Mindanao State University College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY Marawi City
COMPLETING THE AUDIT AND POST-AUDIT RESPONSIBILITIES Accounting 151
After the fieldwork is almost complete, a series of procedures are generally carried out to complete or finish the audit. These procedures primarily include the following: A. Identify and evaluate potential contingencies and commitments which may have an effect on the financial statements. B. Perform procedures to identify subsequent events that may affect the financial statement under audit. C. Review the reasonableness of management’s assessment of the use of the going concern assumption. D. Obtain the management representation letter. Likewise, wrap up procedures are performed to eliminate loose ends and to ensure that all available information have been appropriately considered. IDENTIFYING AND EVALUATING POTENTIAL CONTINGENCIES AND COMMITMENTS A critical step in the audit process is the identification and evaluation of potential contingencies and commitments that may have an impact on the financial statements. Contingencies and commitments are important to readers of financial statements because they represent future cash flow requirements. PAS 37 provides guidance as to whether an estimated loss from a contingency should be recorded or disclosed. Those estimated losses that require disclosure are known as a provision, which is a liability of uncertain timing or amount. On the other hand, those estimated losses that require disclosure only is known as a contingent liability. A contingent liability is defined as 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. Alternatively, a contingent liability is a present obligation that an outflow of resources will be required to settle the obligation or the amount of obligation cannot be measured with sufficient reliability. A contingent asset is a possible asset 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. Examples of loss contingencies include the following: A. Pending or threatened litigation for patent infringement, product warranties or product defects. B. Guaranties of third party obligations. C. Discounted notes receivable or factored accounts receivable. D. Disputed income tax deductions. E. Estimated losses on purchase commitments. F. Line of credit commitments to third parties. Further, PAS 37 prohibits the recognition of contingent assets and contingent liabilities. However, information about contingent liabilities and contingent assets must be disclosed in certain circumstances. Accordingly, exemption from disclosure is allowed in situations where the information would seriously prejudice the position of the entity in dispute with other parties. Audit Procedures for Commitments and Contingencies The auditor’s objectives in the audit of commitments and contingencies are to determine whether all significant commitments and contingencies as of the statement of financial position date are shown properly in the financial statements and the disclosures made are in accordance with the identified acceptable financial reporting framework.
The management, not the auditor, is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities. In many audits, it is impractical for auditors to uncover contingencies without management’s cooperation. Hence, searching for potential loss contingencies requires the auditor’s exercise not only keen judgment but some creativity, since the existence of contingent liabilities is not always readily apparent. Because of the nature of commitments and contingencies, analytical procedures have limited application. Some of the procedures specifically designed to detect contingent liabilities include the following: A. Inquire of management about the possibility of unrecorded contingencies. B. Read minutes of board of directors’ and shareholders’ meetings for indications of lawsuits or other contingencies. C. Read correspondence and communication files of the client and review related documents. D. Read contracts, loan agreements, lease agreements and similar documents. E. Analyze legal expenses for the period under audit year and examine documents from attorneys that may suggest litigation is pending or in progress. F. Obtain a letter from each major attorney performing legal services for the client as to the status of pending litigation or other contingent liabilities. G. Review current year working papers for indication of potential contingencies. H. Examine letters of credit in force as of statement of financial position date and obtain confirmation of the used and unused balance. I. Review accounting estimates related to identified contingencies in accordance with appropriate auditing standards. J. Review reports prepared by agents of the Bureau of Internal Revenue and other taxing authorities such as the Bureau of Customs. K. Read news items related to the company, including any media comment or articles which might indicate the existence of environmental or other liabilities. PERFORMING SUBSEQUENT EVENTS PROCEDURES (PSA 560) Financial statements, and consequently the auditor’s report, may be affected by certain events that occur after the date of the financial statements. These events are referred to as subsequent events. Ordinarily, financial reporting frameworks identify two types of subsequent events: A. Type I subsequent events – also known as recognized subsequent events, these events provide evidence of conditions that existed at the date of the financial statements and thus, require adjustment of the financial statements. Examples include: An uncollectible account receivable resulting from continued deterioration of a customer’s financial condition leading to bankruptcy after statement of financial position date. The settlement of a lawsuit after the statement of financial position date for an amount different from that recorded in the year-end financial statements. B.
Type II subsequent events – also known as nonrecognized subsequent events, these events provide evidence of conditions that arose after the
Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014
Page|1 of 9
date of the financial statements and only require disclosures in the financial statements. Examples include: Purchase or disposal of a business entity. Sale of shares of stock or issuance of bonds by the entity. Loss of the entity’s manufacturing facility or assets resulting from a casualty such as a fire or flood and not fully covered by insurance. Losses on receivables caused by condition such as a casualty arising subsequent to the statement of financial position date. Since these events may potentially affect the financial statements and the auditor’s report, the management and the auditor should consider them. For audit purposes, the auditor is responsible only with those events that occur subsequent to the date of the financial statements but before the date of the auditor’s report and those that become known to the auditor after the date of the auditor’s report.
Relevant Dates in the Consideration of Subsequent Events A. Date of the financial statements – the date of the end of the latest period covered by the financial statements. B.
Date of approval of the financial statements – the earlier date on which those with the recognized authority, the management or those charged with governance have asserted that all the statements comprising the financial statements have been prepared and that those with the recognized authority have taken responsibility for those financial statements.
C. Date of the auditor’s report – the date the auditor dates the report on the financial statements in accordance PSA 700. The auditor’s report cannot be dated earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statements. Sufficient appropriate audit evidence includes evidence that all the statements that comprise the financial statements have been prepared and that those with the recognized authority have asserted that they have taken responsibility for those financial statements. Consequently, the date of the auditor’s report cannot be earlier than the date of approval of the financial statements. D.
Date the financial statements are issued – the date that the auditor’s report and audited financial statements are made available to third parties. The date the financial statements are issued generally depends on the regulatory environment of the entity. In some circumstances, the date the financial statements are issued may be the date that they are filed with a regulatory authority. Since
audited financial statements cannot be issued without an auditor’s report, the date that the audited financial statements are issued must not only be at or later than the date of the auditor’s report, but must also be at or later than the date the auditor’s report is provided to the entity. EVENTS OCCURRING BETWEEN THE DATE OF THE FINANCIAL STATEMENTS AND THE DATE OF THE AUDITOR’S REPORT The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements have been identified. These procedures would ordinarily include: A. Obtain an understanding of any procedures management has established to ensure that subsequent events are identified. B. Inquire of management and those charged with governance where appropriate as to whether any subsequent events have occurred which might affect the financial statements. C. Read minutes, if any, of the meetings, of the entity’s owners, management and those charged with governance, that have been held after the date of the financial statements and inquiring about matters discussed at any such meetings for which minutes are not yet available. D. Read the entity’s latest subsequent interim financial statements, if any. E. Read the entity’s latest available budgets, cash flow forecasts and other related management reports for periods after the date of the financial statements. F. Inquire, or extending previous oral or written inquiries, of the entity’s legal counsel concerning litigation and claims. G. Consider whether written representations covering particular subsequent events may be necessary to support other audit evidence and thereby obtain sufficient appropriate audit evidence. The auditor should take into account the auditor’s risk assessment in determining the nature and extent of such audit procedures. The subsequent events procedures that the auditor performs may also depend on the information that is available and, in particular, the extent to which the accounting records have been prepared since the date of the financial statements. Moreover, the auditor is not expected to perform additional audit procedures on matters to which previously applied audit procedures have provided satisfactory conclusions. When, as a result of the procedures performed, the auditor identifies events that require adjustment of, or disclosure in, the financial statements, the auditor should determine whether each such event is appropriately reflected in those financial statements. FACTS DISCOVERED AFTER THE DATE OF THE AUDITOR’S REPORT BUT BEFORE THE DATE THE FINANCIAL STATEMENTS ARE ISSUED The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report. During this period, it is the responsibility of the management to inform the auditor of events that may affect the financial statements. When, after the date of the auditor’s report but before the financial statements are issued, the auditor becomes aware of a fact which may materially affect the financial statements, the auditor should: A. Discuss the matter with management and, where appropriate, those charged with governance. B. Determine whether the financial statements need amendment. C. Inquire how management intends to address the matter in the financial statements. If management amends the financial statements, the auditor should:
Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014
Page|2 of 9
A.
Carry out the audit procedures necessary in the circumstances on the amendment. B. Issue a new auditor’s report on the amended financial statements. The new auditor’s report should not be dated earlier than the date of approval of the amended financial statements. However, when management does not amend the financial statements in circumstances where the auditor believes they need to be amended, then: A. If the auditor’s report has not yet been provided to the entity, the auditor should modify the opinion as required by PSA 705 and then provide the auditor’s report to the entity. B. If the auditor’s report has already been provided to the entity, the auditor should notify management and those charged with governance, not to issue the financial statements to third parties before the necessary amendments have been made. C. If the financial statements are nevertheless subsequently issued without the necessary amendments, the auditor should take appropriate action, to seek to prevent reliance on the auditor’s report. Effect on the Date of the Auditor’s Report
If management does not take the necessary steps to ensure that anyone in receipt of the previously issued financial statements is informed of the situation and does not revise the financial statements in circumstances where the auditor believes they need to be revised, the auditor should: A. Notify management and those charged with governance, that the auditor will seek to prevent future reliance on the auditor’s report. B. If, despite such notification, management or those charged with governance do not take these necessary steps, the auditor should take appropriate action to seek to prevent reliance on the auditor’s report. OMITTED PROCEDURES DISCOVERED AFTER THE AUDITORS REPORT HAS BEEN ISSUED Auditors are not required to review working papers once an audit report is issued. However, an entity’s quality control program may disclose the omission of auditing procedures considered necessary at the time of the audit. In this situation the auditor should follow the following guidelines: A. Assess the importance of the omitted procedures to the auditor’s ability to support his opinion. Results of other audit procedures that were applied may compensate for or make the omitted procedure less important. Evaluating such results may involve: Reviewing the working papers. Discussing the circumstances with the engagement personnel. Re-evaluating the scope of the audit.
If the subsequent event is of Type I that result in adjustment without disclosure, the audit report should bear the original audit report date. This is because the condition already existed as of the financial statement date and did not actually occur in the subsequent period. However, if the subsequent event is of Type I that result in adjustment and disclosure or is of Type II, the auditor may either: A.
B.
Date the report as of the completion of the audit procedures on the new subsequent event. In this case, the auditor is taking responsibility for all subsequent events that occur up to the new audit report date. Thus, the auditor will have to extend the subsequent event review procedures to identify other subsequent events that may have occurred up to the new audit report date. Dual date the report such as “March 16, 2013, except as to Note 9, which is as of April 16, 2013.” Dual dating supplements the original audit report date with a current date limited specifically to the note describing the subsequent event. In this case, the auditor limits his responsibility for subsequent events occurring after the original date of his report only to the specific event referred to in the note.
FACTS DISCOVERED AFTER THE FINANCIAL STATEMENTS HAVE BEEN ISSUED After the financial statements have been issued, the auditor has no obligation to perform any audit procedures regarding such financial statements. However, when, after the financial statements have been issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor should: A. Discuss the matter with management and, where appropriate, those charged with governance. B. Determine whether the financial statements need revision and, if so, C. Inquire how management intends to address the matter in the financial statements. If management revises the financial statements, the auditor should: A. Carry out the audit procedures necessary in the circumstances on the revisions. B. Review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s report thereon is informed of the situation. C. Issue a new auditor’s report with an Emphasis of a Matter paragraph on the revised financial statements. The new auditor’s report should not be dated earlier than the date of approval of the amended financial statements.
B.
Undertake to apply the omitted procedures or the corresponding alternative procedure. If the auditor determines that the omission of the procedures impairs his current ability to support his opinion and the auditor believes that there are persons current relying or likely to rely on the report, the auditor should promptly apply the omitted procedures or the corresponding alternative procedures. If, after applying the omitted procedures, the auditor determines that the financial statements are materially misstated and the auditor’s report is inappropriate, the auditor should discuss the matter with the management and take steps to prevent future reliance on the report.
EVALUATING REASONABLENESS OF THE USE OF THE GOING CONCERN ASSUMPTION (PSA 570) The going concern assumption is a fundamental principle in the preparation of financial statements. Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. Management’s Responsibility Some financial reporting frameworks require that general purpose financial statements be prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Thus, managements are explicitly required to make a specific assessment of the entity’s ability to continue as a going concern. In other financial reporting frameworks, there may be no explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern. Nevertheless, since the going concern assumption is a fundamental principle in the preparation of the financial statements, management has a responsibility to assess the entity’s ability to continue as a going concern even if the financial reporting framework does not include an explicit responsibility to do so. Management’s assessment of the entity’s ability to continue as a going concern involves making a judgment, at a
Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014
Page|3 of 9
particular point in time, about inherently uncertain future outcomes of events or conditions. The following factors are relevant to that judgment: A. The degree of uncertainty associated with the outcome of an event or condition increases significantly the further into the future an event or condition or the outcome occurs. For that reason, most financial reporting frameworks that require an explicit management assessment specify the period for which management is required to take into account all available information. B. The size and complexity of the entity, the nature and condition of its business and the degree to which it is affected by external factors affect the judgment regarding the outcome of events or conditions. C. Any judgment about the future is based on information available at the time at which the judgment is made. Subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made. Auditor’s Responsibility The auditor’s responsibility is to obtain sufficient appropriate evidence about the appropriateness of management’s use of the going concern assumption in the preparation and presentation of the financial statements and to conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern. This responsibility exists even if the financial reporting framework used in the preparation of the financial statements does not include an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern. It is to be emphasized that the absence of any reference to going concern uncertainty in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern. To fulfill his responsibilities with regards to the use or non-use of the going concern assumption by the client’s management, the auditor should consider the following: RISK ASSESSMENT PROCEDURES AND RELATED PROCEDURES A.
B.
When performing risk assessment procedures as required by PSA 315, the auditor should consider whether there are events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. In so doing, the auditor should determine whether management has already performed a preliminary assessment of the entity’s ability to continue as a going concern and: If such an assessment has been performed, the auditor should discuss the assessment with management and determine whether management has identified events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern and, if so, management’s plans to address them. If such an assessment has not yet been performed, the auditor should discuss with management the basis for the intended use of the going concern assumption, and inquire of management whether events or conditions exist that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern. If events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern are identified after the auditor’s risk assessments are made, the auditor’s assessment of the risks of material misstatement may need to be revised. The auditor should remain alert throughout the audit for audit evidence of events or conditions
that may cast significant doubt on the entity’s ability to continue as a going concern. The following are examples of events or conditions that, individually or collectively, may cast significant doubt about the going concern assumption: Financial Events and Conditions
Net liability or net current liability position. Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on shortterm borrowings to finance long-term assets. Indications of withdrawal of financial support by creditors. Negative operating cash flows indicated by historical or prospective financial statements. Adverse key financial ratios. Substantial operating losses or significant deterioration in the value of assets used to generate cash flows. Arrears or discontinuance of dividends. Inability to pay creditors on due dates. Inability to comply with the terms of loan agreements. Change from credit to cash-on-delivery transactions with suppliers. Inability to obtain financing for essential new product development or other essential investments.
Operating Events and Conditions
Management intentions to liquidate the entity or to cease operations. Loss of key management personnel without replacement. Loss of a major market, key customers, franchise, license, or principal suppliers. Labor difficulties. Shortages of important supplies. Emergence of a highly successful competitor.
Other Events and Conditions
Non-compliance with capital or other statutory requirements. Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy. Changes in law or regulation or government policy expected to adversely affect the entity. Uninsured or underinsured catastrophes when they occur.
When evaluating the significance of the above list on the entity’s ability to continue as a going concern, the auditor should remember that these events or conditions can be mitigated by management’s plans for future actions and other factors. For example, the effect of an entity being unable to make its normal debt repayments may be counter-balanced by management’s plans to maintain adequate cash flows by alternative means, such as by disposing of assets, rescheduling loan repayments, obtaining new equity capital, reducing dividend payments or disposing operations that produce negative cash flows. Similarly, the loss of a principal supplier may be mitigated by the availability of a suitable alternative source of supply. EVALUATING MANAGEMENT’S ASSESSMENT OF THE ENTITY’S ABILITY TO CONTINUE AS A GOING CONCERN C. The auditor should evaluate management’s assessment of the entity’s ability to continue as a going concern. Management’s assessment of the entity’s ability to continue as a going concern is a key part of the auditor’s consideration of
Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014
Page|4 of 9
management’s use of the going concern assumption. In evaluating management’s assessment of the entity’s ability to continue as a going concern, the auditor should cover the same period as that used by management to make its assessment as required by the applicable financial reporting framework, or by law or regulation if it specifies a longer period. If management’s assessment of the entity’s ability to continue as a going concern covers less than twelve months from the date of the financial statements as defined in PSA 560 (Redrafted), the auditor should request management to extend its assessment period to at least twelve months from that date. If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor should consider the implications for the auditor’s report. D. In evaluating management’s assessment, the auditor should consider whether management’s assessment includes all relevant information of which the auditor is aware as a result of the audit. Moreover, the auditor should inquire of management as to its knowledge of events or conditions beyond the period of management’s assessment that may cast significant doubt on the entity’s ability to continue as a going concern. E. When events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor should obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists through performing additional audit procedures, including consideration of mitigating factors. These procedures should include: When management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting management to make its assessment. Evaluating management’s plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management’s plans are feasible in the circumstances. When the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor in considering the future outcome of events or conditions in the evaluation of management’s plans for future action. AUDIT REPORTING AND CONCLUSIONS F.
Based on the audit evidence obtained, the auditor should conclude whether, in the auditor’s judgment, a material uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern.
A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary for the fair presentation of the financial statements or for it not to be misleading. G. When the auditor concludes that the use of the going concern assumption is appropriate in the circumstances but a material uncertainty exists, the auditor should determine whether the financial statements: Adequately describe the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and management’s plans to deal with these events or conditions.
Disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.
If adequate disclosure is made in the financial statements, the auditor should express an unmodified opinion and include an Emphasis of Matter paragraph in the auditor’s report to: Highlight the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entity’s ability to continue as a going concern. Draw attention to the note in the financial statements. If adequate disclosure is not made in the financial statements, the auditor should express a qualified or adverse opinion, as appropriate. The auditor should state in the auditor’s report that there is a material uncertainty that may cast significant doubt about the entity’s ability to continue as a going concern. H.
If the financial statements have been prepared on a going concern basis but, in the auditor’s judgment, management’s use of the going concern assumption in the financial statements is inappropriate, the auditor should express an adverse opinion regardless of whether or not the financial statements include disclosure of the inappropriateness of management’s use of the going concern assumption. If the entity’s management is required, or elects, to prepare financial statements when the use of the going concern assumption is not appropriate in the circumstances, the financial statements are prepared on an alternative basis (e.g., liquidation basis). The auditor may be able to perform an audit of those financial statements provided that the auditor determines that the alternative basis is an acceptable financial reporting framework in the circumstances. The auditor may be able to express an unmodified opinion on those financial statements, provided there is adequate disclosure therein but may consider it appropriate or necessary to include an Emphasis of Matter paragraph in the auditor’s report to draw the user’s attention to that alternative basis and the reasons for its use.
OTHER RESPONSIBILITIES I.
J.
The auditor should communicate with those charged with governance events or conditions identified that may cast significant doubt on the entity’s ability to continue as a going concern. Such communication with those charged with governance should include the following: Whether the events or conditions constitute a material uncertainty. Whether the use of the going concern assumption is appropriate in the preparation and presentation of the financial statements. The adequacy of related disclosures in the financial statements. When there is significant delay in the approval of the financial statements by management or those charged with governance after the date of the financial statements, the auditor should inquire as to the reasons for the delay. When the auditor believes that the delay could be related to events or conditions relating to the going concern assessment, the auditor should perform the abovementioned additional audit procedures necessary, as well as consider the effect on the
Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014
Page|5 of 9
auditor’s conclusion regarding the existence of a material uncertainty. OBTAIN MANAGEMENT REPRESENTATION LETTER (PSA 580) A written representation is a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations for purposes of PSAs do not include financial statements, the assertions therein, or supporting books and records. Written representations are an important source of audit evidence. If management modifies or does not provide the requested written representations, it may alert the auditor to the possibility that one or more significant issues may exist. Further, a request for written, rather than oral, representations in many cases may prompt management to consider such matters more rigorously, thereby enhancing the quality of the representations. Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Furthermore, the fact that management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of management’s responsibilities, or about specific assertions. Management written representations complement the audit evidence the auditor accumulates but they do not substitute for the performance of audit procedures designed to obtain necessary evidence for the expression of an opinion. In addition, a written representation impresses upon management its responsibility for the assertions in the financial statements. Because of their importance, the auditor is required to obtain a management representation letter. FROM WHOM WRITTEN REPRESENTATIONS ARE REQUESTED Written representations are requested from those responsible for the preparation and presentation of the financial statements. Those individuals may vary depending on the governance structure of the entity, and relevant law or regulation. However, management, rather than those charged with governance, is often the responsible party. Written representations may therefore be requested from the entity’s chief executive officer and chief financial officer, or other equivalent persons in entities that do not use such titles. Due to its responsibility for the preparation and presentation of the financial statements, and its responsibilities for the conduct of the entity’s business, management would be expected to have sufficient knowledge of the process followed by the entity in preparing and presenting the financial statements and the assertions therein on which to base the written representations. In some cases, however, management may decide to make inquiries of others who participate in preparing and presenting the financial statements and assertions therein, including individuals who have specialized knowledge relating to the matters about which written representations are requested. Such individuals may include: A. An actuary responsible for actuarially determined accounting measurements. B. Staff engineers who may have responsibility for and specialized knowledge about environmental liability measurements. C. Internal counsel who may provide information essential to provisions for legal claims. In some cases, management may include in the written representations qualifying language to the effect that representations are made to the best of its knowledge and belief. It is reasonable for the auditor to accept such wording if the auditor is satisfied that the representations are being made by those with appropriate responsibilities and knowledge of the matters included in the representations. To reinforce the need for management to make informed representations, the auditor may request that management
include in the written representations confirmation that it has made such inquiries as it considered appropriate to place it in the position to be able to make the requested written representations. FORM AND CONTENT OF WRITTEN REPRESENTATIONS The written representations should be in the form of a representation letter addressed to the auditor. This letter should include: A. A representation that management has fulfilled its responsibility for the preparation and presentation of the financial statements as set out in the terms of the audit engagement. B. A representation that the financial statements are prepared and presented in accordance with the applicable financial reporting framework. C. A representation that management has provided the auditor with all relevant information agreed in the terms of the audit engagement and that all transactions have been recorded and are reflected in the financial statements. D. A representation that describes management’s responsibilities as described in the terms of the engagement. E. Other representations required by other PSAs namely, PSA 240, PSA 250, PSA 450, PSA 540, PSA 550, PSA 560 and PSA 570. F. Other representations the auditor determines to be necessary to support other audit evidence relevant to the financial statements or one or more specific assertions in the financial statements. PERIOD COVERED BY THE WRITTEN REPRESENTATIONS The representation letter should be dated as near as practicable to, but not after, the date of the auditor’s report on the financial statements. This is because written representations are necessary audit evidence, thus, the auditor’s opinion cannot be expressed, and the auditor’s report cannot be dated, before the date of the written representations. Further, the written representations should be for all financial statements and period or periods referred to in the auditor’s report. Management needs to reaffirm that the written representations it previously made with respect to the prior periods remain appropriate. The auditor and management may agree to a form of written representation that updates written representations relating to the prior periods by addressing whether there are any changes to such written representations and, if so, what they are. AUDITOR’S DOUBT AS TO THE RELIABILITY OF WRITTEN REPRESENTATIONS AND WRITTEN REPRESENTATIONS REQUESTED NOT PROVIDED If the auditor has concerns about the competence, integrity, ethical values or diligence of management, or about its commitment to or enforcement of these, the auditor should determine the effect that such concerns may have on the reliability of representations (oral or written) and audit evidence in general. If the auditor concludes that the written representations are not reliable, the auditor should take appropriate actions, including determining the possible effects on the opinion in the auditor’s report in accordance with PSA 705. If management does not provide one or more of the requested written representations, the auditor should: A. Discuss the matter with management. B. Re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general. C. Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in accordance with PSA 705. However, the auditor is required disclaim an opinion on the financial statements in accordance with PSA 705 if: A. The auditor concludes that there is sufficient doubt about the integrity of management such that the
Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014
Page|6 of 9
written representations about management’s responsibilities are not reliable. The written representations about management’s responsibilities are not provided by management.
B.
A SAMPLE MANAGEMENT REPRESENTATION LETTER [Entity Letterhead] [Date] To [Auditor’s Name] This representation letter is provided in connection with your audit of the financial statements of ABC Company for the year ended December 31, 2012 for the purpose of expressing an opinion as to whether the financial statements are presented fairly, in all material respects, in accordance with Philippine Financial Reporting Standards. We confirm, to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves: Financial Statements 1.
2.
3.
4.
5.
6.
We have fulfilled our responsibilities for the preparation and presentation of the financial statements as set out in the terms of the audit engagement dated [insert date] and, in particular, the financial statements are fairly presented in accordance with Philippine Financial Reporting Standards. Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable. (PSA 540) Related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of Philippine Financial Reporting Standards. (PSA 550) All events subsequent to the date of the financial statements and for which Philippine Financial Reporting Standards require adjustment or disclosure have been adjusted or disclosed. (PSA 560) The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is attached to the representation letter. (PSA 450) [Any other matters that the auditor may consider necessary]
Information Provided 7. We have provided you with: All information, such as records and documentation, and other matters that are relevant to the preparation and presentation of the financial statements. Additional information that you have requested from us. Unrestricted access to those within the entity. 8. All transactions have been recorded in the accounting records and are reflected in the financial statements. 9. We have disclosed to you the results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud. (PSA 240) 10. We have disclosed to you all information in relation to fraud or suspected fraud that we are aware of and that affects the entity and involves: Management. Employees who have significant roles in internal control. Others where the fraud could have a material effect on the financial statements.
10. We have disclosed to you all information in relation to allegations of fraud, or suspected fraud, affecting the entity’s financial statements communicated by employees, former employees, analysts, regulators or others. (PSA 240) 11. We have disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements. (PSA 250) 12. We have disclosed to you the identity of the entity’s related parties and all the related party relationships and transactions of which we are aware. (PSA 550) 13. [Any other matters that the auditor may consider necessary] (Senior Executive Officer) (Senior Financial Officer)
OTHER AUDIT COMPLETION PROCEDURES Other audit procedures performed at the completion stage of the audit include the following: A. Performing final analytical procedures. PSA 520 requires the auditor to design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity. Analytical procedures applied in this stage should focus on: Assessing the validity of the conclusions reached and evaluating the overall financial statement presentation. The conclusions drawn from the results of analytical procedures designed and performed in the overall review stage are intended to corroborate conclusions formed during the audit of individual components or elements of the financial statements. This assists the auditor to draw reasonable conclusions on which to base the auditor’s opinion. Identifying unusual fluctuations that were not previously identified. The results of the analytical procedures performed at the overall review stage may identify a previously unrecognized risk of material misstatement. In circumstances where a previously unrecognized risk has been identified, the auditor is required to revise the auditor’s assessment of the risks of material misstatement and modify the further planned audit procedures accordingly. Reviewing the working papers and drawing conclusions on the results of the audit procedures performed.
B.
A review of working papers or the audit documentation is undertaken at the engagement as a final check to ensure that all significant matters and problems have been identified, considered and satisfactorily resolved. This wrap-up review allows evaluating the performance of lessexperienced personnel, quality control and reduction of bias. Working papers may be reviewed two or three times by different members of the audit team. C. Obtaining the approval of the client regarding disclosures and any adjustments made to the financial statements. Since the client is the party responsible for the financial statements, approval must first be
Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014
Page|7 of 9
D.
obtained for the proposed adjusting entries to the statements. If management does not agree that a misstatement has occurred or otherwise decides not to correct the misstatement, the auditor includes the details of the misstatements on a summary of audit differences which shall form part of the audit working papers. Evaluation of the overall financial statements presentation. After reaching an agreement concerning which proposed audit adjustments should be included, the financial statements is prepared by the management which may first be drafted by the auditor. The mathematical accuracy of the statements must be tested by recomputing balances and tracing reported numbers to specific references within the working papers. Additionally, most auditors use a disclosure checklist to make sure that all required information has been included in the financial statements. Such checklist should be completed and reviewed by experienced members of the audit team. However, the checklist is not to be considered as a substitute of the auditor’s own knowledge of the acceptable financial reporting framework.
E.
F.
Review of other information and documents that contain the audited financial statements and ascertain their consistency. Other information in the annual report of the client and documents used in securities offering is not part of the financial report and is not covered by the auditor’s report. However, the auditor should review these other information to identify material inconsistencies and misstatements of facts which might mislead the users of the auditor’s report. Communication with management and those charged with governance. Communication of audit issues and results to management should be made. PSA 260 and PSA 265 provide guidance on this matter.
COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE (PSA 260) An effective two way communication between the auditor and the management and those charged with governance is an important aspect of the audit. This communication assists: A. The auditor and those charged with governance in understanding matters related to the audit in context, and in developing a constructive working relationship. This relationship is developed while maintaining the auditor’s independence and objectivity. B. The auditor in obtaining from those charged with governance information relevant to the audit. C. Those charged with governance in fulfilling their responsibility to oversee the financial reporting process, thereby reducing the risks of material misstatement of the financial statements. WITH WHOM TO COMMUNICATE The auditor should determine the appropriate person(s) within the entity’s governance structure with whom to communicate. Governance structures vary by jurisdiction and by entity, reflecting influences such as different cultural and legal backgrounds, and size and ownership characteristics. When the auditor communicates with a subgroup of those charged with governance, for example, an audit committee, or an individual, the auditor should determine whether the auditor also needs to communicate with the governing body. In some cases, all of those charged with governance are involved in managing the entity, for example, a small business where a single owner manages the entity and no one else has a governance role. In these cases, if matters required by PSAs are communicated with person(s) with management responsibilities, and those person(s) also have
governance responsibilities, the matters need not be communicated again with those same person(s) in their governance role. The auditor should nonetheless be satisfied that communication with person(s) with management responsibilities adequately informs all of those with whom the auditor would otherwise communicate in their governance capacity. MATTERS TO BE COMMUNICATED The auditor should communicate with those charged with governance: A.
The responsibilities of the auditor in relation to the financial statement audit, including that: The auditor is responsible for forming and expressing an opinion on the financial statements that have been prepared by management with the oversight of those charged with governance. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities.
B.
An overview of the planned scope and timing of the audit. Communication regarding the planned scope and timing of the audit may: Assist those charged with governance to understand better the consequences of the auditor’s work, to discuss issues of risk and materiality with the auditor, and to identify any areas in which they may request the auditor to undertake additional procedures. Assist the auditor to understand better the entity and its environment. However, care should be observed when communicating with those charged with governance about the planned scope and timing of the audit so as not to compromise the effectiveness of the audit, particularly where some or all of those charged with governance are involved in managing the entity.
C. Significant findings on the audit including: The auditor’s views about significant qualitative aspects of the entity’s accounting practices including accounting policies, accounting estimates and financial statement disclosures. Significant difficulties, if any, encountered during the audit. Unless all of those charged with governance are involved in managing the entity: a. Significant deficiencies, if any, in the design, implementation or operating effectiveness of internal control that have come to the auditor’s attention and have been communicated to management. b. Significant matters, if any, arising from the audit that were discussed or subject to correspondence with management. c. Written representations the auditor is requesting. Other matters arising from the audit that, in the auditor’s professional judgment, are significant to the oversight of the financial reporting process, if any. D. In the case of listed entities, the auditor should communicate with those charged with governance: A statement that the engagement team and others in the firm as appropriate, the firm and, when applicable, network firms have complied with relevant ethical requirements with regards to independence. All relationships and other matters between the firm, network firms, and the entity that, in
Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014
Page|8 of 9
the auditor’s professional judgment, may reasonably be thought to bear on independence. The related safeguards that have been applied to eliminate identified threats to independence or reduce them to an acceptable level.
ESTABLISHING THE COMMUNICATION PROCESS The auditor should communicate with those charged with governance with the form, timing and expected general content of communications as follows: A. The communication with those charged with governance regarding significant findings from the audit should be in writing when, in the auditor’s professional judgment, oral communication would not be adequate. Written communications need not include all matters that arose during the course of the audit. B.
The communication should be done on a timely basis. The appropriate timing for communications will vary with the circumstances of the engagement. Relevant circumstances include the significance and nature of the matter, and the action expected to be taken by those charged with governance
C. The communication between the auditor and those charged with governance should be adequate for the purpose of the audit. The auditor need not design specific procedures to support the evaluation of the two-way communication between the auditor and those charged with governance. Rather, that evaluation may be based on observations resulting from audit procedures performed for other purposes. If it has not, the auditor should evaluate the effect, if any, on the auditor’s assessment of the risks of material misstatement and ability to obtain sufficient appropriate audit evidence, and should take appropriate action. DOCUMENTATION Where matters required to be communicated are communicated orally, the auditor should document them, and when and to whom they were communicated. Documentation of oral communication may include a copy of minutes prepared by the entity retained as part of the audit documentation where those minutes are an appropriate record of the communication. Where matters have been communicated in writing, the auditor should retain a copy of the communication as part of the audit documentation.
Prepared by: Mohammad Muariff S. Balang, CPA, First Semester, AY 2013-2014
Page|9 of 9
