AUDIT

PROCESS

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SUBSEQUENT EVENT

The second part of completing the audit is the review for subsequent events.
The auditor must review transactions and events occurring after the balance sheet date to
determine whether anything occurred that might affect the fair presentation or disclosure
of the current period statements.
The auditing procedures required by ISA 560, to verify these transactions and events are
commonly called the review for subsequent events or post balance-sheet review.

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 SUBSEQUENT EVENT

The auditor's responsibility for reviewing for subsequent events is normally limited to
the period beginning with the balance sheet date and ending with the date of the
auditor's report.

Because the date of the auditor's report corresponds to the completion of the important
auditing procedures in the client's office, the subsequent events review should be
completed near the end of the engagement.

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 TYPES OF Such subsequent period events as the following require an
adjustment of account balances in the current year's financial

SUBSEQUENT EVENT statements if the amounts are material:

• Declaration of bankruptcy by a customer with an outstanding
accounts receivable balance because of deteriorating financial
condition
Subsequent events require consideration by
• Settlement of a litigation at an amount different from the
management and evaluation by the auditor
amount recorded on the books
1. Those that have a direct effect on the • Disposal of equipment not being used in operations at a price
financial statements and require adjustment below the current book value
These events or transactions provide additional • Sale of investments at a price below recorded cost
information to management in determining the
fair presentation of account balances as of the
balance sheet date and to auditors in verifying the
balances. For example, if the auditor is having
difficulty determining the correct valuation of
inventory because of obsolescence, the sale of
raw material inventory as scrap in the subsequent
period would indicate the correct value of the
inventory as of the balance sheet date. ALPINE SKI HOUSE 4
 TYPES OF
Following are examples of events or transactions occurring in
the subsequent period that may require disclosure rather than

SUBSEQUENT EVENT an adjustment in the financial statements:

• Decline in the market value of securities held for temporary
investment or resale Issuance of bonds or equity securities
• Decline in the market value of inventory as a consequence
2. Those that have no direct effect on the
financial statements but for which disclosure is of government action barring further sale of a product
advisable subsequent events • Uninsured loss of inventories as a result of fire A merger or
an acquisition
This type provide evidence of conditions that
did not exist at the date of the balance sheet
being reported on but are so significant that
they require disclosure even though they do not
require adjustment

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The first category includes cut-off and valuation tests done as a
part of the tests of details of balances
AUDIT TEST
For example, subsequent period sales and acquisition
transactions s examined to determine whether the cut-off is
accurate

Audit procedures for the subsequent events review

Similarly, many valuation tests involving subsequent events are
can be conveniently divided into two categories
also performed as a part of the verification of account balances
procedures
As an example, it is common to test the collectability of Normally integrated as a part of the verification of
accounts receivable by reviewing subsequent period cash year end account balances
receipts
Those performed specifically for the purpose of
It is also a normal audit procedure to compare the subsequent discovering events or transactions that must be
period purchase price of inventory with the recorded cost as a recognised as subsequent events
test of lower of cost or market valuation
The procedures for cut-off and valuation have been discussed
sufficiently in preceding chapters and are not repeated here

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Inquiries of management about subsequent events must be held
with the proper client personnel to obtain meaningful answers
For example, discussing tax or union matters with the accounts
receivable supervisor would not be appropriate
Most inquiries should be held with the controller, the vice
presidents, and the president, depending on the information
desired
Correspond with Solicitors Correspondence with solicitors, which
was previously discussed, takes place as a part of the search for
contingent liabilities
In obtaining letters from solicitors, the auditor must remember the
responsibility for testing for subsequent events up to the date of the
audit report
A common approach is to request the solicitor to date and mail the
letter as of the expected completion date for fieldwork
AUDIT TEST
The second category of tests is performed
specifically to obtain information to incorporate
into the current year's account balances or
footnotes. These tests include the following
Inquire of Management Inquiries vary from client
to client but normally are about potential
contingent liabilities or commitments, significant
changes in the assets or capital structure of the
company, the current status of items that were
not completely resolved at the balance sheet date,
and unusual adjustments made subsequent to the
balance sheet date.
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 PERFORM FINAL ANALYTICAL PROCEDURE
Analytical procedures done during the completion of the
audit are useful as a final review for material misstatements
or financial problems not noted during other testing and to
help the auditor take a final objective look at the financial
statements
It is common for a partner to do the analytical procedures
during the final review of audit documentation and financial
statements
Typically, a partner has a good understanding of the client
and its business because of ongoing relationships
Knowledge of the client's business combined with effective
analytical procedures help identify possible oversights in an
audit
When performing analytical procedures during the final
review stage, the partner would generally read the financial
statements, including footnotes, and consider
(1) the adequacy of evidence gathered about unusual or
unexpected account balances or relationships identified
during planning or while conducting the audit and
(2) unusual or unexpected account balances or relationships
that were not previously identified. Results from final
analytical procedures may indicate that additional audit
evidence is necessary
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 EVALUATE GOING-CONCERN ASSUMPTION
ISA 570, requires the auditor to evaluate whether there is a
substantial doubt about a client's ability to continue as a going
concern for at least 1 year beyond the balance sheet date
That assessment is initially made as a part of planning but is
revised when significant new information is obtained
For example, if the auditor discovered during the audit that the
company had defaulted on a loan, lost its primary customer, or
decided to dispose of substantial assets to pay off loans, the
initial assessment of going concern may need revision
A final assessment is desirable after all evidence has been
accumulated and proposed audit adjustments have been
incorporated into the financial statements
Analytical procedures are one of the most important types
of evidence to assess going concern
Discussions with management and a review of future plans
are important considerations in evaluating analytical
procedures
When the auditor has reservations about the going-
concern assumption, it is necessary to evaluate
management's plans to avoid bankruptcy and the
feasibility of achieving these plans
Making the final decision whether to issue a report with a
going-concern explanatory paragraph is typically time-
consuming and difficult ALPINE SKI HOUSE

OBTAIN MANAGEMENT
REPRESENTATION LETTER
ISA 580, requires the auditor to obtain a letter of
representation documenting management's most
important oral representations during the audit
The client representation letter is prepared on the
client's letterhead, addressed to the audit firm,
and signed by high-level corporate officials,
usually the president and chief financial officer
There are two purposes of the client letter of
representation:
1. To impress upon management its responsibility for the assertions in
the financial statements.
For example, if the letter of representation includes a reference to
pledged assets and contingent liabilities, honest management may be
reminded of its unintentional failure to disclose the information
adequately
To fulfil this objective, the letter of representation should be
sufficiently detailed to act as a reminder to management
2. To document the responses from management to inquiries about
various aspects of the audit
This provides written documentation of client representations in the
event of disagreement or a lawsuit between the auditor and client
Because it is more formal than oral communication, a letter of
representation also helps reduce misunderstandings between
management and the auditor
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 1. Financial statements Management's acknowledgement of its

OBTAIN MANAGEMENT responsibility for the fair presentation in the financial statements of
financial position ,results of operations, and cash flows in
REPRESENTATION LETTER conformity with approved accounting standards
- Management's belief that the financial statements are fairly
presented in conformity with approved accounting standards

The letter should be dated no earlier than the

2. Completeness of information
date of the auditor's report to make sure that
there are representations related to the • Availability of all financial records and related data
subsequent events review • Completeness and availability of all minutes of meetings of
shareholders, directors, and committees of directors
The letter implies that it has originated with the
• Absence of unrecorded transactions
client, but it is common practice for the auditor to
prepare the letter and request the client to type it
on the company's letterhead and sign it

ISA 580 suggests four categories of specific

matters that should be included
The four categories are as follows, with examples
in each category
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OBTAIN MANAGEMENT
REPRESENTATION LETTER
3. Recognition, measurement, and disclosure
• Management's belief that the effects of any
uncorrected financial statement misstatements
are immaterial to the financial statements
• Information concerning fraud involving
(1) management,
(2) employees who have significant roles in
internal control, or
(3) (3) others where the fraud could have a
material effect on the financial statements
• Unasserted claims or assessments that the entity's lawyer has
advised are probable of assertion and must be disclosed in
accordance with MASB Standard20, Provisions, Contingent
Liabilities and Contingent Assets
• Satisfactory title to assets, liens or encumbrances on assets, assets
pledged as collateral
• Compliance with aspects of contractual agreements that may
affect the financial statements
4. Subsequent events
• Bankruptcy of a major customer with an outstanding account
receivable at the balance sheet date
• A merger or acquisition after the balance sheet date
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 CONSIDER INFORMATION ACCOMPANYING THE BASIC
FINANCIAL STATEMENT
Clients often request auditors to include additional
information beyond the basic financial statements in the set
of materials prepared for management or outside users
ISA 720, Other Information in Documents Containing Audited
Financial Statements, refers to "other Financial information"
as other financial or non-financial information that is included
in the company's annual report
The ISA requires the auditor to read such other information
to identify material inconsistencies with the audited financial
statements
The final evaluation the adequacy of the evidence is a review
by the auditor of the entire audit to determine whether all
important aspects have been adequately tested, considering
all circumstances of the engagement
A major step in this process audit program to make sure
that all parts have been accurately completed and
documented and that all audit objectives have been met
Detailed comparative statements supporting the control
totals on the primary financial statements for accounts such
as cost of goods sold, operating expenses, and
miscellaneous assets
• Supplementary information required by the regulators
• Statistical data for past years in the form of ratios and
trends
• A schedule of insurance coverage
• Specific comments on the changes that have taken place
in the statements
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 CONSIDER INFORMATION ACCOMPANYING THE BASIC

EVIDENCE SUPPORTS AUDITOR’S OPINION

An important part of evaluating whether the financial
statements are fairly stated is summarising the
misstatements uncovered in the audit
When the auditor uncovers misstatements that are in
themselves material, entries should be proposed to the client
to correct the statements
It may be difficult to determine the appropriate amount of
adjustment because the true value of a misstatement may be
unknown; nevertheless, it is the auditor's responsibility to
decide on the required adjustment
In addition to the material misstatements, there are often a
large number of immaterial misstatements discovered that
are not adjusted at the time they are found
It is necessary to combine individually immaterial
misstatements to evaluate whether the combined amount is
material.
The auditor can keep track of these misstatements and
combine them in several different ways, but many auditors
use a convenient method called an unadjusted misstatement
audit schedule or summary of possible misstatements.
It is relatively easy to evaluate the overall significance of
several immaterial misstatements with this type of audit
schedule ALPINE SKI HOUSE 14
THANK
YOU

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