CHAPTER 8

COMPLETING THE AUDIT

The audit is not over until the audit report is signed. And even then, it may not be
over if facts are discovered after the balance sheet date and before the next
report. After the fieldwork is almost complete, a series of procedures are
generally carried out to „complete the audit‟.

The intent of these procedures is to review the audit work, get certain assurances
from the client, uncover any potential problems, check compliance with
regulations, and check the consistency of the material that is to be presented to
the users of financial statements.

This chapter describes the last phase of the audit. The procedures for completing
this audit phase are:

 evaluate governance evidence.

 carry out procedures to identify subsequent events;
 review financial statements and other report material;
 carry out wrap-up procedures;
 prepare Matters for Attention of Partners;
 report to the board of directors and prepare audit report

The initial audit procedure in the completion/closing cycle is usually to evaluate

governance evidence, the evidence pertaining to the company and management.
This means obtaining a legal letter and a management representations letter.
Next in the governance evaluation is to look at contingent liabilities and related
parties.

The last work of the completion/closing cycle is wrap-up procedures, matters for
supervisors, report to the audit committee, and the audit report itself. Wrap-up
procedures include: analytical procedures, review working papers, evaluation of
going concern, and client approval of adjusting entries.

Various issues that the auditor considers in completing audit examination are
discussed next:

pg. 1 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

1. SUBSEQUENT EVENTS: ISA 560

1.1. IAS 10 and ISA 560

It is not possible to prepare financial statements that present a true and fair view
by considering only those events and transactions that take place before the date
at which the balance sheet is prepared. Material events that occur after the
reporting period should also be considered when preparing the financial
statements for the year.

Purpose of IAS 10

IAS 10 Events after the reporting period has two main objectives:

 to specify when an entity should adjust its financial statements for events that
occur after the reporting period, but before the financial statements are
authorized for issue, and
 to specify the disclosures that should be given about events that have
occurred after the reporting period but before the financial statements were
authorized for issue.

Events after the reporting period are defined in IAS 10 as „those events,
favorable and unfavorable that occur between the end of the reporting period and
the date when the financial statements are authorized for issue.‟

There are two types of events after the reporting period:

 Adjusting events. These are events that provide evidence of conditions

that already existed at the end of the reporting period.
 Non-adjusting events. These are events that have occurred due to
conditions arising after the reporting period.

The role of the auditor: ISA 560

The work of the external auditor in this area is covered by ISA 560 Subsequent
events.

pg. 2 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

The objectives of the auditor, as stated in ISA 560 are as follows:

 The auditor should obtain sufficient, appropriate evidence about whether

events occurring between the date of the financial statements and the date of
the audit report are appropriately reflected in those financial statements.
 The auditor should also respond appropriately to facts that become known to
him after the date of the audit report that, had they been known to him at that
date, may have caused him to amend his report.

This means that audit procedures must be planned and performed so as to

consider all significant transactions occurring after the reporting period. This
means that the audit work does not stop with events only up to the end of the
reporting period. There are two key dates after the end of the reporting period:
the date of the audit report and the date that the financial statements are issued:

 Before the issue of the audit report, the auditor should actively look for
significant subsequent events. This is sometimes referred to as an active
review.
 After the issue of the audit report (and up to the time that the financial
statements are issued), the auditor has to consider the impact of any
significant subsequent events that come to his attention. However, he does
not have to look for these events actively. This is sometimes referred to as a
passive review.

pg. 3 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

 1.2. Events occurring up to the date of the audit report

Between the end of the reporting period and the date of the audit report, the
auditor is required to obtain sufficient appropriate evidence that all events that
require adjustment of or disclosure in the financial statements:

 have been identified, and

 are suitably reported in the financial statements.

Normal audit verification work

The auditor may find sufficient evidence of subsequent events in the course of
his normal audit verification work. Where this is the case, he is not required to
perform additional audit procedures. Such normal audit verification work might
include the following:

 The audit of receivables will consider whether receivables at the end of the
reporting period are collectable. Cash receipts after the year-end may indicate
a significant non-payment, suggesting the need to write off a debt as
irrecoverable.
 The audit of inventory includes a review of the net realizable value of
inventory. Sales of inventory after the year-end may indicate that some
inventory in the balance sheet is over-valued (because subsequent events
have shown that its NRV was less than cost).

pg. 4 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

 A search for unrecorded liabilities may discover the existence of some
unrecorded liabilities, from invoices received after the reporting period but
relating to the period covered by the financial statements.
 A review of the entity‟s cash position at the end of the reporting period may
find that a cheque from a customer, recorded as part of the bank balances,
was dishonored after the reporting period.

Procedures aimed specifically at identifying subsequent events

The auditor should also actively look for „subsequent events‟, up to the time that
he prepares the audit report. Taking into account his risk assessment of this
area, he should:
 obtain an understanding of management‟s procedures for identifying
subsequent events
 inquire of management as to whether any subsequent events have occurred
which might affect the financial statements
 read the entity‟s latest subsequent financial statements
 read minutes of shareholders‟ meetings, meetings of the board of directors
and senior management meetings held after the date of the financial
statements and inquire about matters discussed at any such meetings where
minutes are not yet available
 obtain written representations in respect of subsequent events (covered in a
later section).

1.3. Facts discovered after the date of the audit report

Even after the date on which the audit report is signed, the auditor retains some
degree of responsibility for events of which he becomes aware, up to the time
that the financial statements are issued. He is not required, during this period, to
actively look for subsequent events. His level of responsibility is therefore much
reduced compared with the period before the signing of the audit report.

pg. 5 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

Between the date of the audit report and the issue of the financial
statements

The auditor has no obligation to perform any audit procedures after the date of
his audit report. However, if he becomes aware of a fact that had it been known
to him at the date of his report, may have caused him to amend his report then
he is required to:

 discuss the matter with management

 determine whether the financial statements need amending, and
 inquire how management intend to address the matter in the financial
statements.

If the financial statements are amended, the auditor is required to:

 carry out the necessary audit procedures on the amendment

 extend his review of subsequent events up to the date of the new audit report.

If management do not amend the financial statements for the subsequent

event, but the auditor feels that an amendment should be made, the auditor is
required to take the following action:

 If the audit report has not yet been provided to the entity, modify his opinion
as appropriate.
 If the audit report has been provided to the entity:
o instruct management not to issue the financial statements before the
necessary amendments have been made
o if they do so, take appropriate action to prevent reliance on the audit
report, after taking legal advice.

Facts discovered after the financial statements have been issued

As above, the auditor has no obligation to perform any audit procedures after the
financial statements have been issued. However, if he becomes aware of a fact
that had it been known to him at the date of his report, may have caused him to
amend his report then he is required to:

pg. 6 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

 discuss the matter with management
 determine whether the financial statements need amending, and
 inquire how management intend to address the matter in the financial
statements.

If the financial statements are amended, the auditor is required to:

 carry out the necessary audit procedures on the amendment

 review the steps taken by management to inform anyone who received the
original financial statements and audit report of the situation
 extend his review of subsequent events up to the date of the new audit report
 issue a new audit report, containing an emphasis of matter paragraph or
other matter paragraph. This should refer to a note in the revised financial
statements that explains in more detail the reason for the re-issue of the
financial statements.

Example:
You are the auditor in charge of the audit of Hindsight, which has a 30 June
year end. The subsequent events review for the year ended 30 June Year 5
revealed that, on 1 August Year 5, a receiver was appointed at a major
customer. At 30 June Year 5 that customer owed $200,000 and goods costing
$300,000 made to that customer‟s specification were held in inventory. Both
these amounts are
material.
Required
List the matters to which you would direct your attention in respect of the above
in relation to the audit for the year ended 30 June Year 5, if the audit report on
the financial statements has not yet been written.

Answer
 Check that the directors are willing to adjust the financial statements for
this adjusting event after the reporting period.
 Establish whether any cash has been received from this customer since
the year end.
 Review any correspondence from the receiver to establish to what extent
the outstanding debt will be recovered.

pg. 7 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

  Consider whether the goods held in inventory are now valued at the
lower of cost and NRV, given that these goods were made to the
customer‟s specification. This may depend on whether or not those
goods can be sold to a different customer.
 In the light of the above, consider whether any write downs proposed by
the directors to receivables and/or inventory are reasonable.
 If they are not, or if the directors refuse to adjust the financial statements,
consider the impact on the audit report.

Note
If the event occurs after the date of the audit report but before the financial
statements are issued, the auditor should discuss the matter with the directors of
the client entity and ask what they propose to do.

 If the directors intend to amend the financial statements to include or report

the event, the auditor should re-write the audit report accordingly and give it a
new date.
 If the directors say that they do not intend to amend the financial statements,
the auditor must consider the most appropriate course of action. If it is too late
to re-write the audit report the auditor should consider communicating with the
shareholders in another way; for example, by asking to speak at the annual
general meeting of the entity (which is the auditor‟s right).
 In the longer term, the auditor should also consider resigning from the audit,
but this would not be appropriate as an immediate response to the problem.
The immediate requirement is to convey the auditor‟s opinion to the
shareholders.

pg. 8 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

2. WRITTEN REPRESENTATIONS: ISA 580

2.1. Definition and objectives

Definition: A written statement by management provided to confirm

certain matters or to support other audit evidence.

The objectives of the auditor in this area, per ISA 580, are to:

 obtain written representations from management that it has fulfilled its

responsibilities in respect of the financial statements and the audit
 obtain written representations as appropriate to support other audit evidence
 respond appropriately to written representations provided by management or
if management refuse to provide the written representations requested.

ISA 580 requires appropriate written representations from management (often

referred to as “management representations”) to be in the form of a letter of
representation, addressed to the auditor.

These written representations may be an important source of audit evidence.

pg. 9 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

 2.2. Written representations as audit evidence

If the auditor considers that written representations are needed to support other
audit evidence, he is required to request such other written representations.
During the course of the audit, management will make many representations to
the auditor. Some of these will be unsolicited but some will be given in response
to specific enquiries from the auditor. The auditor will have recorded such verbal
discussions with management in the audit working papers. However, verbal
evidence is not strong audit evidence. In order to improve the quality of this
evidence, the auditor will ask for any significant discussions to be confirmed in
writing.

Such representations are likely to be needed:

 to support the auditor‟s understanding of management‟s intention or judgment

(for example, in respect of future plans for the business or a specific matter
such as the net realizable value of inventory), or
 in respect of the completeness of a specific item (for example, that all
liabilities have been provided for).

However, although such written representations provide necessary audit

evidence, they do not provide sufficient appropriate evidence on their own.

If a representation by management is contradicted by other audit evidence, the

auditor should:

 consider whether his risk assessment of that area is still appropriate

 consider whether additional audit procedures are needed
 if he has concerns about the integrity of management, document those
concerns and consider withdrawing from the audit.

The auditor is also required by specific other ISAs to request certain other
written representations. These requirements are illustrated in the example letter
set out below.

2.3. Written representations about management’s responsibilities

pg. 10 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

The auditor is also required by ISA 580 to obtain certain other specific written
representations from management. In these representations‟ management
acknowledges that:

 it has fulfilled its responsibility for the preparation and fair presentation of the
financial statements in accordance with the applicable financial reporting
framework
 it has provided the auditor with all relevant information
 all transactions have been recorded and are reflected in the financial
statements.

2.4. Form and contents of the letter of representation

The letter of representation is:

 usually drafted by the auditor (since he knows the areas on which he requires
written representations)
 addressed to the auditor
 dated as near as practicable (but not after) the date of the audit report.

A written representation letter may include the following statements.

 The written representation letter relates to the audit of the client company.
 The management of the entity have fulfilled their responsibilities for the
preparation of the financial statements, and the financial statements give a
true and fair view and are free from material misstatement.
 The assumptions made by management to make accounting estimates and
reach fair values are reasonable.
 Related party relationships and transactions have been disclosed.
 All events after the reporting period have been either adjusted or disclosed.
 The effect of any uncorrected misstatements (a list of which should be
attached to the letter) is immaterial.
 The auditors have been provided with all relevant material, including the
books of account, and unrestricted access to individuals within the entity.

pg. 11 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

 All transactions have been recorded and are included in the financial
 Management have disclosed to the auditors all information that is relevant to
fraud or suspected fraud.
 Management have disclosed all known instances of non-compliance with laws
or regulations that are relevant to the preparation of the financial statements.
 Representations may also be included that refer to specific assertions in the
financial statements, if the auditors require that such assertions should be
made.

2.5. Refusal to provide requested written representations

If management refuse to provide requested written representations the auditor is

required to:

 discuss the matter with management

 re-evaluate the integrity of management and reconsider the impact on other
representations and audit evidence
 take appropriate action, including considering the effect on the audit report.

3. OVERALL REVIEW OF THE FINANCIAL STATEMENTS

After the detailed audit work has been completed, the auditor will carry out an
overall review of the financial statements. By this stage of the audit, the financial
statements should be in their final draft form.

This review will normally be carried out by a senior member of the audit team,
often the manager or partner.

3.1. General review

At a general level, the review will check that a clear conclusion has been reached
and documented on each of the financial statement areas. Analytical procedures
may be used as a final check that the information contained in the draft financial
statements „makes sense‟.

3.2. Specific review

pg. 12 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023

More specifically, the overall review will cover the following matters:

 Compliance by the client with the relevant accounting framework (national

legislation and relevant accounting standards).
 A review of the accounting policies adopted by the entity, to assess whether
they are acceptable (and comply with accounting standards and industry
practice).
 A review of the financial statements for adequate disclosure of relevant
information.
 An assessment of whether the information contained in the financial
statements is consistent with known business facts.

pg. 13 AAU/ACFN Dept/ Student Notes/Auditing II/Chapter 8/May 2023