12th Session Summary of Auditing 2 Fazlan Muallif and Rexy Dwi Putra

Final Review (Audit Completion)

1. Post Balance Sheet Event

Those events, favourable and unfavourable, that occur between the balance sheet date and the
date when the financial statements are authorised for issue. Two types of event can be identified
are:
• Adjusting entries are post date events which provide additional evidence of conditions
existing at reporting date;
• Non adjusting events are post date event which concern conditions which did not exist at the
reporting date.

Picture 1 : Period covered by subsequent events review

The objectives of the auditor are (1) to obtain sufficient appropriate audit evidence about
whether events occuring between the date of financial statements and the date of auditor’s
report that require adjustment of, or disclosure in, the fianancial statements are appropriately
reflected in those fianancial statements in accordance with applicable financial reporting
framework and (2) to respond appropriately to fact that become known to the auditor after the
date of the auditor’s report, that, had they been known to the auditor at that date, may have
caused the auditor to amend the auditor’s report.

2. Contingent Liabilities and Contingent Assets

Contingent Liabilities are possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence of one or more uncertain future events not wholly
within the entity’s control; or Present obligation that arises from past events but is not
recognized because:
• It is not probable that a transfer of economic benefits will be required to settle an obligation
or;
• the amount of the obligation cannot be measured with sufficient reliability.
12th Session Summary of Auditing 2 Fazlan Muallif and Rexy Dwi Putra

Contingent asset is a possible asset that derives from past events and whose existence will be
confirmed only by the occurrence of one or more uncertain future events not wholly within the
entity’s control.
Inflow of economic benefits virtually certain is not a contingent asset. Probable but not
virtually certain is disclose nature and estimate of financial effect. ‘Virtually certain’,
‘probable’ and ‘possible’ are judgement.

3. Going Concern
Use of basis means no intention to liquidate the entity or to cease trading. Assets stated on
continuing use basis and not break-up or liquidation values. Financial statements usually most
relevant if prepared assuming entity is to continue in operational existence for foreseeable
12th Session Summary of Auditing 2 Fazlan Muallif and Rexy Dwi Putra

future. Break-up values not relevant to users assessing entity’s cash-generation ability and
financial adaptability.
When financial statements are prepared on going-concern basis, users assume the
company is going to survive beyond short term. Difference in perception between users and
auditors concerning going concern is one reason for audit expectations gap. Going-concern
status considered during final review.

4. Directors and Auditors Responsibilities for Going Concern

Responsibility of TCWG is to determine if the application of the going concern assumption is
appropriate (ISA 570). Auditors’ responsibility is to satisfy themselves that the use of the going
concern basis by the company is appropriate and its use has been adequately disclosed in
financial statements. For this purpose :
• auditor determines if management has already performed a preliminary assessment of
entity’s ability to continue as a going concern – using ‘appropriate financial information’;
• if yes, auditor discusses assessment with management and determines if management has
identified events or conditions that may cast significant doubt on entity’s ability to continue
as a going concern and, if so, management’s plans to address them;
• if no, auditor discusses with management basis for use of the going concern assumption, and
inquire whether events or conditions exist that may cast significant doubt on the entity’s
ability to continue as a going concern.

5. Reporting on Going Concern

• If no doubt about going concern, management and auditors no need to report (ISA 570).
• Combined Code on Corporate Governance requires directors to report the business as a
going concern, with supporting assumptions or qualifications.
• If doubts about going concern, auditors consider if additional disclosures required in
financial statements.
• Where management aware of material uncertainties casting significant doubt about going
concern, disclose those uncertainties in financial statements.
• If sufficient appropriate disclosures in financial statements (including management plans to
deal with the uncertainties) and auditors are of the opinion that the statements give a true and
fair view, need not modify audit opinion.
• Auditors issue unqualified audit report but include emphasis of matter describing the
material uncertainty and directing reader to the note disclosure.
• Where auditors consider the disclosures to be inadequate: issue an except for qualification
for disagreement or an adverse audit report. Audit report will contain details of the material
uncertainty casting significant doubt on going concern.
12th Session Summary of Auditing 2 Fazlan Muallif and Rexy Dwi Putra

• Unqualified report where auditors agree that the use of the going concern basis in preparing
the financial statements is still appropriate.
• But where the auditors do not agree its use is appropriate, they should issue an adverse
opinion.

6. Management Representation Letter

At the end of the audit, management are asked to confirm in writing their responsibilities and to
confirm too assertions or representations that they have made to the auditors. This is regarded as
important evidence in the hands of the auditor, especially as it is written. The relevant ISA is
ISA 580 – Written representations and paragraphs quoted in this section refer to this ISA unless
otherwise stated. Here is what paragraph 6 has to say about the objectives of the auditor:
• To obtain written representations from management and, where appropriate, those charged
with governance that they believe that they have fulfilled their responsibility for the
preparation of the financial statements and for the completeness of the information provided
to the auditor;
• To support other audit evidence relevant to the financial statements or specific assertions in
the financial statements by means of written representations if determined necessary by the
auditor or required by other ISAs;
• To respond appropriately to written representations provided by management and, where
appropriate, those charged with governance, or if management or, where appropriate, those
charged with governance do not provide the written representations requested by the auditor
What are the representations required from management?
There are two broad category of representation:
• Representations about management’s responsibilities:
- Preparation of the financial statements;
- Information provided and completeness of transactions.
• Other written representations
- Additional written representations about the financial statements;
- Written representations about specific assertions.

7. Audit Documentation
There are two major purposes of audit documentation:
• First – to record the audit evidence to form the basis of conclusions and opinion;
• Second – to increase the efficiency and effectiveness of the audit and to allow quality
control and other reviews to take place. One of the efficiency and effectiveness elements
relates to the recording of matters that will make future audits more efficient and effective.
12th Session Summary of Auditing 2 Fazlan Muallif and Rexy Dwi Putra

8. Role of Final Review

The final review takes place immediately before the audit report is finalized. It is very
important, as at this stage all the audit work is put into context and a view reached as to the
truth and fairness of the financial statements taken as a whole .
The objective of this review is to ensure that:
• All routine matters that should have been covered have been dealt with (for instance,
has the impact of company legislation, accounting standards and Stock Exchange
requirements been considered?).
• There are no outstanding matters in the audit documentation. Notes such as: ‘Two
major debtors still outstanding at 13 March 2012 – discuss with chief accountant’, should
not be left open but a conclusion formed and recorded in the files.
• The financial statements have been reviewed at conclusion of the audit process and a
decision made that in the light of the interim and final work carried out, they do make sense
and do show a true and fair view – with the exception of qualifications in the audit report.
The objective of the review at the conclusion of audit work is to ensure that:
- All important matters have been covered by audit work;
- The accounts as a whole show a true and fair view and not merely that the disparate
elements of the accounts are fairly stated.
The auditor records a number of matters at the final review stage:
• Results of analytical review, including ratio analysis;
• Conclusions on each balance sheet and profit and loss account heading. Remember that we
encouraged you to write conclusions at the end of systems and transactions testing work.
The same applies to figures in the year-end accounts;
• A memorandum commenting on any major account headings greater than or less than the
previous year by a predetermined percentage;
• Whether evidence recorded in the audit documentation supports the conclusions reached.
The audit documentation should be a complete synopsis of the audit and should be self-
explanatory;
• The management letter of representation.