CHAPTER 14

Audit finalisation and review

EXAM FOCUS
The final stages of audit work involve a good deal of skill and judgement. The auditor m ust
evaluate the evidence of subsequent events w hich provide a necessary input into complex
areas of audit work. The ability to judge w hether the entity is a going concern is one of the
critical areas of judgement. The impact of IAS 10 (Post balance sheet events) and IAS 37
(provisions, contingent liabilities and contingent assets) impose disciplines on auditors to
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the spirit of true and fair reporting.

SYLLABUS AND STUDY GUIDE COVERAGE

This chapter covers the following elements of the ACCA study guide:

23 Going Concern Reviews

¨ Explain the importance of going concern reviews.

¨ Describe the procedures to be applied in perform ing going concern reviews.
¨ Describe the disclosure requirements in relation to going concern issues.
¨ Describe the reporting implications of the findings of going concern review s.

24 Audit Finalisation

Describe the:

¨ quality of management representations as audit evidence.

¨ circumstances in which obtaining management representations is necessary and

the matters on w hich representations are comm only obtained.

¨ purpose of the subsequent events review.

¨ procedures to be undertaken in performing a subsequent events review.

25 The Final Review

¨ Describe the importance of the overall review of evidence obtained.

¨ Analyse the problem s associated with the application of accounting treatments.
¨ Explain the significance of unadjusted differences.

In order to cover these elements the follow ing topics are included:

ISA 560 Subsequent events

ISA 570 Going concern
ISA 580 M anagement representations
Overall review of financial statements

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1 Introduction
This chapter deals with the important issues that relate to the finalisation of audit w ork. This
phase of the audit requires a good deal of skill and care and we can conveniently divide up the
audit issues into three areas of work.

¨ The going concern review;

¨ The subsequent events review;
¨ The final review before signing the audit report.

In order to put these tasks into perspective we m ust consider the timescales involved in
carrying out audit w ork.

Accounting reference date (ARD) AGM

'LUHFWRUV·PHHWLQJ Auditor signs the
(balance sheet date) (to approve the
(to approve the accounts) audit report
accounts)

The accounting reference date is the date that is agreed with the regulatory authorities as the
reporting date of the entity. A company can then typically prepare its accounts each year at
any date that is within seven days of the ARD. The ARD also determines the deadline for
filing accounts (for example, 7 or 10 months for public or private companies respectively).

The date on w hich the directors approve the accounts is also critical because it is the act of
signing the balance sheet that legally creates the financial statements. The period between the
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DUH´RQHQTXLU\µXSWRWKLVSRLQW

The subsequent review is an essential part of evidence gathering in order to com plement the
field work undertaken by audit staff. The relevant issues are dealt with in ISA 560. The final
review gives the engagement partner the necessary assurance so that he/she can sign the audit
report. These audit tasks are undertaken in the period between the ARD and the date on
which the balance sheet is signed.

2 The going concern review

2.1 General principles
The assum ption of going concern is an underlying principle in preparing financial statements
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The going concern basis implies that the entity will continue in operational existence for the
foreseeable future. This concept means that in the financial statements assets are valued on the
basis that the entity expects to recover (through use or realisation) the amounts at w hich they
are carried on the balance sheet.

Liabilities are measured on the basis that they w ill be discharged in the normal course of
business.

Consequently, the directors must satisfy themselves that the going concern basis is appropriate
and whether the financial statements need to include any additional information which w ould
enable a true and fair view to be given.

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 Chapter 14 Audit finalisation and review

Unfortunately, there is no com monly agreed guidance in law or professional regulation to

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entity such as the size and complexity of its operations and the quality of its reporting system s.
In practice the foreseeable future m ight typically be understood to mean the 12 months after
the date of approval of the financial statements.

Accordingly, ISA 570 states:

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a going concern. The auditor should consider the same period as that used by management
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DVVHVVPHQWRIWKHHQWLW\·VDELOLW\WRFRQWLQXHDVDJRLQJFRQFHUQFRYHUVOHVV WKDQ  PRQWKV
from the balance sheet date, the auditor should ask management to extend its assessment
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2.2 Identifying the risk factors

The auditors should determine and document the extent of their concern (if any) about the
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auditors should take account of all relevant information of which they have become aware
during their audit.

The auditors may identify the following risk factors that may indicate that the entity has a
problem with the going concern concept.

(a) Financial

¨ excess of liabilities over assets.

¨ net current liabilities.
¨ necessary borrowing facilities have not been agreed.
¨ defaults on loan agreements.
¨ liquidity problems.
¨ losses since the date of the balance sheet.
¨ sales of non-current assets not replaced.
¨ restructuring of debt.
¨ denial of credit from suppliers.
¨ major debt repayment falling due soon.
¨ inability to pay debts as they fall due.

(b) Operational problems

¨ inability to compete due to changes in technology.

¨ externally forced reductions in operations.
¨ loss of key staff.
¨ loss of key suppliers or customers.

(c) Other

¨ impact of major litigation.

¨ other uncertainties.

These concerns may:

¨ cause the auditors to disagree with the directors about the presumption of going concern,
(qualification of the audit report is then inevitable); or

¨ prompt the auditors to write to the directors draw ing their attention to the need to take
specialist advice if they continue to trade while the entity is insolvent.

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W ritten confirmations from the directors may be necessary regarding:

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¨ the relevant disclosures in the financial statements.

Failure to obtain these confirmations could constitute a limitation in the scope of the audit.

2.3 Reporting issues

The auditors should consider w hether the financial statements are required to include
disclosures relating to going concern in order to give a true and fair view.

There are only two main grounds for qualification of the audit report which are:

1 a limitation in scope; and

2 a disagreement on law and accounting principles.

Consequently, if the financial statements do not give sufficient disclosures relating to the
ability of the entity to remain a going concern this constitutes a disagreement and an except for
qualification will be necessary.

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to continue as a going concern, but do not disagree with the preparation of the financial
statements on the going concern basis, they should include an explanatory paragraph when
setting out the basis of their opinion. They should not qualify their opinion on these grounds
alone, provided the disclosures in the financial statements are adequate.

This paragraph harm onises the logic of ISA 570 and ISA 700. The primary aim of the audit
report is clear com munication. If the auditor does not want to qualify his opinion, but he does
want to highlight going concern issues, then he should signify his intentions by a separate basis
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In the explanatory paragraph in the audit report dealing with the going concern position, the
auditor will include:

¨ a statement that the financial statements have been prepared on the going concern basis;
¨ a statement of the pertinent facts;
¨ the nature of the concern that the auditors feel about the going concern assumption;
¨ a statement of the position adopted by the directors;
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2.5 What constitutes sufficient evidence for this purpose?

The auditor w ill examine matters such as:

¨ cash budgets if available;

¨ forecasts;
¨ business plans;
¨ good order book statistics;
¨ evidence of bank support for one year ahead;
¨ active tendering for new business;

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 Chapter 14 Audit finalisation and review

¨ evidence of healthy cash inflows;

¨ good staff morale.

2.6 Disagreem ent of the auditors

W here the auditors disagree w ith the preparation of the financial statements on the going
concern basis, they should issue an adverse audit opinion.

This is the last resort w hen to prepare the financial statements on a going concern basis would
be seriously m isleading.

The audit firm Coopers and Lybrand were pioneers here in their audit report on the car
manufacturer British Leyland (circa 1974) which said:

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JLYHDWUXHDQGIDLUYLHZ«µ

In the unlikely event of the directors preparing accounts on a basis other than that of a going
concern, no audit qualification is necessary if the auditors concur with the directors that such a
basis is appropriate.

Such a basis might be appropriate for joint ventures or similar strategic alliances which are
wound up w hen the project is completed.

Please note that further illustrations of and reports on this topic are found in Chapter 15,
Section 3.

3 The subsequent events review

3.1 ISA 560 - Subsequent events
The auditing standard ISA 560 is written in the context of the audit of lim ited companies, but
its principles apply to the audit of other enterprises whose financial statements are intended to
give a true and fair view. In other circumstances, the auditor will be guided by the term s of his
particular appointment or by relevant legislation.

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extends to the date on w hich he signs his audit report. Further, he may retain some
responsibility after that date as described in the standard. It is for this reason that the auditor
should not confine him self to those events after the balance sheet date w hich are defined in
IASDV´SRVWEDODQFHVKHHWHYHQWVµie, those events both favourable and unfavourable w hich
occur between the balance sheet date and the date on which the financial statements are
approved by the board of directors. The definition of subsequent events is w ider.

The auditor should always date his audit report. The date used should be that on w hich he
signs his report on the financial statements. The auditor should plan his work so that, w herever
practicable, his report is dated as close as possible to the date of approval of the financial
statements by the directors.

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directors. Legally, such statements do not exist until they have been approved by the directors.

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It follows that the auditor can never date his report earlier than the date on w hich the complete
financial statements were approved by the directors. Before signing his report, the auditor
should obtain evidence that the financial statements have been approved by the directors.
IAS 10 requires disclosure of the date on which the directors approve the financial statements.

At the date on w hich the financial statements are approved by the directors, they do not have
to be in the precise printed or typewritten form submitted to members. H owever, the auditor
should satisfy himself that the approved financial statements are complete in all material
respects. Accordingly, the financial statements approved by the directors should not leave
unresolved any matters which require exercise of judgement or discretion (although they may
omit item s which merely require mechanical calculation: for example, the provision of a
dividend at a rate already agreed by the directors). As com pliance w ith statute and accounting
standards may require the exercise of judgement or discretion, financial statements w hich do
not take account of these matters cannot be regarded as complete in all material respects.

Action up to the date of the audit report

The auditor should take steps to obtain reasonable assurance in respect of all significant events
up to the date of his report. He should ensure that any such significant events are, where
appropriate, accounted for or disclosed in the financial statements. If not, he should consider
whether to qualify his report.

Action after the date of the audit report but before the financial statements are issued

The directors have a duty to issue financial statements that give a true and fair view, so they
might reasonably be expected to inform the auditors of any significant subsequent events that
occur before the financial statements are issued to the members.

W here the auditors become aware of such events, they should ensure that the events are
properly reflected in the financial statements.

Action after the statements have been issued but before their laying before members

After the date of the audit report, the auditor does not have a general duty to search for
evidence of post balance sheet events. However, if before the general meeting at which the
financial statements are laid before the members the auditor becomes aware of information,
from sources either within or outside the company, which might have led him to give a
different audit opinion had he possessed the information at the date of his report, he should
discuss the matter w ith the directors. He should then consider whether the financial statements
should be amended by the directors. If the directors are unw illing to take action which the
auditor considers necessary to inform the members of the changed situation, the auditor
should consider making a statement at the general meeting at w hich the financial statements
are laid before the members. He should also consider taking legal advice on his position. The
auditor typically does not have a statutory right to comm unicate directly in writing w ith the
members.

If the directors w ish to amend the previously approved financial statements after the auditor
has signed his report but before they have been sent to the members, the auditor will need to
consider whether the proposed amendments affect his report. H is report, revised if necessary,
should not be dated before the date on w hich the amended financial statements are approved
by the directors. The auditor should take steps to obtain reasonable assurance in respect of all
significant events up to the date of his report on the amended financial statements.

W here, after the financial statements have been sent to the mem bers, the directors wish to
prepare and approve an amended set of financial statements to lay before the members in
general meeting, the auditor should perform appropriate steps before making his report on the
amended financial statements. In this latter report, he should refer to the original statements
and his report on them.

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 Chapter 14 Audit finalisation and review

If after the general meeting the auditor becomes aware of information which suggests that the
financial statements which were laid before that meeting are wrong, he should inform the
directors. He should ascertain how the directors intend to deal with the situation, in particular
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directors are not dealing correctly with the situation, he should consider taking legal advice on
his position.

3.2 Procedures for the audit of events after the balance sheet date
Certain events and transactions occurring after the balance sheet date are examined by the
auditor as part of his normal verification work on the balance sheet. For example, he may check
cash received from certain debtors or the amounts realised from the sale of inventory after the
year end. In addition, the auditor should carry out audit procedures w hich are described as a
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The objective of the review of events after the balance sheet date is to obtain reasonable
assurance that all such material events have been identified and, w here appropriate, either
disclosed or accounted for in the financial statements.

The review should consist of discussions with managem ent, and may also include
consideration of the following issues.

¨ Procedures taken by management to ensure that all events after the balance sheet date
have been identified, considered and properly evaluated as to their effect on the financial
statements.

¨ Any management accounts and relevant accounting records.

¨ Profit forecasts and cashflow projections for the new period.

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revealed by previous audit experience.

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mem oranda relating to item s included in the minutes.

¨ Relevant information which has come to his attention, from sources outside the enterprise,
including public knowledge, or competitors, suppliers and customers.

His review should be updated to a date as near as practicable to that of the audit report by
making enquiries of management and considering the need to carry out further tests.

3.3 Impact of IAS 10

The auditor should evaluate subsequent events in part by considering whether the accounting
treatment adopted by the entity is appropriate. IAS 10 identifies two classes of post balance
sheet events.

Adjusting events give additional evidence of conditions that existed at the balance sheet date.
Non-adjusting events are those that provide evidence of conditions arising after the balance
sheet date but w hich are of such significance to the future prospects of the entity that they
require disclosure in the financial statements.

The table below gives examples of each type of event.

Adjusting events Non-adjusting events

Insolvency of a debtor after the balance sheet Destruction of a significant asset.
date.
Sale of inventories after the balance sheet date A change in the way in which the
giving evidence of their net realisable value at the business is financed.

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balance sheet date.

Settling an account payable at some agreed A fundamental reorganisation of the business
amount after the balance sheet date. after the balance sheet date.
Discovery of errors or frauds which reveal that The issue of significant shares or loans.
the financial statements were incorrect in some
material aspect.
Agreement of taxation liabilities. A take-over of another business.
Purchases or sales of significant non-current
assets.
If the management do not recognise significant adjusting events the financial statements may
not give a true and fair view because profits or losses may be significantly misstated.

The failure to disclose significant non-adjusting events may also have an impact on the truth
and fairness of the financial statements. In particular the failure to disclose certain transactions
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3.4 IAS 37: Provisions, contingent liabilities and contingent assets

The auditor m ust check the appropriate accounting for contingent items. A contingent liability
is by definition a liability that is dependent upon some future uncertain event. IAS 37 clarifies
the differences between provisions, contingent liabilities and contingent assets.

A provision is a liability of uncertain tim ing or amount that is recognised in the accounts.

A contingent asset is one that arises from past events and w hose existence will be confirmed by
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control.

A contingent liability is:

¨ a possible obligation that arises from past events and whose existence w ill be confirmed by
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control; or

¨ a present obligation that arises from past events but is not recognised because it is not
probable that a transfer of econom ic benefits will be required to settle the obligation, or the
amount of the obligation cannot be measured w ith sufficient reliability.

The purpose of IAS 37 is to clarify accounting treatments so that the follow ing are discouraged:

¨ Accruing for contingent liabilities of uncertain amount or probability of occurrence. This

effectively creates a secret reserve of profit.

¨ Taking credit for assets that may never be realised and thus misstating the measurement of
income.

3.5 Main requirements of IAS 37

Provisions

A provision should only be recognised if three conditions hold:

(a) the entity has a present obligation as a result of a past event;

(b) it is probable that an outflow of econom ic benefits will be required to settle the
obligation; and

(c) a reliable estimate can be made of the am ount of the obligation.

Unless these three conditions are met, no provision should be recognised.

For example, a board decision taken before the balance sheet date to restructure the business
does not in itself create an obligation (since the decision could be reversed), so no provision
should be set up at the balance sheet date for the costs of the restructuring.

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 Chapter 14 Audit finalisation and review

Contingent liabilities

The details of contingent liabilities should be disclosed in a note to the accounts, unless the
possibility of any transfer in settlement is rem ote.

Contingent assets

W here an inflow of benefits from a contingent asset is probable, the details should be disclosed
in a note to the accounts.

The above rules can be expressed in the format of a decision tree, as follows.

Decision Tree

Start

No No
Present obligation as Possible
a result of an obligation?
obligating event?

Yes Yes

No Yes
Probable Remote?
outflow?

Yes No

No (rare)
Reliable
estimate?

Yes

Provide Disclose contingent liability Do nothing

Note: in rare cases it is not clear w hether there is a present obligation. In these cases, a past
event is deemed to give rise to a present obligation if, taking account of all available evidence,
it is m ore likely than not that a present obligation exists at the balance sheet date.

3.6 Legal matters

Of particular concern to the auditor are contingencies arising from legal matters. The Law
Society in the UK has advised solicitors that they should not go beyond confirming the
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Guidance has been sought by UK auditors in respect of this problem and is reproduced here.

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matters

It is the duty of directors to ensure that proper account is taken of all liabilities, including
contingent liabilities, in the preparation of company financial statements. From the audit
viewpoint, pending lawsuits and other actions against the company may present problem s
both of ascertainment and appraisal.

The following audit procedures are suggested for the verification of the existence of such
claims though they w ill not necessarily provide the auditor with adequate information of the
likely am ounts for which the company may ultimately be responsible.

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the attention of the managem ent or board.

¨ Discussing the arrangements for instructing solicitors with the officials responsible for
legal matters (for example, the head of the legal department or the company secretary).

¨ Examining the minutes of the board of directors and/or executive or other relevant
com mittee for references to, or indications of, possible claims.

¨ Examining bills rendered by solicitors and correspondence w ith them; in w hich connection
the solicitors should be requested to furnish bills or estimates of charges to date, or to
confirm that they have no unbilled charges.

¨ Obtaining a list of matters referred to solicitors from the appropriate director or official
with estimates of the possible ultimate liabilities.

¨ Obtaining a written assurance from the appropriate director or official that he is not aware
of any matters referred to solicitors other than those disclosed.

In appropriate circumstances, auditors may decide to obtain written confirmations from third
parties of certain representations made by directors; for example, the identification and
appraisal of contingent liabilities. In the field of legal actions, the normal and proper source of
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Requests for such confirmations should be kept within the solicitor-client relationship and
should thus be issued by the client with a request that a copy of the reply should be sent direct
to the auditors.

In order to ascertain whether the information provided by the directors is complete, auditors
(especially in certain overseas countries) may decide to arrange for solicitors to be requested to
advise whether they have matters in hand w hich are not listed in the letter of request, and to
provide information as to the likely am ounts involved. W hen considering such a non-specific
enquiry, auditors should note that the Council of the Law Society has advised solicitors that it
is unable to recom mend them to comply with requests for information which are more widely
drawn than the specimen form of w ording set out below.

In these circumstances, the enquiry should normally list matters identified as having been
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specific enquiries, has been agreed as one w hich may be properly addressed to, and answered
by, solicitors.

In connection with the preparation and audit of our accounts for the year ended ... the
directors have made estimates of the amounts of the ultimate liabilities (including costs)
which might be incurred, and are regarded as material, in relation to the follow ing
matters on which you have been consulted. W e should be obliged if you would confirm
that in your opinion these estimates are reasonable.

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 Chapter 14 Audit finalisation and review

M atter Estimated liability including costs

There may additionally be circumstances in which it is necessary as an audit procedure for an

enquiry of a general nature to be addressed to the solicitors in order to confirm that the
information provided by the directors is complete in all material particulars.

If the outcome of the enquiries appears satisfactory, auditors would not normally regard the
absence of a corroboration of the completeness of a list of legal matters as a reason in itself for
qualifying their report. If the enquiries lead to the discovery of significant matters not
previously identified, the auditors will wish to extend their enquiries and to request their
clients to address further enquiries to, or arrange a meeting with, the solicitors, at w hich the
auditors w ill w ish to be present. If however, having regard to all the circumstances, the
auditors are unable to satisfy themselves that they have received all the information they
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3.7 Other audit procedures

The following additional procedures should be followed.

¨ Review relevant correspondence, files and minutes up to the date the financial statements
are approved.

¨ Review contracts and agreements entered into before the balance sheet date for penalty
clauses.

¨ Review third-party certificates received during the audit for the existence of guarantees.

¨ Review certificates from bankers for bills discounted with recourse and guarantees.

¨ Discuss fully with directors and senior employees the existence and disclosure of
contingencies, including the basis on w hich any estimates have been made. Record details
of these discussions as part of the audit w orking papers as well as the steps taken to verify
the reasonableness of the estimates. (This work must be delayed until the financial
statements have been approved by the board.)

¨ Include in the w orking papers details of any other w ork done to establish the existence of
contingencies.

¨ Arrange for confirmation of the proper disclosure of all material contingencies in the
financial statements to be included in the letter of representation obtained from the
directors after having reminded the signatories to the letter (if relevant) that there are
statutory penalties for directors who make false statements to the auditor.

3.8 The date of signing the audit report

The dating of the audit report is important and this is considered in this section.

IAS 10 Events after the Balance Sheet Date refers to the date on which the directors approve the
financial statements. IAS 10 requires this date to be disclosed in the financial statements. The
auditing standard ISA 700 7KH $XGLWRU·V 5HSRUW RQ )LQDQFLDO 6WDWHPHQWV gives guidance on the
dating of the audit report.

¨ The directors should be encouraged to date their signatures to the financial statements
because of the requirements of IAS 10.

¨ If the directors do date their signatures the date should be the date on w hich they met and
approved the financial statements.

¨ The date used by the auditor in dating his report should be that on w hich he signs his
report on the financial statements. He should not sign and date his report until the

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financial statements have been approved by management and he has completed the audit.
This w ill include a post balance sheet events review up to the date of the audit report.

¨ Events may delay the actual signing of the report, in which case the auditor should use the
date on which he com mits himself to expressing an opinion on the financial statements
approved by the management. For example, printing of the financial statements means that
formal signing takes place some time after the date management approved the accounts
and the auditor has issued a final copy of the report he proposes to sign. In this case, the
audit report will be dated using the earlier date.

4 Representations by management
4.1 Reasons why auditors ask for m anagem ent representations
Representation letters are obtained by auditors for a number of reasons.

¨ They provide information on matters where only the directors may possess the required
knowledge.

¨ They provide an overall assurance on ownership, existence and valuation of assets and
holdings.

¨ In certain cases (such as with small or proprietary businesses) they provide reassurance
that all transactions have been recorded.

¨ They may provide assurance on unusual or irregular transactions.

¨ They confirm that all relevant transactions affecting directors (eg under relevant statutory
requirements) have been properly disclosed.

4.2 ISA 580 - Management Representations

ISA 580 amplifies an important aspect of audit evidence gathering namely, the representations
that are provided by management.

An important postulate in evidence gathering states that written evidence is more reliable than
oral evidence. W hile oral evidence can be corroborated by other sources of evidence there is
often lack of corroborative evidence w here knowledge of facts is restricted to management or
where there are matters requiring the exercise of judgem ent or the formulation of opinion.

Representation letters are useful from a statutory viewpoint; they remind both auditors and
directors of their rights and duties.

The auditor has the right to obtain all the information and explanations necessary for the
purposes of the audit. An officer of a company w ill typically be guilty of an offence if he
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misleading, false or deceptive in a material particular.

As the practices used in obtaining management representations can vary widely, the standard
attempts to codify best practice in this area. It contains the following requirements.

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papers.
¨ M anagement should be encouraged to participate in the drafting of such a letter.
¨ The letter should be signed by persons w hose level of authority is appropriate to the
significance of the representations made eg, the chief executive. The auditor should
recommend that the consideration of the letter and its approval by the board are minuted.

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¨ Arrangements to obtain the letter of representation should be agreed at an early stage. The
formal record of representations should be approved on a date as close as possible to the
date of the audit report and after the review of post balance sheet events has been
concluded.
¨ There may be circum stances where the management refuses to co-operate in providing the
necessary representations. In such cases the auditor may consider that he has not obtained
all the necessary information and explanations and may qualify his report. This may be
done on the grounds of inherent uncertainty.
¨ An alternative is for the auditor to prepare a list of matters represented to him w hich
should be sent to management with a request to confirm that his understanding of the
representations is correct.

4.3 Example of a m anagem ent representation letter

The following example of management representations from a company to its auditors is in the
form of a letter, but it is not intended to be a standard letter, nor to imply that management
representations must necessarily be in the form of a letter. Representations by management
vary from one entity to another and from one year to the next.

Although seeking representations from management on a variety of matters may serve to focus
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those matters in m ore detail than w ould otherwise be the case, auditors are cognisant of the
limitations of management representations as audit evidence as set out in ISA 580.

(Company letterhead)

(To the auditors)

(Date)

We confirm to the best of our knowledge and belief, and having made appropriate enquiries of other
directors and officials of the company, the following representations given to you in connection with
your audit of the financial statements for the year ended 31 December 20 ..
(1) We acknowledge as directors our responsibilities under [the relevant financial reporting
framework] for preparing financial statements which give a true and fair view and for
making accurate representations to you. All the accounting records have been made
available to you for the purpose of your audit and all the transactions undertaken by the
company have been properly reflected and recorded in the accounting records. All other
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meetings, have been made available to you.
(2) The legal claim by ABC Limited has been settled out of court by a payment of $258,000. No
further amounts are expected to be paid, and no similar claims have been received or are
expected to be received.
(3) We have no plans or intentions that may materially alter the carrying value or classification
of assets and liabilities reflected in the financial statements.
(4) The company has not had, or entered into, at any time during the period any arrangement,
transaction or agreement to provide credit facilities (including loans, quasi-loans or credit
transactions) for directors or to guarantee or provide security for such matters.
(5) There have been no events since the balance sheet date which necessitate revision of the
figures included in the financial statements or inclusion of a note thereto.
As minuted by the board of directors at its meeting on ............ (date)

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__________________ __________________

Chairman Secretary

Other signatories may include those with specific knowledge of the relevant matters, for
example the chief financial officer.

5 Overall review of the financial statements

5.1 The place of analytical review within the audit framework
As well as conducting detailed tests the auditor must also pay attention to the overall picture
conveyed by the accounts. This is normally achieved by a systematic procedure of analytical
review. Best practice in this area of the audit is summarised in the paragraphs that follow.

5.2 Overall review

Auditors should carry out such a review of the financial statements as is sufficient, in
conjunction with the conclusions drawn from the other audit evidence obtained, to give them a
reasonable basis for their opinion on the financial statements.

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Having accumulated audit evidence about individual items or groups of item s, he should
therefore carry out an overall review to determine whether in his opinion:

¨ the financial statements have been prepared using acceptable accounting policies w hich
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¨ the results of operations, state of affairs and all other information included in the financial
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enterprise.

¨ there is adequate disclosure of all appropriate matters and the information contained in the
financial statements is suitably classified and presented.

¨ the financial statements com ply with all statutory requirements and other regulations
relevant to the constitution and activities of that enterprise.

¨ the conclusions drawn from the other tests w hich he has carried out, together with those
drawn from his overall review of the financial statements, enable him to form an opinion
on the financial statements.

Throughout the review the auditor needs to take account of the materiality of the matters
under review and the confidence which his other audit w ork has already given him in the
accuracy and completeness of the information contained in the financial statements.

Skill and imagination are required to recognise the matters to be examined in carrying out an
overall review, and sound judgement is needed to interpret the information obtained.
Accordingly the review should not be delegated to someone lacking the necessary experience
and skill.

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of the enterprise is not of itself a sufficient basis for the expression of an audit opinion on those
statements. However, it provides valuable support for the conclusions arrived at as a result of
his other audit w ork. In addition apparent inconsistencies could indicate areas in which
material errors, omissions or irregularities may have occurred w hich have not been disclosed
by other procedures.

5.3 Compliance with accounting regulations

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 Chapter 14 Audit finalisation and review

Auditors should consider w hether the information presented in the financial statements is in
accordance with statutory requirements and that the accounting policies em ployed are in
accordance with accounting standards, properly disclosed, consistently applied and
appropriate to the entity.

W hen considering whether the accounting policies adopted by management are appropriate,
auditors have regard to:

¨ policies com m only adopted in particular industries;

¨ policies for which there is substantial authoritative support;

¨ whether any departures from applicable accounting standards are necessary for the
financial statements to give a true and fair view; and

¨ whether the financial statements reflect the substance of the underlying transactions and
not merely their form.

In reviewing the financial statements to ensure compliance with statutory requirements,

accounting standards and other applicable regulations, auditors may find it helpful to use a
checklist or other aide memoire.

5.4 Review for consistency and reasonableness

Auditors should consider w hether the financial statements as a whole and the assertions
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results of other audit procedures, and the manner of disclosure is fair.

The principal considerations w hen carrying out such a review are:

(a) whether the financial statements adequately reflect the information and explanations
previously obtained and conclusions previously reached during the course of the
audit;

(b) whether it reveals any new factors w hich may affect the presentation of, or disclosures
in, the financial statements;

(c) whether analytical procedures applied w hen completing the audit, such as com paring
the information in the financial statements with other pertinent data, produce results
which assist in arriving at the overall conclusion as to w hether the financial statements
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(d) whether the presentation adopted in the financial statements may have been unduly
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light; and

(e) the potential impact on the financial statements of the aggregate of uncorrected
misstatements (including those arising from bias in making accounting estimates)
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5.5 The significance of unadjusted differences

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valuation of a particular item that the auditor discovers during the course of his substantive
testing need not w orry the auditor unduly, since on their ow n they will not affect the view
given by the accounts.

However there is always the possibility that a number of small errors w ill aggregate together
into a material misstatement, or conversely that a material error in one direction w ill be
cancelled out by a different material error in the other direction.

233
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Therefore the auditor should keep a running schedule of unadjusted errors during his final
audit. He will only press the management for restatement of figures if a net material difference
exists at the end of the audit w ork between the figure in the accounts and w hat the auditor
believes it should be.

Practice question 1 (The answer is in the final chapter of this book)

Newbridge

ISA 560 Subsequent Events has been issued to assist the auditor in this area.

You are auditing the financial statements of Newbridge Trading plc for the year ended
31 October 20X7.

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for identifying subsequent events. Also, he has asked you to describe the audit procedures
which examine subsequent events.

He has suggested that an example of one point in answer to part (b) below w ould be:

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DFFRXQWVUHFHLYDEOHDWWKH\HDUHQGDQGKLJKOLJKWGRXEWIXOGHEWVµ

The detailed audit work was completed on Friday 5 Decem ber 20X7. It is proposed that:

¨ the audit report is signed on Friday 19 December.

¨ the financial statements are sent to shareholders on M onday 5 January 20X8.
¨ WKHFRPSDQ\·VDQQXDOJHQHUDOPHHWLQJZLOOEHKHOGRQ: HGQHVGD\-DQXDU\;

Required

(a) &RQVLGHU WKH DXGLWRU·V UHVSRQVLELOLWLHV IRU GHWHFWLQJ PDWHULDO VXEVHTXHQW HYHQWV LQ WKH
periods:

(i) 31 October to 5 December 20X7

(ii) 5 December to 19 December 20X7
(iii) 19 December 20X7 to 5 January 20X8
(iv) 5 January 20X8 to 28 January 20X8
(v) after 28 January 20X8 (7 marks)

(b) List and briefly explain audit procedures which involve examination of subsequent
events. (10 marks)

(c) Describe the audit work you will carry out in period (a)(ii) above. (3 marks)

7RWDO²PDUNV

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Approach to the question

This is a past examination question (December 1997) and there are a number of marks awarded
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responsibilities are with respect to each time period.

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should include solid points ie, fully developed with illustrations where appropriate.

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 Chapter 14 Audit finalisation and review

6 Summary
The auditor is required to give an opinion on the financial statements as a whole. Before
finalising his opinion he should:

¨ consider whether the going concern assumption is appropriate

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framework in this area

¨ obtain representations from management (in writing) when it is difficult to obtain audit
evidence from other sources in an area

¨ carry out an overall review of the financial statements to ensure that they are consistent
LQWHUQDOO\DQGZLWKWKHDXGLWRU·VNQRZOHGJHRIWKHHQWLW\DQGWKHEXVLQHVVVHFWRU

235