LECTURE 11 – AUDIT COMPLETION AND REPORTING
Audit engagements have a deadline for completion:
Disclosing entity – S319 Corporations Act requires lodgement with ASIC of audited financial report within three
months of balance date
1 July 2009 – beginning of financial year
o Initial planning
o Interim audit –
Gain understanding of internal controls
Assess control risk
Tests controls & transactions
Develop audit program
Update working papers
30 June 2010 – end of financial year
o Final Audit
Complete tests of controls & transactions
Update audit program (?)
Tests of balances
Update working papers
Issue audit opinion
14 Sept. – Sign Director’s Declaration
15 Sept. - Sign independent Auditor’s Report
o Date of report:
Should be dated/signed no earlier than Director’s Declaration
Establishes last date of auditor’s responsibility for knowledge of events that should be reflected
in financial report.
30 Sept. – Management distributes financial report
31 Oct. – AGM to consider:
o Financial report for the year
o Director’s report for the year
o Auditor’s report for the year
Assessing the Quality of the Audit
Analytical review of the audit (Required by ASA 520)
o Do company results make sense in relation to industry and economic trends?
Concurring partner review
o Independent review by an experienced auditor who is not part of the audit team
o Necessary for businesses in Australia that need to report in the US requires by Sarbanes-Oxley Act
o New audit engagement and concurring review partner every 5 years Other Considerations in the Final Review of the Audit
1. Review for contingencies/unusual liabilities
o Contingent losses/liabilities that are both probable and reasonably estimated should be accrued and
o Contingent losses/liabilities that are reasonably possible and remote contingencies should be disclosed
in the notes to the financial statements.
o Contingencies include:
Collectability of receivables and loans
Product warranty liability
Litigation and claims
Threat of expropriation of assets in a foreign country
Guarantees of debts of others
Purchase and sale commitments
Agreements to repurchase receivables that have been sold
Obligations of banks under standby letters of credit.
o Management is responsible for identifying, evaluating and accounting for contingencies.
o The auditor is responsible for determining client has properly identified, accounted for and disclosed
Sources of evidence
o Primary sources include management and client’s lawyers.
o Additional sources include corporate minutes, contracts, correspondence from government agencies
and bank confirmations.
Solicitor’s Representation Letter
Primary source of corroborative evidence concerning litigation, claims and assessments is the client’s lawyers.
The representation or letter of inquiry should include
o Management’s description and evaluation of its contingencies
o A request that the lawyer furnish the auditor with a comment on the completeness of management’s
list and evaluations and, for each contingency:
A description of the matter, progress to date and action the client intends to take
An evaluation of the likelihood of an unfavourable outcome and estimate of potential loss
Any limitations on the lawyer’s response.
The letter of inquiry is good for establishing completeness of potential liabilities and providing factual
information about contingencies.
o However, because audit working papers are not privileged, lawyer responses will be less than
forthcoming about the likelihood of unfavourable outcomes and the estimated amount of any potential
o A lawyer’s refusal to provide the requested information is a scope limitation sufficient to preclude
issuing an unqualified opinion.
2. Adequacy of Disclosures
‘Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise
stated in the report.’
The auditor must be sure that:
o Disclosed events and transactions occurred and pertain to the client
o All disclosures that should be included are included
o Disclosures are understandable to users
o Disclosures are accurate.
3. Management Representations Management representation letter
o Reminds management of its responsibility for financial statements
Confirms significant oral responses made by management
o Reduces possibility of misunderstandings between management and auditor
Management certification of financial statements
o Australian businesses reporting in US must meet the SOX Act requirement that the CEO and CFO certify
financial statements are fairly presented in accordance with GAAP.
o The auditor should review management’s processes for certification.
4. Communications of Audit Matters with those Charged with Governance
Auditors notice things that may make the client more profitable.
Many of these observations are related to control deficiencies or operational matters.
Observations are included in a management comment letter with the audit report.
Management letter is not required, but does add value to the audit.
5. Evaluating the Going Concern Assumption
The auditor is required to evaluate client’s ability to remain a going concern for a period not to exceed one year
from the balance sheet date.
Indicators of potential going concern problems:
o Negative trends in key financial areas such as cash flow, sales, profits
o Internal matters, such as loss of key personnel and outdated facilities and/or products
o External matters, such as new legislation, loss of significant customer, uninsured casualty loss
o Other matters, such as loan default, inability to pay dividends, attempted debt restructuring.
If substantial doubt about ability of client to remain a going concern, the auditor should:
o Discuss the situation with management
o Assess management’s plans to overcome problems
o Consider the effects on the financial statements.
Evaluate the adequacy of financial statement disclosure.
Including the cause of going concern doubt and management’s plan to overcome the problem.
Consider the effects on the audit report:
o Add explanatory paragraph to unqualified report
o Disclaim opinion
o Issue qualified opinion if disclosure is not adequate.
6. Review of Significant Estimates
Management estimates provide opportunities for the entity to ‘manage’ or even manipulate earnings. The
auditor provides reasonable assurance that:
o Management has information system to develop estimates material to the financial statements.
o Estimates are reasonable and are presented per accounting standard requirements.
In evaluating management estimates, the auditor concentrates on key factors and assumptions that are
o Significant to the accounting estimate o Susceptible to misstatement
o Sensitive to variations o Inconsistent with current economic
o Deviations from historical patterns trends.
7. Communicating with the Audit Committee
Items the auditor should discuss with the audit committee include:
o Auditor’s responsibility under auditing o Difficulties encountered in performing
standards the audit
o Management judgements and o Copies of significant communications
accounting estimates between auditor and management
o Audit adjustments o Management’s discussion with other
o Uncorrected misstatements accounting firms
o Accounting policies and alternative o Significant fraud or illegal acts
treatments o Significant deficiencies in internal
o Major accounting and reporting control
disagreements with management o Any independence issues
o Any other significant matters. Subsequent Events
Subsequent events occur after the balance sheet date (AASB110)
Audit procedures used to identify subsequent events include:
o Reading minutes of meetings of the BOD, shareholders and other groups held after year-end
o Reading interim financial statement and investigating significant changes
o Inquiring of management about:
Significant changes noted in interim statements
Significant contingent liabilities
Significant changes in working capital, debt or owners’ equity
Status of any tentative items
Unusual accounting adjustments made after the balance sheet date.
o Inquiring of management and lawyer about subsequent events
o Obtaining a management representation letter.
How an auditor handles a subsequent event depends on two things:
o Whether the subsequent event provides evidence about conditions that existed at balance date (type I),
or conditions arising after balance date (type II)
o When the subsequent event occurred:
After fieldwork, but before the audit report has been issued
After the audit report has been issued
After financial report has been issued.
Type I Event
Type I events provide evidence about conditions that existed at balance date.
The financial statement numbers should be adjusted to reflect this information; footnote disclosure may also be
Examples of type I subsequent events:
o A major customer, whose deteriorating financial condition existed prior to the balance date, files for
bankruptcy during subsequent period
o Lawsuit settled for different amount from accrual
o Bonus share issue/share split in subsequent period