Near the end of the audit process the auditors must assess a number of areas before they can form an overall opinion on the financial statements. The main areas to consider are as follows:
- overall review of the financial statements
- other information
- subsequent events
- going concern
ACCA P7 Lecture Index
1 Rules of Professional Conduct
2 Professional Responsibility and Liability
3 Regulatory Environment
4 Practice Management
5 Audit Process
7 Evaluation and Review
8 Audit of Financial Statements
9 Group Audits
10 The external audit report
11 Audit Related Services (Non Audit Services)
12 Assurance Services
13 Prospective Financial Information (PFI)
14 Internal Audit
15 Outsourced Finance and Accounting Functions
16 Social and Environmental Audits
Overall review of financial statements
The auditors should carry out a review of the financial statements that is sufficient, in conjunction with the conclusions drawn from other evidence, to give them a reasonable basis for their opinion.
The review will determine whether
acceptable accounting policies have been used.
information included in the financial statements is compatible with audit findings.
adequate disclosure has been made and there is proper classification and presentation of information.
the financial statements comply with statutory and other regulatory requirements.
The auditor can use analytical procedures at the overall review stage of the audit. This will help the auditor to decide whether the figures in the financial statements appear to be reasonable.
This task is normally performed by more experienced staff because considerable knowledge and experience is needed to carry out the procedures effectively.
At the final review stage of the audit of Tervyseks Ltd you find that the accounts receivable payment period has increased from 45 days in 2009 to 50 days in 2010.
What factors could have led to this increase?
Initial engagements – opening balances
Auditors should obtain sufficient appropriate audit evidence that:
opening balances do not contain errors or misstatements which materially affect the current period’s financial statements,
appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and adequately disclosed, and
comparatives agree with the amounts and disclosures in the preceding period and are free from errors that would impact on the current period
Audit work required
check that the balances have been brought forward correctly from the previous period
check that consistent accounting policies have been used or that any change of policy is correctly dealt with in accordance with IAS 8
check that comparatives have been properly disclosed by checking them against the previous period’s financial statements.
With new audit clients additional procedures may be required due to the fact that the preceding period was not audited by the current audit firm. These procedures would include the following:
consultations with the management
review of the client’s records, working papers and systems details for the previous period
the audit work on the current period
consultations with the previous auditors. However, there is no legal or ethical obligation for them to co-operate
in exceptional circumstances, the opening balances would be retested.
Qualification in the previous period
If the matter has been resolved, and properly dealt with in the current period no qualification will be required in the current period.
If the matter has not been resolved, and is material to the current period, then a qualification will be required in the current period. The audit report would refer to the fact that the audit report on the previous period’s financial statements was qualified on the same matter.
The auditor is required to give an opinion on the truth and fairness of the financial statements. These are comprised of:
the Statement of Financial Position
the Statement of Comprehensive Income
the Statement of Cash Flows
The Statement of Total Recognised Gains and Losses / Statement of Changes In Equity
the notes to the financial statements
other matters identified as being part of the financial statements
Other information often included in an entity’s annual report with the financial statements:
- the directors’ report
- the chairman’s report
- five year summary
- financial and operating review
The audit opinion is not given on these items. However, this information could include details that are misleading or inconsistent and may serve to create doubts about the financial statements.
The auditor should read the other information. If they become aware of any misstatement or inconsistency, they should consider whether an amendment is required to the financial statements or to the other information. They should seek to resolve the matter through discussion with the directors.
If, after discussion with the directors, the auditors conclude that the financial statements require amendment and no such amendment is made, they should consider the implication for the audit report.
If the other information requires amendment, and this is not made, the appropriate action will depend on the item which contains the inconsistency or error. The auditor should seek legal advice and consider resigning from the appointment.
Subsequent events are defined as “those events occurring between the end of the reporting period and the date of the auditors’ report and facts discovered after the date of the auditors’ report”.
Give 3 examples of subsequent events.
The auditors should perform procedures designed to provide sufficient appropriate evidence that all material subsequent events up to the date of the audit report which require adjustment of, or disclosure in, the financial statements have been identified and properly reflected.
When, after the date of the audit report but before the financial statements are issued, the auditor becomes aware of subsequent events which may materially affect the financial statements, they should establish whether the financial statements need amendment, discuss the matter with management and consider the implications for their report, taking additional action as appropriate.
If the directors amend the financial statements, the auditors should issue a new audit report on these amended financial statements.
When, after the financial statements have been issued, but before they are laid before the members, the auditors become aware of subsequent events which had occurred by the date of the audit report and which, if known at that date, might have caused them to issue a different report, they should consider whether the financial statements need amendment, discuss the matter with management, and should consider the implications for their report, taking additional action as appropriate.
If the directors revise the financial statements, then the auditors will need to audit the changes and issue a new report. The report should refer to a note in the financial statements describing the changes and it should refer to the previous report.
When forming an opinion as to whether the financial statements give a true and fair view, the auditors should consider whether the entity has the ability to continue as a going concern.
If the going concern assumption does not apply, what is the impact on a set of financial statements?
Directors’ and auditors’ responsibilities
It is the directors’ responsibility to determine whether the entity is a going concern. The auditors’ responsibility is to satisfy themselves that the use of the going concern basis is appropriate and its use has been adequately disclosed in the financial statements.
The auditors should make enquiries of the directors and examine appropriate financial information. They should also plan and perform procedures designed to identify any material matters which could indicate doubt about the entity’s ability to continue as a going concern.
Suggest five factors that might cause you to believe that the going concern basis is not appropriate for an entity
Evidence available on going concern
At the planning stage, the auditor would wish to assess the risk that the entity may not be a going concern. They would do this through obtaining a thorough knowledge of the business, its products and the environment it operates in. They would also assess the controls to help them decide how much confidence they should have in forecast data. Finally, analytical procedures can help the auditor identify potential problems.
The auditors would also review the cash flow forecast and forecast financial statements to ensure that the assumptions on which they are based are realistic and reasonable.
The foreseeable future
“foreseeable future” is defined as “generally a period not to exceed one year after the period end”.
Audit Report implications
Where the auditors consider that there are doubts over whether the entity is a going concern, they would wish to see additional disclosures in the financial statements. If appropriate disclosure is given and the auditors do not disagree with the use of the going concern basis, then the audit report will be unqualified with an additional “emphasis of matter” paragraph.
Where the auditors disagree with the use of the going concern basis they should issue an audit report which is modified on the grounds of material misstatement and issue an adverse opinion
Where the financial statements are prepared on a break-up basis, and the auditors agree with this basis, the audit report should be modified with an “emphasis of matter” paragraph.