Completing the Audit Engagement

Overview

This topic addresses the final procedures and considerations in completing an audit engagement, focusing on contingencies, commitments, subsequent events, going concern, and auditor communications with governance and management. These areas are critical for ensuring that the financial statements present a true and fair view and comply with applicable accounting standards.

Contingencies

Definition and Importance

• Contingencies are potential liabilities or losses that depend on the outcome of future events.

• They differ from most liabilities in that their timing and amount are uncertain.

• Examples include pending litigation, tax disputes, product warranties, and guarantees.

• Auditors must identify and evaluate contingencies because they may require recognition or disclosure in the financial statements.

Accounting for Contingencies (MFRS 137)

• Probable: If the event is more likely than not, recognize the liability and disclose it.

• Neither Probable nor Remote: If the likelihood is less than probable but more than remote, disclose the contingency only.

• Remote: If the chance is slight, no disclosure is required.

Audit Procedures for Identifying Contingencies

• Review minutes of meetings of those charged with governance (e.g., Board of Directors, Audit Committee).

• Examine contracts, loan agreements, leases, and correspondence from government bodies.

• Review tax returns and reports from tax authorities.

• Confirm guarantees and letters of credit with financial institutions.

• Inspect other documents for possible guarantees or similar arrangements.

• Near audit completion, auditors should:

  • Inquire and discuss with management about policies for identifying and accounting for contingencies.

  • Examine legal correspondence and invoices for pending lawsuits.

  • Obtain a legal letter from external counsel regarding litigation, claims, and assessments.

  • Obtain written representation from management confirming all relevant matters have been disclosed.

Legal Letters

• A legal letter is sent to the entity’s external legal counsel to obtain evidence about litigation, claims, and assessments.

• It requests information on pending or threatened litigation, descriptions, evaluations, and confirmation of management’s assessments.

• Any limitations in the lawyer’s response must be disclosed.

Commitments

Definition and Audit Considerations

• Commitments are long-term agreements to purchase or sell goods at fixed prices, often to secure favorable terms or supply.

• Auditors identify commitments through inquiries and review of board minutes and contracts.

• Accounting standards require disclosure of such commitments, with adjustments to Other Comprehensive Income (OCI) for gains or losses on derivatives and hedging.

• Auditors must ensure proper disclosure and accruals in the financial statements.

Subsequent Events

Definition

• Subsequent events are events occurring between the financial statement date and the auditor’s report date, or facts discovered after the report date (ISA 560).

• These may require adjustments or disclosure in the financial statements.

Types of Subsequent Events

• Type 1: Events providing additional evidence about conditions existing at the statement of financial position (SOFP) date.

  • Require adjustment of the financial statements.

  • Examples:

    • Customer bankruptcy confirming an uncollectible receivable.

    • Post-year-end sale of inventory indicating net realizable value.

    • Settlement of a lawsuit for an amount different from that recorded.

    • Determination of asset costs or proceeds after SOFP date for transactions before year-end.

• Type 2: Events about conditions arising after the SOFP date.

  • Require disclosure only, not adjustment.

  • Examples:

    • Purchase or disposal of a business.

    • Issuance of equity or bonds.

    • Loss of assets due to fire or flood.

    • Major litigation arising from post-year-end events.

Auditor’s Responsibility Regarding Subsequent Events

• Between Balance Sheet Date and Audit Report Date:

  • Perform procedures to identify subsequent events (inquiries, review of minutes, interim financials, public information).

  • Evaluate management’s assessment and ensure proper adjustments/disclosures.

• After Audit Report Date but Before Financial Statement Issuance:

  • If a subsequent event is identified, discuss with management, determine if amendment or disclosure is needed, and update the audit report if necessary.

• After Financial Statements Are Issued:

  • If a material event is discovered, communicate with management and governance, possibly reissue statements, or notify users/regulators if management refuses to act.

Audit Procedures for Subsequent Events

• Inquiry of management

• Review of post-balance sheet transactions

• Review of minutes of meetings

• Review of interim financial statements

• Review of legal correspondence

• Inquiries regarding long-term debt and loan agreements

• Review of customer and supplier correspondence

• Assess significant changes in the business

• Consider external sources of information

Final Evaluation of Audit Evidence

Key Steps

• Perform final analytical procedures

• Evaluate the entity’s ability to continue as a going concern

• Obtain a representation letter from management

• Review working papers

• Carry out a final evaluation of audit results

• Evaluate financial statement presentation and disclosure

• Obtain a quality control review of the engagement

Communications with Those Charged with Governance and Management (TCWGM)

Purpose and Requirements

• Guided by ISA 260 and ISA 265, auditors must communicate with those charged with governance (TCWG) about significant audit matters and internal control deficiencies.

• The aim is to foster two-way dialogue and ensure TCWG are informed about significant audit-related issues.

• Three main categories of communication:

  • Auditor’s responsibilities under auditing standards

  • Overview of planned audit scope and timing

  • Significant findings from the audit

• Significant findings should be communicated in writing if oral communication is inadequate.

• For listed companies, auditors must confirm compliance with ethical requirements regarding independence.

Management Letter

• A management letter is issued to management after the audit, highlighting internal control issues, operational inefficiencies, and other significant findings not affecting the financial statements directly.

• It includes recommendations for improvements in processes, controls, or accounting practices.

• While not required by auditing standards, it is considered a value-added service to enhance company operations and governance.

Summary Table: Contingency Recognition and Disclosure (MFRS 137)

Key Formulas and Standards

• Going Concern Assessment: Auditors evaluate whether the entity can continue as a going concern for at least 12 months after the reporting period.

• Relevant Standards: MFRS 137 (Provisions, Contingent Liabilities and Contingent Assets), ISA 560 (Subsequent Events), ISA 260 (Communication with Those Charged with Governance), ISA 265 (Communicating Deficiencies in Internal Control).

Example: Subsequent Event Adjustment

• If a customer owing $100,000 at year-end goes bankrupt after the reporting date but before the audit report, and the bankruptcy confirms the receivable was uncollectible at year-end, the auditor should ensure the financial statements are adjusted to write off the receivable.

Additional info: The above notes expand on the brief points in the original slides, providing definitions, examples, and context for audit procedures and communications as required by international standards.