bea2004 slides unit 8 completing the audit

Rhgj201

Sujets

• management
• managers

Informations

• Publié par: Ustue
• Nombre de lectures: 19
• Langue: English

Extrait

Completing the Audit

Issues as to • Evidence aggregation and evaluation • Consideration of going concern • Management representations • Provisions and contingent liabilities • Subsequent events • Final discussions with management • Management letter

Evidence aggregation and evaluation Audit procedures will normally be undertaken and working papers prepared by more junior staff and this work will be reviewed at manager and partner level these reviews will consider the nature and suitability of the audit evidence collected and the impact of known or estimated mis- statements on the truth and fairness of the financial statements

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Evidence aggregation and evaluation Here decisions as to whether actual or potential errors do, or do not, impact the truth and fairness of the financial statements will be influenced by inter alia • the nature and size of the error • the nature of the account item • the strength of the evidence • the management response

Evidence aggregation and evaluation These decisions will be made within an overall context of materiality and audit risk Here factors such as perceived earnings management by the client may be relevant, for example where there are a number of errors/contentious forms of accounting all running in the same direction as in Pergammon (see slides for unit 5) or more recently Enron (see forthcoming handout)

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Going concern

Financial statements are normally prepared on a going concern basis, i.e. the assumption that the entity will continue in business for the immediately foreseeable future The auditor needs to consider whether this assumption is appropriate, for example by review of operating data and forecasts, cash flow forecasts, access to finance facilities, the existence of debt covenants etc (ISA UK & I) 570

Going concern

The difference between financial statements prepared on a going concern basis and those prepared on a break up basis may be becoming less significant under the fair value balance sheet based approach of current conceptual frameworks and accounting standards – but going concern audit report modifications are likely to contain information to users of financial statements

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Going concern

Detailed consideration of the audit role in respect to going concern can be found in the AIDB tribunal report on Mayflower (available on the FRC website) – where the complaint (which failed) against PWC was that they failed to address the issue of the client’s going concern status in accordance with the then applicable auditing standard

Going concern

Auditors are normally very reluctant to qualify the audit report on a going concern basis unless the relevant issues are clearly in the public domain This is particularly so with respect to financial institutions where there is a perceived danger that the qualification might become a self fulfilling prophecy

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Going concern

Note however the existence of confidential reporting channels to regulators for the auditors of banks and other financial institutions

Management representations

ISA (UK & I) 580 requires the auditor to obtain a representation letter from management/‘those charged with governance’ (normally the directors)

This letter should confirm the responsibility of the directors for producing financial statements which present fairly in accordance with the appropriate financial reporting framework/show a true and fair view

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Management representations

The letter should also • confirm management responsibilities for the internal control system • confirm management belief that any uncorrected errors uncovered by audit are immaterial • provide confirmation of oral representations by management

Management representations

The letter should also provide written representations from management on matters material to the financial statements ‘when other sufficient appropriate audit evidence cannot reasonably be expected to exist’

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Management representations

The extent to which a management representation letter can in itself constitute meaningful audit evidence is debatable - but it may bring home to management their responsibilities and also clarify areas where management assumptions, estimates etc are of critical importance to the picture portrayed by the financial statements

Provisions and contingent liabilities

IAS 37 defines a provision as ‘a liability of uncertain timing or amount’ and a contingent liability (which should be disclosed in the notes to the financial statements) as a ‘conditional obligation’ for example litigation, warranties, restructuring and termination payments (note the proposed revisions to IAS 37 eliminate both terms replacing them by ‘non-financial liabilities’ which are to be included in the financial statements)

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Provisions and contingent liabilities

Audit procedures with regard to contingent liabilities are likely to include review of board minutes, legal correspondence, enquiry of management, general business knowledge

Provisions and contingent liabilities

Issues as to whether an item should be provided for or disclosed are essentially judgemental the present IAS 37 framework refers to the need for provision if the likely outcome is ‘probable’ if the likely outcome lies between ‘remote’ and probable’ then disclosure as a ‘ contingent liability is required

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Provisions and contingent liabilities

An exemplar of a potential contingent liability which was considered too remote for disclosure in the financial statements was the £2.6 billion claim by the Equitable against its auditors Ernst & Young Ernst & Young did not disclose this as a contingent liability (nor did their auditors consider it to be relevant from a going concern perspective)

Subsequent events

Subsequent events (covered by IAS 10 and ISA (UK & I) 560) include:

• events after the balance sheet date but ahead of the signing of the audit report

• events after the signing of the audit report   but before the financial statements are made available to the members

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Subsequent events

IAS 10 distinguishes between events which

• provide evidence as to conditions existing at the balance sheet date (adjusting events) • are indicative of conditions of events arising after the balance sheet date (non- adjusting events)

Subsequent events

After the signing of the audit report the auditor has no duty to make further enquiries with respect to the financial statement numbers However if the auditor becomes aware of further relevant information before the distribution of the financial statements then the auditor should discuss the matter with management and in the light of this take action as appropriate

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Subsequent events

If the management do not agree to amend the financial statements when the auditor believes they should be amended then the auditor should issue a modified (qualified) audit report

Subsequent events

If the auditor becomes aware of relevant facts after the issue of the financial statements then again the auditor should discuss the situation with management

If management agree to issue amended financial statements then the audit report should contain an emphasis of matter paragraph detailing the reasons for the amendment

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