Lecture 7- Subsequent events & letter of representation

It is important to remember [blank_start]bridging[blank_end] work that takes place at [blank_start]end[blank_end] of audit process. [blank_start]Interim[blank_end] & [blank_start]bridging[blank_end] work is where auditors link [blank_start]interim[blank_end] work they do as part of their [blank_start]planning[blank_end], [blank_start]risk[blank_end] assessment & initial [blank_start]testing[blank_end]. Then look at transactional [blank_start]tests[blank_end] that happen where gap needs to be [blank_start]closed[blank_end] between when initial [blank_start]testing[blank_end] was done & what is being done at [blank_start]year[blank_end] end

One process that interim examinations would include is looking at [blank_start]controls[blank_end] on [blank_start]accounting[blank_end] & [blank_start]control[blank_end] systems

Another process that interim examinations would include is [blank_start]analytical review[blank_end] of year to date [blank_start]results[blank_end]

Third process that interim examinations would include is [blank_start]substantive[blank_end] tests on year to date [blank_start]P&L[blank_end] items

Near or at balance sheet date [blank_start]auditors[blank_end] need to reperform [blank_start]analytical review[blank_end] of financial statements, do [blank_start]bridging[blank_end] work for period between [blank_start]interim[blank_end] examination & [blank_start]year end[blank_end] date, send out [blank_start]debtors/creditors[blank_end] confirmation letters & send out [blank_start]bank[blank_end] confirmation letters

Typical audit work at year-end include chasing [blank_start]bank confirmation[blank_end] letters, chasing [blank_start]debtors[blank_end] & [blank_start]creditors[blank_end] circularisation (kind of confirmation), chase letters to other [blank_start]professionals[blank_end] (could be from [blank_start]valuers[blank_end], [blank_start]actuaries[blank_end], [blank_start]legal professionals[blank_end]), plan [blank_start]stock count[blank_end] observation, make sure there is enough [blank_start]substantive[blank_end] tests of balance sheets & [blank_start]remaining[blank_end] period of year for P&L & finally gather evidence on [blank_start]contentious[blank_end] (cause disagreement) items

One thing that [blank_start]auditors[blank_end] determine before end of audit is whether [blank_start]financial statements[blank_end] have been prepared using [blank_start]consistent[blank_end] & [blank_start]appropriate[blank_end] accounting principles

Another thing that [blank_start]auditors[blank_end] determine before end of audit is whether [blank_start]information[blank_end] published with [blank_start]financial statements[blank_end] is compatible with them

Third thing that [blank_start]auditors[blank_end] determine before end of audit is whether [blank_start]presentation[blank_end] & [blank_start]disclosure[blank_end] are as required by law & by regulatory bodies & achieve [blank_start]truth[blank_end] & [blank_start]fairness[blank_end]

Fourth thing that [blank_start]auditors[blank_end] determine before end of audit is whether [blank_start]conclusions[blank_end] drawn from tests & overall [blank_start]review[blank_end] of financial statements enable an [blank_start]opinion[blank_end] to be formed

Subsequent events are events [blank_start]favourable[blank_end] & [blank_start]unfavourable[blank_end], that occur between [blank_start]balance sheet[blank_end] date & date when [blank_start]financial statements[blank_end] are authorised for issue

One type of subsequent event can be identified is those that provide [blank_start]evidence[blank_end] of conditions that existed at [blank_start]balance sheet[blank_end] date ([blank_start]adjusting[blank_end] events). Another is those that are [blank_start]indicative[blank_end] of conditions that arose after [blank_start]balance sheet[blank_end] date ([blank_start]non-adjusting[blank_end] events). [blank_start]Auditor[blank_end] has to consider whether any events after date financial statements are [blank_start]authorised[blank_end] (up to & beyond date of annual general meeting)

One audit work that can be carried out to detect subsequent events is [blank_start]company procedures[blank_end] e.g. [blank_start]legal[blank_end] department provides [blank_start]report[blank_end] to chief financial officer

Another audit work that can be carried out to detect subsequent events is [blank_start]minutes of meetings[blank_end] e.g. board [blank_start]meetings[blank_end], [blank_start]executive[blank_end] committees & [blank_start]audit[blank_end] committees

Third audit work that can be carried out to detect subsequent events is [blank_start]review management accounts[blank_end] & [blank_start]accounting records[blank_end]

Fourth audit work that can be carried out to detect subsequent events is look at [blank_start]profit[blank_end] & [blank_start]cash flow[blank_end] forecasts for [blank_start]subsequent[blank_end] period to see [blank_start]financial[blank_end] performance

Fifth audit work that can be carried out to detect subsequent events is have formal [blank_start]enquiry[blank_end] of [blank_start]legal[blank_end] department & [blank_start]external lawyers[blank_end] used

Sixth audit work that can be carried out to detect subsequent events is focus on [blank_start]known risk areas[blank_end] & [blank_start]contingencies[blank_end] for type of industry being [blank_start]audited[blank_end]. Make sure known risk areas are clearly [blank_start]understood[blank_end] & have been [blank_start]addressed[blank_end]

Seventh audit work that can be carried out to detect subsequent events is look at [blank_start]correspondence[blank_end] & [blank_start]memoranda[blank_end] with [blank_start]suppliers[blank_end] & [blank_start]customers[blank_end] to ensure they are suitable

Eighth audit work that can be carried out to detect subsequent events is clear [blank_start]confirmation[blank_end] from [blank_start]third parties[blank_end]

Ninth audit work that can be carried out to detect subsequent events is [blank_start]information[blank_end] in [blank_start]public[blank_end] domain e.g. in trade press

Tenth audit work that can be carried out to detect subsequent events is have detailed [blank_start]discussions[blank_end] & have management [blank_start]interviews[blank_end] on [blank_start]known risk[blank_end] areas, new [blank_start]commitments[blank_end] & significant [blank_start]assets[blank_end] movements (if they have [blank_start]sold[blank_end] or [blank_start]acquired[blank_end] new [blank_start]assets[blank_end]). Also, discussion on [blank_start]going-concern[blank_end] status (significant losses of [blank_start]assets[blank_end])

Auditor should already be [blank_start]aware[blank_end] of significant matters of [blank_start]subjective[blank_end] judgement. They should know how to make some [blank_start]judgements[blank_end] when these issues occur

One auditor objective under ISA580 is to obtain [blank_start]written[blank_end] representations from [blank_start]management[blank_end] … that they believe that they have fulfilled their [blank_start]responsibility[blank_end] for preparation of financial statements & for [blank_start]completeness[blank_end] of information … to auditor

Another auditor objective under ISA580 is to [blank_start]support[blank_end] other audit evidence relevant to [blank_start]financial statements[blank_end] or specific [blank_start]assertions[blank_end] in financial statements … if determined necessary by auditor

Third auditor objective under ISA580 is to [blank_start]respond[blank_end] appropriately to [blank_start]written[blank_end] representations provided by [blank_start]management[blank_end] … , or … if do not provide [blank_start]written[blank_end] representations requested by auditor

Written representations are provided by [blank_start]chief executive officer[blank_end] & [blank_start]chief financial officer[blank_end] (suggested by ISA 580). But depending on business they may also include other [blank_start]individuals[blank_end] who have specialised knowledge such as [blank_start]actuaries[blank_end], [blank_start]engineers[blank_end] & [blank_start]lawyers[blank_end]

One representation that is required is [blank_start]preparation[blank_end] of financial statements in accordance with [blank_start]applicable financial reporting[blank_end] framework (so with appropriate [blank_start]standards[blank_end] & [blank_start]approach[blank_end])

Another representation that is required is all [blank_start]information[blank_end] has been provided & all [blank_start]transactions[blank_end] have been [blank_start]recorded[blank_end] correctly

Third representation that is required is confirm additional [blank_start]written[blank_end] representations about [blank_start]financial statements[blank_end] e.g. [blank_start]appropriateness[blank_end] of accounting policies & whether [blank_start]certain[blank_end] matters have been accounted for [blank_start]correctly[blank_end] given future plans

Fourth representation that is required is [blank_start]written[blank_end] representations about specific [blank_start]assertions[blank_end] e.g. from company geologists on whether oil reserves can be extracted

Fifth representation that is required is [blank_start]acknowledgment[blank_end] of managements [blank_start]responsibility[blank_end] for [blank_start]internal[blank_end] controls

Sixth representation in management representation letter is [blank_start]confirm[blank_end] that they believe that effects of [blank_start]uncorrected[blank_end] misstatements are [blank_start]immaterial[blank_end]

Date that letter of representation should bear is date accounts are signed by [blank_start]directors[blank_end] & date accounts are signed by [blank_start]auditors[blank_end] (similar date)