Chapter 10

COMPLETING THE AUDIT and POST AUDIT RESPONSIBILITIES

After the field work is almost complete, a series of procedure are generally carried out
to complete the audit. These procedures include:

1. Identifying Subsequent events that may affect the financial statement under
audit,
2. Identifying contingencies such as litigation, claims and assessment.
3. Performing wrap-up procedures.

 Subsequent Events
Subsequent events are those events are transaction that occur subsequent to the
balance sheet date that may affect the financial statement and the auditor’s
report.

For audit purposes, the auditor is only concerned with those events that occur
subsequent to the balance sheet date but before the date of the auditor’s report.

Subsequent are events may be classified as:

o Requiring Adjustment - hose that provide further evidence of

condition that existed at the balance sheet such as:
 Settlement of litigation in excess of recorded liability.
 Loss on uncollectible receivable as a result of costumer’s
deteriorating financial condition.

o Requiring Disclosure - those that are indicative of conditions that

arose subsequent to the balance sheet date. For example,
 Insurance of stocks or bonds after that balance sheet date.
 Loss on inventory due to fire that occurred in the subsequent
period.
 Loss on uncollectible receivable because of a major casually
suffered by that customer after the balance sheet date.

Procedure to identify subsequent events

According to PSA 560, “the auditor should perform procedure designed to
obtain sufficient appropriate evidence that all events up to the date of the
auditor’s report that may require adjustment of, or disclosure in the financial
statement have been identified.” This procedure would ordinarily include:
o Inquiring of management about any subsequent events.
o Reviewing procedures management has established to identify
subsequent events.
o Reviewing the minutes of board of directors and stockholder’s
meetings.
o Reading the latest available interim financial statement as well as
management reports such as budgets and forecasts.
o Inquiring of the entity’s lawyers concerning litigation claims, and
assessments.
When the auditor becomes aware of subsequent events which materially
affect the financial statement, the auditor should consider whether such
events are properly accounted for and disclosed in the financial statements.

Subsequent events occurring after the report date but before the financial
statement are issued. The auditor does not have any responsibility to
perform procedures to identify subsequent events occurring after the date
of the auditor’s report. During this period it is the responsibility of the
management to inform the auditor of events that may affect the financial
statements.

If the auditor becomes aware of an event occurring after the date of the
report but before the issuance of the financial statements, the auditor
should take the necessary action to ascertain whether such events has been
properly accounted for and disclosed in the notes to financial statements.

Failure on the part of the client to make appropriate amendments to the

financial statements, where the auditors believes they need to be amended,
will cause the auditor to issue either qualified or adverse opinion.

In the event that the auditor’s report has been released to the entity, the
auditor would notify those persons ultimately responsible for the for the
overall discussion of an entity not to issue the financial statements. If the
financial statements are subsequently released, the auditor needs to take
action to prevent reliance on the auditor’s report. These steps will be
discussed in the later section of this chapter

Effect of subsequent events on the date of the report

Generally, report should be dated as of the completion of the essential
audit procedures, the date of report is important because it shows the date
when the auditor’s responsibility for subsequent ends.

A question regarding the dating of the report arrives when subsequent

events occur after the date of the auditor’s report but before the issuance of
the financial statements. It is to be emphasized that the auditor is not
responsible to perform audit procedure to identify subsequent events after
the date of the auditor’s report. During the period from the date of the
auditor’s report to the date the financial statement issued, the responsibility
to inform the auditor of facts which may affect the financial statements rest
with management.

If a material subsequent event requiring adjustment to the financial

statement occurs after the date of the auditor’s report but before the
issuance of the financial statements, the financial statements should be
adjusted adjusted and the auditor’s report should bear the original be
adjusted and the auditor’s report - that is, the date of the completion of
essential audit procedures. This is because the condition already existed as
of the balance sheet date and did not actually occur in the subsequent
period.
On the other hand, if a subsequent event requiring disclosure occurs during
this period, the auditors should consider the adequacy of disclosure and
should date the report either.
1. As of the subsequent events; or
2. Dual date the report (e.g., March 15, 2015 except for note 10 as to
which the date is March 31, 2015)

When the auditors decided to date the report as of the date of the
subsequent events, his responsibility for the subsequent events is extended
up to subsequent event date. Thus, the auditors will also have to extend his
subsequent event review procedures to identify other subsequent events
which may have transpired from the original audit report date up to the
new audit report date.

If the auditor does not want to extend his subsequent event review
procedures another option available to him is to dual date the audit report.
When dual dating the report the auditor’s responsibility for subsequent
events occurring after the original date of the of the audit report is limited
only to the specific events referred to in the note.

 Litigation, Claims and Assessment

It is the management responsibility to adopt the polices and procedure that will
identify, evaluate, and account for the litigation, claims and assessment as a
basis for the preparation of financial statements in conformity with applicable
financial reporting framework. However, PSA 501 requires the author to carry
out procedures in the order to become aware of any litigation and claims
involving the entity, which may have a material effect on the financial
statements.

Management is the primary source of information about litigation, claims,

assessment. The auditor corroborates the information obtained from
management by asking the client to send letters of the audit inquiry to lawyer
whit whom the client to send letters of audit inquiry to lawyer whit whom the
client has consulted concerning these matters. The letter, which should be
prepared by the management and sent by the auditor, should request the
lawyer to communicate directly to the auditor to assist the auditor in obtaining
sufficient appropriate audit evidence about material litigation and claims.

If the management refuses to give the auditor permission to communicate with

the entity’s lawyer or the lawyer refuses to reply, this would be considered a
scope of limitation that would require the auditor to issue either qualified or
disclaimer of opinion. If the lawyer is unable to estimate the likelihood of an
unfavorable outcome including the amount of or range of potential loss on one
or more items, the auditor should consider adding an emphasis of a matter
paragraph to an unmodified report to draw the attention of the readers of
financial statement to this uncertainty.

 Written Management Representation

PSA 580 requires an auditor to obtain sufficient appropriate audit evidence
that the entity’s management.
o He has acknowledged that it has fulfilled its responsibility for the
preparation and presentation of fair financial statements; and
o Has approved the financial statements.

Such evidence is acquired by obtaining a written representation from

management. The auditor shall request written representation from
management with appropriate responsibilities for the financial statements and
knowledge of the matters concerned. Written representation is normally
requested from the entity’s chief executive officer and chief financial officer,
or the other equivalent persons in entities that do not use such titles.

Written Representation as Audit Evidence

Written representation is an important source of audit evidence, if
management modifies or does not provide requested written representations, it
may alert the auditor about other issues affecting the financial statements.
Further, a request for written, rather than oral, representation may prompt
management to consider the matter more rigorously, thereby enhancing the
quality of evidence.

Although written representation provides necessary audit evidence, they do

not provide sufficient appropriate audit evidence on their own about any of the
matters with which they deal. Furthermore, the fact that management has
provided reliable written representations does not affect the nature or the
extent of other audit evidence that the auditor obtains about the fulfillment of
management’s responsibilities, or about specific assertions.

Management written representations compliment the audit evidence the

auditor accumulates, but they do not substitute for the performance of audit
procedures designed to obtain necessary evidence for the expression of an
opinion.

Form and Content of Written Representation

The written representation shall be in the form of a representation letter from
management. This letter shall include: A representation that management has
fulfilled its responsibility for the preparation and representation of the
financial statements as set out in the terms of the engagement;
o A representation that the financial statement are prepared and
presented in accordance with the applicable financial reporting
framework;
o A representation that management has provided the auditors with all
relevant information agreed in the terms of the engagement, and that
all transactions have been recorded and reflected in the financial
statement;
o A representation that describes management’s responsibilities as
described in the terms of the engagement;
o Other representation required by other PSAs.

Basic Elements of a Written Management

o The written representation should be addressed to the auditor.
o The date of the written representation shall be as near practicable to,
but not after, the date of the auditor’s report.
o The written representation should be signed by the appropriate level of
management who has the primary responsibility for the financial
statements.

Ordinarily, written representation is signed by the chief executive officer and

the equivalent because they are usually the ones responsible for the
preparation and fair presentation of the financial statements.

Management’s Refusal to provide Written Representation

Written representation is an important source of audit evidence. If
management modifies the requested written representation, it may alert the
auditor to the possibility that one or more significant issues may exist.

When management does not provide written representation or the auditors

concludes that there is sufficient doubt about the integrity of management; the
auditor should consider these as scope of limitation that would warrant a
disclaimer of opinion.

 Wrap-up Procedures
Wrap-up are those procedures done at the end of the audit that generally
cannot be not performed before the other audit work is complete. These
include:
a. Financial analytical procedures
b. Evaluation of the entity’s ability to continue as a going concern
c. Evaluating audit finding and obtaining client’s approval for the
proposed adjusting entries

Financial Analytical Procedures

As discussed in Chapter 5, analytic procedure is required to be performed in
the planning and overall review stages of the audit. According to PSA 520, the
auditor should apply analytical procedures at or near the end of the audit when
forming an overall conclusion as to whether the financial statements as a
whole are consistent with the auditor’s knowledge of business. Analytical
procedures applied in the completion phase of the audit should focus on:
o Identifying unusual fluctuation that were not previously identified.
o Assessing the validity of the conclusion reached and evaluating the
overall financial statement presentation.

Evaluating of the entity’s ability to continue as a going concern

The going concern assumption is a fundamental principle in the preparation of
the financial statements. An entity’s continuance as a going concern is
assumed in the preparation of financial statements in the absence of
information to the contrary.

Management Responsibility
IAS 1 contain an explicit requirement for management to make a specific
assessment of the entity’s ability to continue as a going concern. This
assessment should take into account all available information for the
foreseeable future, which should be at least, but is not limited to, twelve
months from the balance sheet date.

Auditor’s responsibility
The Auditor’s responsibility is to consider the appropriateness of management
use of the going concern assumption in the preparation of the financial
statements. For this purpose,
1. The auditor should consider whether there are events or condition
which may cast significant doubt on the entity’s ability to continue as a
going concern.
2. In addition, the auditor should evaluate management’s assessment of
the entity’s ability to continue as a going concern.

Example of Condition or events that may cast significant doubt about the
going concern assumption include:
o Non-compliance with the terms of loan agreements or other statutory
requirements.
o Pending major legal or regulatory proceedings.
o Changes in legislation or government policy expected to adversely
affect the entity.
o Net liability or net current liability
o Substantial operating losses
o Inability to pay creditors on due date
o Loss of major market, franchise, license or principal supplier

When evaluating the entity’s going concern assumption, the auditor should
remember that the conditions and events that may indicate significant doubt
about entity’s continued existence can be mitigated by other factors.

For example, the effect of an entity’s not being able to make its normal debt
repayments may be mitigated by management’s plans to maintain adequate
cash flows by alternative means such as:
o Disposal of assets;
o Rescheduling of loan repayments; or
o Obtaining additional capital.

Effects on the auditor’s report

After the auditor has carried out the necessary audit procedures, obtained the
required information, and considered the effect of the management plans, he
should determine whether the questions raised regarding going concern have
been satisfactorily resolved.

If there is a reasonable assurance that the entity is a going concern, the auditor
should express an unmodified audit report.

If there is an uncertainty about the entity’s ability to continue as a going

concern, the auditor’s report will depend on whether this uncertainty is
adequately disclosed. If the going concern uncertainty is adequately disclosed,
the auditor should issue an unmodified opinion with emphasis of a matter
paragraph. If the auditor believes that the going concern uncertainty is not
adequately disclosed, the auditor should express either qualified opinion or
adverse opinion.

If the going concern assumption is not appropriate, the financial statement

should be prepared using another appropriate basis. Otherwise, the auditor
should issue an adverse opinion.

Evaluating audit findings and preparing a list of potential adjusting

entries.
After evaluating the evidence obtained, the auditor should decide whether to
accept the financial statements fairly stated or to request management to revise
the statements. Material misstatements discovered during the audit must be
corrected by recommending appropriate adjusting entries.

If management accept all the adjusting entries proposed by the auditor, an

unmodified report is issued on the financial statements. On the other hand, if
management refuses to correct the financial statements for these material
misstatements, the auditor should issue a qualified or an adverse opinion.

POST AUDITT RESPONSIBILITIES - Events after the financial

statements have been issued.

Ordinarily, the author does not have any responsibility to perform additional
procedures after the financial statements are issued. However, when the
auditor becomes aware that the audit report issued in connection with the
financial statement may be inappropriate, he must take steps to prevent future
reliance on such report.

 Subsequent discovery of facts

The auditor has no obligation to make any inquiry regarding previously issued
financial statements unless he becomes aware of a material fact,
o which existed at the date of the auditor’s report: and
o which, if known at the date, may have caused the auditors to modify
the report.

This critical because users may be relying on misleading financial statements.

When the auditor becomes aware of this type of information, he should:
1. Discuss the matter with the appropriate level of management and
consider whether the financial statements need revision.
2. Advise management to take the necessary steps to ensure that the users
of the previously issued financial statements are informed of the
situation.

If the management makes the appropriate revisions and disclosures to the

users of the financial statements, the auditor should issue a new audit report
that includes an emphasis of a matter paragraph to highlight the reason for the
revision of the previously issued financial statements.

In the event that management refuse to revise the financial statements or to

inform the user about the newly discovered information, the auditor should
notify those persons ultimately responsible for the direction of the entity about
the management’s refusal and about this intent to prevent users from relying
on the audit report.

 Subsequent discovery of omitted procedures

Auditors are not required to review the working papers once an audit report is
issued. However, firm’s internal inspection program or quality control review
may disclose the omission of auditing procedures considered necessary at the
time of the audit. In this situation the auditors should follow these guidelines:

1. Asses the importance of the omitted procedures to the auditor’s

ability to support his opinion.
Results of other audit procedures that were applied may compensate
for or make the omitted procedures less important. Evaluating such
results may involve:
o Reviewing the working papers
o Discussing the Circumstances with the engagement personnel
o Reevaluating the scope of the audit.

2. Undertake to apply the omitted procedure or the corresponding

alternative procedures.
If the auditor determines that the omission of the procedures impairs
his current ability to support his opinion, and the auditor believes that
there are persons currently relying, or likely to rely on the report, the
auditor should promptly apply the omitted procedure or the
corresponding alternative procedures.

If, after applying the omitted procedures, auditor determines that the
financial statements are materially misstated and that the auditor’s
report is inappropriate, the auditor should discuss the matter with the
management and take steps to prevent future reliance on the report.