditor during audit,
and also clarifies management’s responsibilities.
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-17
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. 574-575).
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-18
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  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-19
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:
(i) Occurrence and rights and obligations - disclosed
events, transactions and other matters have occurred
and pertain to the entity;
(ii) Completeness - all disclosures that should have been
included in the financial report have been included
(iii) Classification and understandability – financial;
information is appropriately presented and described
and disclosures are clearly expressed;
(iv) Accuracy and valuation - financial and other information
is disclosed fairly and at appropriate amounts.
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-20
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 their 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.
Copyright  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-21
Review of other information contained in
annual report
•
Other information in annual report is not part of the
financial report and is not covered by the audit report,
e.g. directors’ report.
• Auditor should review other information to identify:
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–
•
Material inconsistencies with financial report; and
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  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-22
Learning Objective 5:
Appropriateness of the Going Concern
Basis
•
As well as assessing risk of going concern problems at
planning stage, AUS 708/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  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-23
Assessing going concern at
completion stage
•
Additional procedures include:
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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  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-24
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  2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett
12-25