CHAPTER 12

Completing and
reporting on the audit
 LEARNING OBJECTIVES
After studying this presentation you should be able
to:
12.3 assess the two types of (material) subsequent
events to determine what effect they have on the
financial report (if any)
12.4 evaluate misstatements and explain the difference
between quantitative and qualitative
considerations when evaluating misstatements
 LEARNING OBJECTIVES
After studying this presentation you should
understand the disclosures of:
Contingent Liabilities
Related Parties
 Subsequent events
Financial report is based on events up to, and
conditions existing at, year-end:
a. Three other key dates:
date financial report approved by
management
date of auditors report
date financial report publicly released.
 Subsequent events
Financial report is based on events up to, and
conditions existing at, year-end
b. Subsequent events:
Events that occur between year-end and the
date of auditors report, and facts discovered
after date of auditors report.
 Subsequent events
Type 1 subsequent events adjusting events:
Events that provide additional evidence with respect to
conditions that existed at year-end.
Type 2 subsequent events non-adjusting events:
Events that provide evidence with respect to conditions
that developed subsequent to year-end.
See both AASB 110 (IAS 10) and ASA 560 (ISA 560)
for guidance on reporting and auditing these
events.
 Subsequent events
1. Type 1 subsequent events adjusting events:
Can affect estimates in financial report, or
indicate that going concern assumption is not
appropriate.
Accounting treatment:
Adjust financial report for the effect of
these events, where material.
 Subsequent events
1. Type 1 subsequent events adjusting events:
Examples:
Bankruptcy of customer after year-end which would
be considered when evaluating provision for
doubtful debts.
Amount received for insurance claim in negotiation
at year-end.
Deterioration in operating results after year-end that
means going concern not appropriate.
 Subsequent events
1. Type 1 subsequent events adjusting events:
If the auditor becomes aware of Type 1 event after the
date of the auditors report BUT before the financial
report is issued, the auditor:
a. Considers whether the financial report needs
changing.
b. Discusses the matter with the client.
c. Takes action appropriate in the circumstance.
 Subsequent events
1. Type 1 subsequent events adjusting events:
Consequences:
 Subsequent events
2. Type 2 subsequent events non-adjusting
events:
- Do not result in changes to amounts in the financial
report.
- Might be so significant to require disclosure.
Do not require accounts to be adjusted.
 Subsequent events
2. Type 2 subsequent events non-adjusting
events:
- Examples:
Uninsured loss of assets due to fire, flood,
subsequent to year-end.
Purchase of a business, issuance of shares or debt
subsequent to year-end.
 Subsequent events
2. Type 2 subsequent events non-adjusting events:
Consequences:
 Subsequent events
3. Procedures used when conducting a subsequent events
review:
The usual examinations of transactions after year-end
are performed as part of the substantive tests of
certain account balances.
In contrast, the subsequent events review is concerned
only with significant events occurring subsequent to
the balance sheet date that may require adjustment to
or disclosure in the financial report.
 Subsequent events
3. Procedures used when conducting a subsequent events
review:
gaining an understanding of, and evaluating
reading minutes of meetings
reading and analysing the latest
extending any analytical procedures
enquiring or extending
assessing continued
 Subsequent events
3. Procedures used when conducting a subsequent events
review:
Examples of enquiries of management on specific
matters include:
new commitments
sales of assets
the issue of new shares
change of ownership
assets have been seized
 Subsequent events
3. Procedures used when conducting a subsequent
events review:
Examples of enquiries of management on specific
matters include:
developments regarding risk areas
unusual adjustments
significant changes.
 Subsequent events
3. Procedures used when conducting a subsequent events
review:
The auditor to modify auditors report, the auditor
should:
1. consider whether the financial report needs
revision
2. discuss the matter with the client
3. consider whether the actions taken are appropriate
in the circumstances.
 Misstatements
Misstatements are differences between a reported
financial report item and the correct reporting as required
by standards.
- Differences could relate to items amount,
classification, presentation or disclosure.
- Misstatements can be unintentional (error) or due to
fraud.
- Auditor evaluates whether misstatements need to be
corrected.
 Misstatements
Quantitative and qualitative considerations:
Risk of additional misstatements remaining
undetected.
Effects of identified misstatements on clients
compliance with debt covenants.
Whether it is an error or judgmental misstatement.
Turnaround effect on current years financial report of
misstatements identified in previous year.
 Misstatements
Quantitative and qualitative considerations:
Likelihood that recurring differences will be more
material in future.
Sensitivity of circumstances.
E.g. fraud and illegal acts.
 Misstatements
Significance of financial report element affected by
misstatement.
Significance of misstatements relative to known user
needs.
Effect of misstatements on segment information, or other
important portion of clients business.
Effects of offsetting misstatements in different financial
report captions.
E.g. cash and prepayments.
 Misstatements
1. Current year misstatements:
Auditor prepares schedule of uncorrected differences
in order to assess overall effect on financial report and
on individual items or balances.
Consider effect on future years reports.
 Misstatements
2. Prior year misstatements:
May be immaterial in previous year, could be
material this year (ASA 450; ISA 450).
Consider potential turn around.
E.g. understating payables last year due to
cut-off error turns-around this year.
 Misstatements
3. Qualitative considerations:
Qualitative considerations, quantitatively immaterial
amounts to be considered material to the financial
report.
Affects clients compliance with regulatory
requirements or covenants under debt or similar
agreements.
Affects clients compliance with contractual
requirements of operating and other agreements.
 Misstatements
3. Qualitative considerations:
Affects managements satisfaction of requirements for
the award of bonuses or other forms of incentive
compensation.
Affects the reported profit by changing it to a loss or
vice versa.
Affects individual line items, subtotals or totals by a
material amount.
 Misstatements
3. Qualitative considerations:
Affects key ratios monitored by analysts or other key
users of the financial report.
 Related Parties
NZ IAS 24 Related Party Disclosures
The objective of this Standard is to disclose and to
draw attention to the possibility that the entitys
financial position and profit or loss may have been
affected by the existence of related parties and by
transactions and outstanding balances.
 Related Parties
The Standard requires
disclosure of related party relationships, transactions
and outstanding balances, including commitments, in
the consolidated and separate financial statements of a
parent or investors with joint control of, or significant
influence over, an investee.
 Contingent Liabilities
NZ ISA 37 Provisions, Contingent Liabilities and
Contingent Assets
The objective of this Standard is to ensure that
appropriate recognition criteria and measurement
bases are applied to provisions, contingent liabilities
and contingent assets and that sufficient information
is disclosed in the notes to enable users to understand
their nature, timing and amount.
 Contingent Liabilities
A contingent liability is:
(a) a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future
events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is
not recognised because: (i) it is not probable that an
outflow of resources embodying economic benefits will
be required to settle the obligation; or (ii) the amount of
the obligation cannot be measured with sufficient
reliability.
 Summary

There are two types of subsequent events.

Quantitative and qualitative considerations of
misstatements.
Disclosure requirements for contingent liabilities
and related parties.
 MCQs

1) The dollar amount of some misstatements cannot be

accurately measured. For example, if the client were
unwilling to disclose an existing lawsuit, the auditor must
estimate the likely effect on:
a) Net income
b) Users of the financial statements
c) The auditors exposure to lawsuits
d) Managements future decisions
 MCQs
2) Which of the following is NOT correct concerning type 1 and type 2
Subsequent Events:
a) A type 1 may require adjustment to financial statements
while a type 2 will not.
b) Both a type 1 and a type 2 subsequent event may require
note disclosure.
c) A type 1 is an event that occurred prior to year end, but was
discovered after, while a type 2 is one that arose subsequent
to year end.
d) A type 2 event may require adjustment to the financial
statements and a type 1 may require note disclosure.
 MCQs
3) Which one of the following is NOT one of the
primary purposes of audit documentation?
a) A basis for planning the audit
b) A record of the evidence accumulated and the
results of the tests
c) A basis for review by supervisors and partners
d) A basis for determining work deficiencies by peer
review teams