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Audit book by m asif chapter 18 final matters

Auditing – Study Notes

Chapter 23 Final Matters

CHAPTER TWENTY THREE
FINAL MATTERS
LO #

LEARNING OBJCTIVE

PART A: WRITTEN REPRESENTATION
LO 1

DEFINITION OF WRITTEN REPRESENTATION

LO 2

WRITTEN REPRESENTATION ABOUT MANAGEMENT’S
RESPONSIBILITIES

LO 3


WRITTEN REPRESENTATIONS ABOUT SPECIFIC ASSERTIONS

LO 4

WRITTEN REPRESENATION AS AUDIT EV IDENCE

PART B: SUBSEQUENT EV ENTS
EVENTS OCCURRING BETWEEN DATE OF FINANCIAL
LO 5
STATEMENTS AND DATE OF AUDITOR’S REPORT
FACTS DISCOV ERED AFTER AUDITOR’S REPORT (REV ISION IN
LO 6
AUDITOR’S REPORT)
PART C: ADDITIONAL CONCEPTS
LO 7

MANAGEMENT LETTER AND ITS CONTENTS

LO 8

AUDIT CORRESPONDENCE

9

ICAP'S
SYLLABUS
REFERENCE

ICAP'S STUDY
TEXT REFERENCE*
SECTION 2
(CHAPTER 15)
SECTION 2
(CHAPTER 15)
SECTION 2
(CHAPTER 15)
SECTION 2
(CHAPTER 15)
SECTION 1


(CHAPTER 15)
SECTION 1
(CHAPTER 15)
SECTION 4.3
(CHAPTER 5)
N/A


Auditing – Study Notes

Chapter 23 Final Matters

PART A – WRITTEN REPRESENTATION
LO 1: DEFINITION OF WRITTEN REPRESENTATION:
Written representation
A written statement by management provided to the auditor to confirm
certain matters or to support other audit evidence.

Form and Date of written representations:
Written representations shall be:
 in the form of a letter.
 addressed to auditor.
 dated as near as possible, but not after, the date of auditor’s report.

LO 2: WRITTEN REPRESENTATION ABOUT MANAGEMENT’S RESPONSIBILITIES :

Representation
required about
management’s
responsibilities

About Financial Statements
Management has fulfilled its
responsibility for the preparation of
financial statements in accordance
with the AFRF, as agreed in the
terms of the audit engagement.

About Information Provided
a) Management has provided the auditor
with all relevant information and access,
as agreed in the terms of the audit
engagement, and
b) All transactions have been recorded in
financial statements.

LO 3: WRITTEN REPRESENTATIONS ABOUT SPECIFIC ASSERTIONS :
Following is a list of other representations which are either:
1. required by different ISAs or
2. requested by auditor to support other audit evidence

Representation
required by
different ISAs

9

About Financial Statements
About Information Provided
Significant assumptions and accounting We have disclosed to you the results of our
estimates are reasonable. (ISA 540)
assessment of the risk that the financial
statements may be materially misstated as a
Related
party
relationships
and result of fraud. (ISA 240)
transactions have been appropriately
accounted for and disclosed in accordance We have disclosed to you all information in
with the requirements of AFRF. (ISA 550) relation to fraud or suspected fraud that we
are aware of and that affects the entity
All events subsequent to the date of involving management, employees or others.
financial statements for which AFRF (ISA 240)
requires adjustment or disclosure, have
been adjusted or disclosed. (ISA 560)
We have disclosed to you the identity of the
entity’s related parties and all the relatedparty relationships and transactions of
which we are aware. (ISA 550)


Auditing – Study Notes

Additional
Representations
requested by
auditor

Chapter 23 Final Matters

The effects of uncorrected misstatements
are immaterial, both individually and in We have disclosed to you all known
the aggregate, to the financial statements instances of non-compliance or suspected
as a whole. (ISA 450)
non-compliance with laws and regulations
affecting financial statements. (ISA 250)
e.g. about Plans or intentions that may
e.g. about deficiencies in internal control
affect carrying amount or classification of
assets and liabilities

LO 4: WRITTEN REPRESENATION AS AUDIT EVIDENCE :

1. Like Inquiry, written representation is an audit evidence.
2. However, written representations, alone, do not provide sufficient appropriate audit
evidence about matters to which they deal.
3. It is only a supporting evidence and does not affect nature, timing and extent of other
evidence to be obtained.

If written representation is not provided:
If management refuses to provide written representation to auditor, the auditor shall inquire
reason for refusal.
Auditor shall:
 Re-evaluate the integrity of management.
 Reconsider the impact on other representations and audit evidence.
 Take appropriate actions, including considering effect on audit report.

If written representation is contradicted by other evidence:
Auditor should consider:
 whether additional audit procedures are needed to resolve contradiction.
 whether there is need to revise risk of material misstatement, including risk of fraud.
 if auditor has concerns about integrity of management, document those concerns and
consider withdrawing from the audit.

PART B – SUBSEQUENT EVENTS
LO 5: EVENTS OCCURRING BETWEEN DATE OF FINANCIAL STATEMENTS AND DATE OF
AUDITOR’S REPORT :
Auditor’s Responsibility:
Auditor’s responsibility is to perform audit procedures to obtain sufficient appropriate audit
evidence that all events subsequent to the date of the financial statements have been identified by
management and have been adjusted or disclosed, as appropriate.
For this purpose, auditor performs:
 Active Review of subsequent events (i.e. auditor actively searches for significant subsequent
events. This review is performed till date of auditor’s report)
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Auditing – Study Notes


Chapter 23 Final Matters

Passive Review of subsequent events (i.e. auditor does not search subsequent events
actively; rather he relies on information from management. This review is performed after
the date of auditor’s report but before financial statements are issued)

Auditor’s Procedures to fulfill responsibility:
Normal audit verification work:
Auditor may find information about subsequent events during his normal audit verification e.g.
 In the audit of receivables, cash receipts from customers after the balance sheet date in the
audit of receivables or bankruptcy of a debtor after balance sheet date.
 In the audit of liabilities, review of subsequent payments to identify unrecorded liabilities.
 In the audit of inventory, sale of inventory below cost after balance sheet date.

Procedures aimed specifically at identifying subsequent events:
To meet his responsibility, auditor shall perform following procedures:
1) Inquiring of management and TCWG as to whether any subsequent events have occurred
which might affect the financial statements (auditor may make specific inquiries relating to
events adjusting or non-adjusting events).
2) Obtaining an understanding of procedures established by management to identify
subsequent events.
3) Reading minutes of subsequent meetings of the entity’s owners, management and TCWG
and inquiring about matters discussed at any such meetings for which minutes are not yet
available.
4) Reading the entity’s subsequent interim financial statements, if any.
5) Requesting management to provide written representation that “all events subsequent to
the date of the financial statements requiring adjustment or disclosure have been adjusted
or disclosed”.

9


Auditing – Study Notes

Chapter 23 Final Matters

LO 6: FACTS DISCOVERED AFTER AUDITOR’S REPORT (REV ISION IN AUDITOR’S REPORT):

If after the date of auditor’s report, auditor becomes aware a misstatement in financial statements
(e.g. an error/fraud in financial statements), auditor shall:
 Discuss with management to determine whether financial statements need amendment.
 If amendment is required, auditor shall inquire whether management agrees to amend
financial statements or not.

When financial
statements have
not been issued

When financial
statements have
been issued

9

If management agrees to amend financial
If management does not agree to
statements
amend financial statements
Management’s Responsibilities:
1. If auditor’s report has not been
–Management shall amend financial statements before
provided to entity, auditor shall
issuance.
modify the opinion.
2. If auditor’s report has been
Auditor’s Responsibilities:
provided to entity, auditor shall
Auditor shall:
notify management and TCWG
–Carry out necessary audit procedures on the
not to issue the financial
amendment.
statements to third parties
–Provide a new audit report on the amended financial
before
the
necessary
statements.
amendments.
Management’s Responsibilities:
Auditor shall take appropriate
–Management take necessary steps to ensure that users action to ensure that users are
do not rely on previously issued financial statements.
informed not to rely on financial
–Management shall amend financial statements to re- statements.
issue them. These financial statements shall include an
additional note to explain the reason for the
amendment.
Auditor’s Responsibilities:
Auditor shall:
– Review the steps taken by management to ensure that
users do not rely on previously issued financial
statements.
–Carry out necessary audit procedures on the
amendment.
–Provide a new audit report (on amended financial
statements) that shall include an Emphasis of Matter
Paragraph or Other Matter Paragraph, referring to the
 note in financial statements that explains reason
for the amendment in financial statements, or
 earlier report provided by the auditor.


Auditing – Study Notes

Chapter 23 Final Matters

PART C – ADDITIONAL CONCEPTS
LO 7: MANAGEMENT LETTER AND ITS CONTENTS:

Management Letter is a document prepared by auditor which states internal control weaknesses
discovered during the audit. To provide value-added service to audit client, auditor also
communicate to management recommendations to overcome weakness.
Management Letter is normally issued at the conclusion of the audit engagement and contains
following elements:
 Internal Control Weakness
 Risk faced by entity because of weakness
 Suggestions by auditor to remove control weaknesses
 Management’s Response

LO 8: AUDIT CORRESPONDENCE:
Type of Letter

By

To

Professional
Clearance Letter

Auditor

Predecessor
Auditor

Confirmation Letter

Auditor

Engagement Letter

Timing
Before
Acceptance of
audit client
At start of the
engagement

Auditor

Management

Representation
Letter

Management

Auditor

Audit Report

Auditor

Management
Letter/ Letter of
weakness

Members
(or TCWG)

Near the end
of the audit

Auditor

Management

After the
Audit Report

9

External
Parties

During Audit

At the end of
the audit

Brief Description
To discuss whether there is any professional
reason because of which engagement should
not be accepted.
Engagement Letter confirms acceptance and
appointment of auditor
To obtain information about entity from
outside parties.
It reminds management about their
responsibility for preparation of financial
statements and for completeness of
information provided to auditor.
The audit report expresses opinion on
financial statements.
It includes:
–identified weaknesses in internal control,
–risks because of weakness in internal
control, and
–recommendations to improve internal
control.



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