6.

Give the three major time periods (subsequent to balance sheet date) of
concern to the auditor.

When the auditor becomes aware of events which materially affect the
financial statements, the auditor should consider whether such events are
properly accounted for and adequately disclosed in the financial
statements. There are three major time periods involved in considering
subsequent events:

a) The period from the balance sheet date up to the date of the auditor's
report
b) The period from the date of the auditor's report up to the date when the
financial statements are issued
c) The period from the time the financial statements were issued
onwards.

7. Explain the going concern assumption. Who is responsible for

assessing the reasonableness of the going concern assumption?

Under the going concern basis of accounting, the financial

statements are prepared on the assumption that the entity is a going
concern and will continue its operations for the foreseeable future,
General purpose financial statements are prepared using the going
concern basis of accounting, unless management either intends to
liquidate the entity or to cease operations, or has no realistic alternative
but to do so. Special purpose financial statements may or may not be
prepared in accordance with a financial reporting framework for which the
going concern basis of accounting is relevant (e.g., the going concern
basis of accounting is not relevant for some financial statements prepared
on a tax basis in particular jurisdictions). When the use of the going
concern basis of accounting is appropriate, 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.

8. Give at least three examples of conditions and events which may cause
the auditor to have doubt about the entity's ability to continue as a
going concern.

Financial Events and Conditions

a) Net liability or net current liability position. schedules and potential

sources of replacement financing before it can satisfy
b) Fixed-term borrowings approaching maturity without realistic prospects
of renewal or repayment; or excessive reliance on short-term
borrowings to finance long-term assets.
 c) Indications of withdrawal of financial support by debtors and other
creditors.
d) Negative operating cash flows indicated by historical or prospective
financial statements.
e) Adverse key financial ratios.
f) Substantial operating losses or significant deterioration in the value of
g) assets used to generate cash flows.
h) Arrears or discontinuance of dividends.
i) Inability to pay creditors on due dates.
j) Inability to comply with the terms of loan agreements.
k) Change from credit to cash-on-delivery transactions with suppliers.
l) Inability to obtain financing for essential new product development or
other essential investments.

Operating Events and Conditions

a) Loss of key management without replacement.

b) Loss of a major market, franchise, license, or principal supplier.
c) Labor difficulties or shortages of important supplies.

Other Events and Conditions

a) Non-compliance with capital or other statutory requirements.

b) Pending legal or regulatory proceedings against the entity that may, if
successful, result in claims that are unlikely to be satisfied.
c) Changes in legislation or government policy expected to adversely
affect the entity.

9. What are related parties? What are related party transactions?

PSA SS0 on Related Parties provides guidance on identifying and

evaluating related parties and related party transactions. The auditor
should perform audit procedures designed to obtain sufficient appropriate
audit evidence regarding the identification and disclosure by management
of related parties and the effect of related party transactions that are
material to the financial statements. However, an audit cannot be
expected to detect all related party transactions

Management Responsibility

Management is responsible for the identification and disclosure of

related parties and transactions with such parties. This responsibility
requires management to implement adequate accounting and internal
control systems to ensure that transactions with related parties are
 appropriately identified in the accounting records and disclosed in the
financial statements.

Auditor's Responsibility

The auditor needs to have a level of knowledge of the entity's

business and industry that will enable identification of the events,
transactions and practices that may have a material effect on the financial
statements. See Chapter Eight, Audit Planning, for various reasons why
related parties and related party transactions are considered in an audit of
financial statements,

Existence and Disclosure of Related Parties

The auditor should review information provided by the directors and

management identifying the names of all known related parties and should
perform the following procedures in respect of the completeness of this
information

Transactions With Related Parties

The auditor should review information provided by directors and

management identifying related party transactions and should be alert for
other material related party transactions When obtaining an understanding
of the accounting and internal control systems and making a preliminary
assessment of control risk, the auditor should consider the adequacy of
control procedures over the authorization and recording of related party
transactions

During the course of the audit, the auditor needs to be alert for
transactions which appear unusual in the circumstances and may indicate
the existence of previously unidentified related parties.

10.What is the main concern of the auditor regarding related parties?

During the course of the audit, the auditor carries out procedures which
may identify the existence of transactions with related parties Examples include
the following:

a) Performing detailed tests of transactions and balances.

b) Reviewing minutes of meetings of shareholders and directors.
 c) Reviewing accounting records for large or unusual transactions or
balances, paying particular attention to transactions recognized at
or near the end of the reporting period.
d) Reviewing confirmations of loans receivable and payable and
confirmations from banks. Such a review may indicate guarantor
relationship and other related party transactions.
e) Reviewing investment transactions, for example, purchase or sale
of an equity interest in a joint venture or other entity.

In examining the identified related party transactions, the auditor should

obtain sufficient appropriate audit evidence as to whether these transactions
have been properly recorded and disclosed. Given the nature of related party
relationships, evidence of a related party transaction may be limited, for example,
regarding the existence of inventory held by a related party on consignment or an
instruction from a parent company to a subsidiary to record a royalty expense.
Because of the limited availability of appropriate evidence about such
transactions, the auditor would consider performing procedures such as:

a) Confirming the terms and amount of the transaction with the related
party
b) Inspecting evidence in possession of the related party.
c) Confirming or discussing information with persons associated with the
transaction, such as banks, lawyers, guarantors and agents.

Written management representations should be requested from the client

regarding related parties and related party transactions.