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AUDITING
Week 11

18.12

Can facts discovered after the issue of the financial

statements have an impact on the auditors report? Discuss.

Anauditorhasnoresponsibilitytomakeanongoinginquiryonthefinancialreportafterit
hasbeenissued.Thekeydifferenceintheperiodafterthefinancialreporthasbeenissuedis
thattheonlyeventthatconcernstheauditorissomethingthatheorshemissedbeforesigning
the audit reportthat has now come tolight. This is in contrast totheperiod before the
financialreporthasbeenissuedwhentheauditormustconsiderwhethertotakeactionin
relationtoanyeventthatheorshebecomesawareof.Thislimitationintheperiodafterthe
financial report has been issued ensures that there is an end point to the auditors
responsibilitiesinrelationtoacompanysfinancialstatementsforaparticularyear.
Themainissuefortheauditortoconsiderinassessingtheimpactofthiseventistodetermine
whetherornot,iftheeventwereknownatthedateoftheauditreport,theauditorwouldhave
qualified theauditreport.Iftheauditorwouldhavequalified theauditreport,heorshe
shouldconsiderwhetherthefinancialreportneedsrevision.Ifmanagementdoesnotagreeto
the revision, the auditor should notify the persons ultimately responsible for the overall
directionoftheentitythatactionwillbetakenbytheauditortopreventfuturerelianceonthe
auditreport.
Thepreferredresultisthepreparation ofarevisedfinancialreportbytheclient andthe
issuanceofarevisedauditreportassoonaspracticable.Again,priortotheissuanceofa
revisedauditreporttheauditorshouldextendthereviewofsubsequenteventsuptothedate
oftheissuanceoftherevisedreport.Thenewreportshouldincludeanemphasisofmatter
paragraphreferringtoanoteinthefinancialstatementsthatprovidesanexplanationforthe
revisionofthepreviouslyissuedfinancialreportandtheearlierauditreport.
18.13 How would you define the two types of events that occur after the reporting
period? What are the potential accounting effects of each type?
Conditions existing at the reporting date (adjusting events)
Events that provide additional evidence with respect to conditions that existed at the date of
the balance sheet and affect the estimates inherent in the process of preparing the financial
report. These events may require adjustment of the financial report.
Conditions arising after the reporting date (non-adjusting events)
Events that provide evidence with respect to conditions that did not exist at the date of the
balance sheet but arose subsequent to that date. These events require disclosure, and in very
material cases, by attaching pro-forma data to the financial report.

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18.14 What procedures should the auditor perform when a question arises
regarding going concern?
The auditor performs most of these procedures during the period of completion of the audit
(ASA 570.16), such as:
Analysing and discussing cash flow, profit and other relevant forecasts with
management.
Analysing and discussing the entitys latest available interim financial report.
Reading the terms of debentures and loan agreements and determining
whether any have been breached.
Reading minutes of the meetings of shareholders, those charged with
governance and relevant committees for reference to financing difficulties.
Enquiring of the entitys legal counsel regarding the existence of litigation and
claims and the reasonableness of managements assessments of their outcome and the
estimate of their financial implications.
Confirming the existence, legality and enforceability of arrangements to
provide or maintain financial support with related and third parties and assessing the
financial ability of such parties to provide additional funds.
Evaluating the entitys plans to deal with unfilled customer orders.
Performing audit procedures regarding subsequent events to identify those that
either mitigate or otherwise affect the entitys ability to continue as a going concern.
Confirming the existence, terms and adequacy of borrowing facilities.
Obtaining and reviewing reports of regulatory actions.
Determining the adequacy of support for any planned disposals of assets.
18.15 What are the objectives of the management representation letter?
Under what circumstances are management representations
considered acceptable audit evidence?
The objectives of the management representation letter include:
confirmation of oral representations given to the auditor
document the continuing appropriateness of representations
reduce the possibility of misunderstandings concerning managements representations
support other audit evidence relevant to the financial report or specific assertions in the
financial report
acknowledge managements responsibility for the preparation of the financial
statements in accordance with the applicable financial reporting framework
acknowledge managements responsibility for the completeness of the
information provided to the auditor.
Management representations are considered acceptable audit evidence only where other
sufficient appropriate audit evidence cannot reasonably be expected to exist. However it is
still prudent to consider management representations to be supporting rather than primary
evidence.
18.16

Explain the purpose of the

procedures at the end of the audit.

performance

of

analytical

The objective of using analytical review in the overall review is to corroborate conclusions
formed during the audit on individual elements of financial information and to assist in
arriving at the overall conclusion that the financial information as a whole is consistent with
the knowledge of the entitys business. Analytical review procedures applied at the end of the
audit are also a useful method in gaining assurance that the company will remain a going
concern for the relevant period.
18.21

Subsequent events

You are an audit assistant allocated to perform the audit of Topporene Ltd for the year
ended 30 June 2015. The managing director of Topporene is interested in the audit
responsibilities for identifying subsequent events. The audit partner would like you to
document these responsibilities in a memo to the managing director. The detailed audit
work is expected to be completed by 31 August 2015. It is planned that:
the auditors report will be signed on 15 September 2015
the financial statements will be sent to shareholders on 30 September 2015.
Required
(a) In your memo explain the auditors responsibilities for identifying
subsequent events in the following periods:
30th June 2015 to 31st August 2015
1st September 2015 to 15th September 2015
18th September 2015 to 30th September 2015
1st October 2015 onwards

Memo
To: Managing Director Topporene Ltd
30 June 2015 to 31 August 2015
Events occurring up to the date of the audit report
The auditor is required to perform procedures to identify and evaluate all events that might
require adjustment or disclosure in the financial report up until the date the audit report is
signed. This responsibility is discharged by the auditor in the following two ways: (1) by
being alert for subsequent events in performing year-end substantive procedures (such as cutoff tests and the search for unrecorded liabilities); and (2) by performing the auditing
procedures specified in ASA 560.10 (ISA 560.07) at or near the completion of the
examination (discussed below in (b).

If the audit procedures identify events that could affect the financial report, the auditor
should carry out further procedures to assess whether such events are appropriately reflected
in the financial statements. At this point the auditor needs to consider the appropriate
accounting treatment of the event..

1 September 2015 to 15 September 2015

Post-Audit responsibilities for subsequent events
After the audit report has been signed the auditor has no responsibility to perform procedures

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to detect subsequent events or to make any inquiry regarding the financial report. This is one
of the reasons why the date on the audit report is important; the audit report should be signed
on the same day as the directors report where possible. However, if the auditor becomes
aware of a fact after the audit report has been signed, it may be appropriate to take some type
of action. The action the auditor should take depends on whether the fact is discovered after
the date of the audit report but before the issuance of financial statements or after the
financial report has been issued.
16 September 2015 to 30 September 2015
Events occurring after the date of the audit report but before the financial report is issued
The auditor has no responsibility to make an inquiry or to perform auditing procedures
during this time to discover any material after-balance-date events. However, during this
period, management is responsible for informing the auditor of any events that may affect the
financial report. The events may relate to conditions existing at reporting date or conditions
existing after reporting date. The need to amend the financial report should be considered and
discussed with management.

If the financial report is amended, the auditor must carry out any necessary auditing
procedures, including extending the review of after-balance-date events, and reissue the audit
report at the date of approval of the amended financial report. If management do not amend
the financial report where the auditor believes it should be amended, and the audit report has
not been released to the entity, the auditor should issue a qualified report in accordance with
ASA 705 (ISA 705). If the financial report has been released to the entity and management
refuses to make the required amendments the auditor should take action to prevent reliance
on the audit report. This can be done, for example, by exercising the auditors right to be
heard at the general meeting at which the audited financial report is presented to members.

1 October 2015 onwards

Facts discovered after the financial report has been issued
An auditor has no responsibility to make an on-going inquiry on the financial report after
it has been issued. This responsibility is essentially the same as during September where
action by the auditor is only required if he or she becomes aware of an event. The key
difference in this period is that the only event that concerns the auditor is something that he or
she missed before signing the audit report that has now come to light. This is in contrast to
September when the auditor must consider whether to take action in relation to any event
that he or she becomes aware of. This limitation from 1 October ensures that there is an end
point to the auditors responsibilities in relation to a companys financial statements for a
particular year.

The main issue for the auditor to consider in assessing the impact of this event is to
determine whether or not, if the event was known at the date of the audit report, the auditor
would have qualified the report.

If the auditor would have qualified the audit report, he or she should consider whether the
financial statements need revision. If management does not agree to the revision, the auditor
should notify the persons ultimately responsible for the overall direction of the entity that
action will be taken by the auditor to prevent future reliance on the audit report.

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The preferred result is the preparation of a revised financial report by the client and the
issue of a revised audit report as soon as practicable. Again, before a revised auditors report
is issued, the auditor should extend the review of subsequent events up to the date of the
issuance of the revised report. The new report should include an emphasis of matter
paragraph referring to a note in the financial statements that provides an explanation for the
revision of the previously issued financial report and the earlier audit report.

The new report should be dated not earlier than the date on which the revised financial
statements are approved. If the issue of the following periods financial statements is
imminent, then the revised financial statements may not be issued. However, in these
circumstances, appropriate disclosures are required in the following periods statements.
(b) Discuss the procedures that are involved in identifying subsequent
events.

ASA560.10(ISA560.07)suggests some of the following:

Reviewing procedures that management has established to ensure that subsequent
events are identified;
Enquiring of management and where appropriate, those charged with governance, as
to whether any subsequent events have occurred which might affect the financial
report;
Reading minutes of the meetings of shareholders, those charged with governance,
audit and executive committees held after the end of the reporting period, and
enquiring about matters discussed at meetings for which minutes are not yet available;
Reading the entitys latest available interim financial report and, as considered
necessary and appropriate, budgets, cash flow forecasts and other related management
reports;
Enquiring (or adding to previous oral or written inquiries) of the entitys lawyers;
Enquiring of management as to whether any subsequent events have occurred which
might affect the financial statements. Examples of specific inquiries that might be
made of management include: the current status of items that were accounted for on
the basis of tentative, preliminary or inconclusive data; whether new commitments,
borrowings or guarantees have been entered into; or whether sales of assets have
occurred or are planned.

18.27 Going concern indicators

Ulysses Polytropos Ltd is an Australian company which manufactures travel products
including suitcases, backpacks, wallets, hiking gear, clothing and other sundry travel
related items. The market for these products is characterised by fashion conscious
customers, innovation in design, high levels of competition and product costs pressure
from cheaper but high quality products from a variety of manufacturers around Asia.
The market continues to grow which creates new opportunities but also attracts new
entrants into the market. Ulysses Polytropos operates at the high quality, and high
price, end of the market and has in recent years seen a decline in demand for its
products despite the overall buoyant market. This has been attributed to demand for
cheaper products as well as domestic customers buying online from around the world.
In order to address this decline, the company has tried to change its research and
development division but has struggled to attract employees with the vision to take the
company forward.

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In order to reduce production costs the organisation invested in new manufacturing
plant and reorganised the factory layout to create more efficient processes. This
required a significant investment, only some of which was able to be financed by longterm bank loans. Ulysses Polytropos has fully drawn down on its bank overdraft facility,
the banks are unwilling to provide further funds and in order to manage cash flows
creditor payment days have extended, leading to difficult relations with some key
suppliers who will no longer do business with the company.
The forecast for the coming 12 months shows the cash position worsening so
additional funds will be required to allow the company to continue meeting its
obligations. The directors believe that it will take another 18 to 24 months to turn the
business around and move back into profitability. The bank overdraft is being reviewed
in two months time and the directors are confident that additional funds will be made
available to allow the company to continue to trade for the next two years and then they
will see the business become successful again.
Required
Identify and explain any indicators that there are doubts about Ulysses
Polytropos Ltds ability to continue as a going concern.
Going concern indicators:
There has been a decline in demand for the companys products, if this continues then it will
be difficult to generate sufficient cash to survive as an organisation.
The company is unable to recruit new research and development staff, this will make it
difficult to develop new innovative products to meet the changing demands of customers.
The company was unable to obtain the funds required to invest in new manufacturing plant,
this would indicate that either the company has insufficient assets to provide the necessary
security required by the bank or that the bank was not sufficiently confident in the companys
prospects to lend further funds. The prospects of obtaining new additional funds might be
more difficult than the directors believe.
The company is at its overdraft limit indicating immediate financial problems, the fact that
some suppliers are not getting paid on time suggests that the company is unable to pay its
debts today, it may be insolvent.
The loss of key suppliers, the cash flow problems have meant that suppliers are no longer
trading with the organisation which may mean difficulty in getting supplies leading to
production problems.
The forecast indicates continuing problems with cash flows for at least 12 months and
possibly as long as 24 months; this will place greater difficulty on paying suppliers.
All these difficulties indicate that the organisation is going to have difficulty convincing the
bank to provide additional funds. Without these funds it would appear that the company is
unlikely to survive 12 months never mind the possibility of 24 months that may be needed
before things start to get better.