Module 12: Audit Review and Finalization the financial statements are issued, they may need to take

action.
Learning Objectives:
Timeline for Subsequent Events and Auditor’s
1. Subsequent events Responsibilities:
2. Going concern
3. Written representations ● Active Duty:
4. Overall review of financial statements ○ At year-end, auditors review subsequent
events.
○ The auditor signs the report.
● Passive Duty:
SUBSEQUENT EVENTS
○ After signing the report, auditors ensure that
any events between the signed report and
Subsequent events are occurrences that happen between
issuance of financial statements are
the date of the financial statements and the date of the
considered.
auditor’s report, as well as facts that become known to the
○ Once the financial statements are issued or
auditor after the report date. Auditors must evaluate the
approved by members, the auditors’
impact of these events on the financial statements and
responsibility for subsequent events
their audit opinion.
diminishes.
PAS 10 - Events After Reporting Period
Events Occurring Up to Date of the Auditor’s Report
PAS 10 outlines how events occurring after the end of the
Auditors are required to perform procedures to ensure that
reporting period should be handled in financial statements.
all events up to the date of the auditor’s report that may
These events are divided into two types:
require adjustment or disclosure in the financial
statements have been identified.
1. Adjusting Events:
○ Provide evidence of conditions that existed at
These procedures go beyond testing specific transactions
the year-end.
after the period end, such as cut-off tests. They focus on
○ Examples:
events that could impact the financial statements, even
■ Settlement of a court case
those with subjective judgment or preliminary data.
■ Sale of inventory after year-end that
shows net realizable value at year-end
■ Discovery of fraud or error in previous Audit Procedures to Test Subsequent Events
financial statements
2. Non-adjusting Events: 1. Inquiries of Management:
○ Relate to conditions that arose after year-end. ○ Status of items involving judgment.
○ Examples: ○ Status of items based on preliminary or
■ Dividends declared after year-end uncertain data.
■ Fire causing damage to major assets ○ New commitments, borrowings, or
■ Announcement of a major restructuring guarantees.
○ Sales or destruction of assets.
○ Changes in business structure (e.g., issuance
Auditor’s Objectives (PSA 560):
of shares/debentures).
○ Risk areas, provisions, contingencies, and
1. To gather sufficient appropriate audit evidence
unusual accounting adjustments.
about events between the date of the financial
○ Major events like going concern issues
statements and the date of the auditor’s report that
affecting accounting policies.
require adjustments or disclosures.
○ Litigation or claims.
2. To respond appropriately to facts that arise after the
2. Other Procedures:
auditor’s report date, which may necessitate an
○ Review management processes for identifying
amendment to the report if they were known earlier.
subsequent events.
○ Read board or committee meeting minutes for
Procedures unusual items.
○ Examine interim financial statements,
Auditors are responsible for reviewing subsequent events
budgets, and other management reports.
before signing the auditor’s report. If they become aware
of events between the date the report is signed and when
 ○ Obtain legal evidence regarding any ongoing 1. Discuss the matter with management and those
litigation or claims with client permission. charged with governance.
○ Request a written representation confirming 2. Evaluate whether the financial statements need to be
all events requiring adjustment or disclosure amended.
have been handled. 3. Determine how management will address the issue in
the financial statements.
Facts Discovered After the Date of the Auditor’s
Report but Before the Financial Statements are Issued If management amends the financial statements, the
auditor will:
After the auditor’s report is signed but before the financial
statements are issued, the responsibility for informing the ● Perform necessary procedures on the amendment.
auditor about material subsequent events falls on ● Ensure that anyone who received the previous
management. These events could affect the financial financial statements is informed about the changes.
statements. ● Issue a new or amended auditor's report, which
includes an explanatory paragraph (such as an
The auditor has no obligation to perform procedures or emphasis of matter or other matter paragraph)
make inquiries about the financial statements after the referring to the updated note in the financial
report date. However, if the auditor learns of a fact that statements explaining the amendment.
might have led to a change in the auditor’s opinion, the
auditor must: If management does not take appropriate action:

1. Discuss the matter with management and those ● The auditor will notify management and those charged
charged with governance. with governance that they will take steps to prevent
2. Evaluate whether the financial statements need to be reliance on the original report.
amended. ● If management still does not act, the auditor will take
3. Determine how management will address the issue in necessary steps to prevent reliance on the auditor's
the financial statements. report.

If changes are required, the auditor will:

GOING CONCERN
● Perform necessary audit procedures on the changes.
● Extend procedures to ensure events needing The going concern assumption is fundamental to the
adjustments or disclosures are properly reflected. preparation of financial statements. It assumes that an
● Issue a new auditor’s report on the amended financial entity will continue to operate in the foreseeable future,
statements. enabling assets and liabilities to be recorded based on the
expectation that the entity will realize its assets and
If management does not amend the financial statements: discharge its liabilities through normal operations.
● Before the original auditor’s report is issued, the If the going concern assumption is not appropriate—i.e.,
auditor will modify the opinion and issue the report. the entity is unlikely to continue its operations—then
● If the auditor’s report has already been provided and financial statements must be prepared on a liquidation or
the financial statements are issued without termination basis. This could involve reclassifying non-
amendment, the auditor will seek to prevent reliance current assets and liabilities as current, adjusting asset
on the original report. values to their realizable value, and providing for
additional liabilities or provisions due to the entity’s
Facts Discovered After the Financial Statements Have winding-down operations.
Been Issued
The going concern assumption is essential for financial
Once the financial statements are issued, auditors are not statement preparation and is guided by PAS 1 Presentation
required to perform additional procedures or inquiries of Financial Statements. Management must assess whether
regarding the statements. the entity can continue as a going concern.
However, if the auditor becomes aware of a fact that, if Since this assumption is critical, auditors allocate
known at the time of the report, may have led to changes significant attention to it during audits, following PSA
in the auditor’s opinion, they must: 570. The objectives of PSA 570 include:
1. Obtaining sufficient audit evidence regarding the use ● Degree of Uncertainty: Increases the further into the
of the going concern assumption. future the event or condition is.
2. Assessing if material uncertainties exist that could cast ● Size and Complexity: Larger and more complex
significant doubt on the entity’s ability to continue as entities may face more challenges.
a going concern. ● Nature and Condition of the Business: The nature of
3. Reporting in line with PSA 570. operations may affect the likelihood of sustaining
business continuity.
Examples of Going Concern Indicators (events or
conditions that could raise doubts about going concern) Management must make these judgments based on
are categorized into: information available at the time. However, new
information or events may arise, potentially leading to
1. Financial: changes in the assessment.
○ Net liabilities or current liabilities exceeding
assets. If management identifies material uncertainties that cast
○ Fixed borrowings nearing maturity with no doubt on the entity’s ability to continue as a going
prospects for renewal. concern, these uncertainties must be disclosed in the
○ Lack of financial support from creditors. financial statements.
○ Negative cash flows or deteriorating financial
ratios. If management concludes that the going concern
2. Operating: assumption is not appropriate, they must prepare the
○ Management planning to cease operations or financial statements on a different basis, such as
liquidate. liquidation or termination. In this case, they are required
○ Loss of key management or major to clearly disclose this fact and provide reasons for not
suppliers/customers. using the going concern assumption.
○ Labor strikes or shortages of essential
supplies. Management’s Assessment
3. Other:
○ Non-compliance with legal or regulatory Management may have already assessed whether the
requirements. entity can continue as a going concern. If they have, the
○ Pending legal actions or regulatory auditor should discuss this assessment with them.
proceedings that could lead to financial
claims. If management has not made an assessment, the auditor
○ Changes in laws or government policies will need to discuss why they intend to continue using the
adversely affecting the entity. going concern assumption.
○ Uninsured or underinsured major events (e.g.,
natural disasters). Auditors’ Responsibilities Regarding Management’s
Assessment
Management’s Responsibilities for Going Concern
During the audit, auditors must remain alert to events or
Management has important responsibilities when it comes conditions that may raise concerns about the entity's
to assessing a company’s ability to continue as a going ability to continue as a going concern. They have specific
concern. This is particularly outlined in PAS 1, which responsibilities related to management’s assessment:
requires management to assess the entity's ability to
operate as a going concern. 1. The auditor evaluates management’s assessment of
going concern.
Since financial statements are typically prepared on the 2. If management’s assessment covers less than 12
assumption that the entity will continue to operate, months from the financial statement date, the auditor
management must evaluate whether the entity can sustain will ask them to extend the assessment period to at
its operations in the foreseeable future. Even if the least 12 months.
financial reporting framework does not explicitly require 3. Additionally, auditors will inquire about any events or
this assessment, management still holds the responsibility conditions beyond the assessment period that may
to make this determination. impact the entity’s going concern status.

Management's assessment of going concern involves Events or Conditions Identified

judgment regarding uncertain future outcomes. This
judgment is influenced by: When events or conditions are identified that may raise
doubts about an entity’s ability to continue as a going
concern, auditors must gather sufficient evidence to assess  Auditor's opinion: The auditor gives an
if a material uncertainty exists. This includes: unmodified opinion (a clean report) but adds a
note called Material Uncertainty Related to
1. Requesting management’s assessment if it has not Going Concern. It’s like saying, “The financial
been done. statements are correct, but the company has
2. Evaluating management’s future plans and actions. challenges that may affect its future.”
3. Assessing the reliability of the data used in cash flow
forecasts and examining the assumptions made. Example:
4. Reviewing new information or facts that may have The company is losing money and has more debts than
become available since management’s initial assets. They’ve explained this situation clearly, so the
assessment. auditor adds a note but doesn’t change the overall report.
5. Obtaining written representations from
management and governance about their plans and
their feasibility.
Scenario 2: Disclosure is Incomplete or Missing
Audit Procedures for Going Concern Reviews
 What happens? The company has problems that
To assess a company's ability to continue as a going might affect its future, but it hasn’t disclosed these
concern, auditors may perform the following procedures: properly in the financial statements.

1. Analyze and discuss cash flow, profit, and other  Auditor's opinion: The auditor gives a qualified
relevant forecasts with management. opinion or an adverse opinion, depending on how
2. Review the entity’s latest interim financial statements serious the omission is.
or management accounts.
3. Examine loan agreements, debentures, and check for o Qualified Opinion: This means the
any breaches. auditor says, “The financial statements are
4. Check minutes from shareholder, board, and key mostly correct, but there’s an issue with
committee meetings for signs of financial difficulties. how the going concern uncertainty is
5. Consult the entity’s lawyer about litigation or claims. explained.”
6. Confirm financial support arrangements with related
and third parties. o Adverse Opinion: This means the auditor
7. Assess the financial capacity of these parties to says, “The financial statements are not
provide additional funding. correct because they failed to explain the
8. Review the status of unfulfilled customer orders. serious problems with the company’s
9. Analyze events after the reporting period that may future.”
impact going concern.
10. Verify borrowing facilities, including their existence, Example:
terms, and adequacy. The company is losing money and has debts coming due
11. Review regulatory reports for any potential impacts.. soon, but it doesn’t tell investors about this in its financial
statements. The auditor gives a negative opinion because
Audit Reporting: Going Concern Considerations this is a big deal.

Auditors must assess whether a material uncertainty exists

that could affect an entity’s ability to continue as a going
concern. Depending on the findings, this will impact the Scenario 3: Going Concern is Not Appropriate
auditor’s report. Below are the scenarios and their
corresponding audit opinions:  What happens? The company is in such bad
shape that it cannot continue operating as a going
concern, and its financial statements should have
been prepared differently (e.g., assuming
Scenario 1: Everything is Properly Disclosed liquidation instead of normal operations).

 What happens? The company’s financial  Auditor's opinion: The auditor gives an adverse
situation has problems (like big losses), but the opinion because the financial statements are
company has disclosed (explained) these wrong.
problems properly in its financial statements.
Example: ● Supporting other audit evidence when necessary.
The company is planning to close down, but it still ● Responding appropriately if management does not
prepared its financial statements as if it would keep provide requested written representations.
running. This is incorrect, so the auditor strongly
disagrees. Written representations are needed to confirm
management’s responsibilities, comply with other ISA
requirements, and support audit evidence.

Scenario 4: Management Refuses to Assess Going Written Representations About Management’s

Concern Responsibilities
The auditor will ask management to provide written
 What happens? The company’s management statements about the following:
won’t assess whether it can continue as a going
concern, or they refuse to extend the assessment a. Confirming that they are responsible for preparing and
period (e.g., beyond 12 months). presenting the financial statements according to the
agreed terms of the audit and the applicable reporting
 Auditor's opinion: The auditor may give a standards.
qualified opinion or a disclaimer of opinion. b. Confirming that they have provided all necessary
information agreed upon in the audit terms, and that
o Disclaimer of Opinion: This means the all transactions have been properly recorded and
auditor says, “I cannot express an opinion included in the financial statements.
because I didn’t get enough information
to verify the going concern assumption.” Other Written Representations
In addition to the standard written representations required
Example: by PSAs, auditors may request additional ones if
The company’s management doesn’t want to assess if they necessary to support audit evidence. These could include:
can survive the next year. The auditor may refuse to give a
full opinion because they don’t have enough information. ● Confirmation that accounting policies are appropriate
● Plans or intentions affecting asset and liability values
● Actual and contingent liabilities
● Ownership or control of assets, and any encumbrances
Communicating to Those Charged with Governance ● Compliance with laws, regulations, and contractual
agreements
Auditors must inform those charged with governance ● Deficiencies in internal control communicated to the
about events or conditions that could raise doubts about an auditor
entity's ability to continue as a going concern. This ● Specific assertions in the financial statements
includes: ● Reasonableness of significant assumptions used in
estimates
● Whether these events or conditions indicate a ● Disclosure of all subsequent events requiring
material uncertainty. adjustment or disclosure
● Whether the use of the going concern assumption ● Disclosure of uncorrected misstatements and their
is appropriate in the financial statements. immateriality
● Results of management’s risk assessment of financial
statement misstatements due to fraud
● Disclosure of fraud or suspected fraud involving key
WRITTEN REPRESENTATIONS
personnel or others
Written representations are statements provided by ● Disclosure of non-compliance with laws or
management to the auditor to confirm certain matters or regulations
support audit evidence. These do not include financial
Quality and Reliability of Written Representations
statements or supporting records.
Written representations are a form of audit evidence, but
PSA 580 outlines the auditor’s objectives for obtaining
they come from management, so they aren’t enough on
written representations:
their own to support all audit findings. While reliable,
● Confirming that management has met its written representations don’t replace the need for other
responsibilities as part of the audit process. audit evidence that verifies management’s responsibilities
or specific statements in the financial statements..
Obtaining Written Representations Key considerations include:
Written representations are typically in the form of a letter
to the auditor. During the audit, auditors identify the areas a. Ensuring the financial statements reflect information
where written representations are needed and inform and conclusions previously obtained.
management about these. At the end of the audit, auditors b. Identifying any new factors that may affect the
provide a draft letter for management to review, sign, and presentation or disclosure in the financial statements.
print on company letterhead. The date on the c. Using analytical procedures, such as comparing
representation should be as close as possible to, but not financial data with other relevant information, to
after, the auditor’s report date. Written representations are assess overall consistency.
usually obtained from those responsible for preparing the d. Evaluating if the presentation is influenced by the
financial statements, like the CEO or CFO, but in some directors’ bias to present the financial statements in a
cases, they may come from those charged with favorable or unfavorable way.
governance as well. e. Assessing the impact of uncorrected misstatements on
the financial statements, including those from
Doubt About the Reliability of Written previous audits.
Representations
At the final stage, auditors conduct a thorough review
If written representations conflict with other audit using accounting ratios, changes in products/customers,
evidence, auditors must investigate further to resolve the trends, and other factors, ensuring any significant
issue. If the inconsistency cannot be resolved, auditors fluctuations are adequately investigated through
may reassess the trustworthiness of management and the management discussions and additional audit procedures
impact on the reliability of audit evidence. If the as needed.
representations are deemed unreliable, auditors will take
appropriate actions, which may affect the auditor's report. Auditors review financial statements to ensure that
accounting policies are consistently applied. They check if
If management doesn’t provide the requested written new accounting policies are appropriate and ensure that all
representations, the auditor will: financial information is consistent. The goal is to make
sure the financial statements provide a true and fair view
● Discuss the issue with management of the entity’s financial position.
● Review management’s integrity and how it affects
the reliability of audit evidence Treatment of Misstatements
● Take necessary steps, including adjusting the A misstatement is any difference between the reported
auditor’s report if needed. financial statement item and what should be reported
according to the applicable accounting rules.
Misstatements can result from errors or fraud. An
uncorrected misstatement is one that auditors identify
OVERALL REVIEW OF FINANCIAL during the audit but have not corrected.
STATEMENTS
PSA 450 requires auditors to accumulate misstatements,
After performing most of the detailed audit procedures, except those that are clearly insignificant. Misstatements
auditors will have a draft of the financial statements can be factual (clear errors), judgmental (based on
supported by sufficient audit evidence. At the end of the management’s decisions), or projected (estimates made
audit process, auditors typically conduct an overall from sampling).
review. This review, combined with other audit evidence,
ensures a reasonable basis for the auditor’s opinion. It is During the audit completion, auditors assess whether the
usually done by a senior member of the audit team with total uncorrected misstatements are significant by
the necessary skills and experience. reassessing materiality. They evaluate the size and nature
of these misstatements and consider how they affect the
Auditors should ensure that financial statements are financial statements as a whole.
consistent with their understanding of the entity’s business
and the results of other audit procedures. This includes Communication of Uncorrected Misstatements
evaluating whether the manner of disclosure is fair. PSA 450 requires auditors to communicate any
uncorrected misstatements and their impact to those
To achieve this, auditors apply analytical procedures near charged with governance. Significant uncorrected
the end of the audit, as outlined in PSA 520. These misstatements should be identified individually. Auditors
procedures help the auditor form an overall conclusion must request these misstatements be corrected and also
about the consistency of the financial statements. report any effects related to prior periods.
The auditor will seek a written confirmation from
management and those in charge of governance, asking if
they believe the uncorrected misstatements are immaterial,
both individually and collectively, to the overall financial
statements. A summary of these misstatements is included
in the representation document.

Misstatements in Disclosures
Judgement is needed to decide if a misstatement in
qualitative disclosures is material or not. PSA 450
provides examples of misstatements that may be
significant.

For insurance or banking companies, errors such as

incomplete descriptions of capital management policies
may be material.

In mining or similar industries, omitting information about

events causing impairment losses, like a long-term drop in
metal demand, can be significant.

Incorrect descriptions of key accounting policies related to

financial statements (e.g., assets, income, or cash flow) are
also considered misstatements.

For businesses operating internationally, inadequate

explanations of exchange rate sensitivities may indicate a
misstatement.

In some cases, misstatements in disclosures could suggest

fraud—especially if they result from management bias or
aim to hide important financial information. Professional
skepticism is essential when evaluating these
misstatements.

Documentation
PSA 450 requires auditors to document the following:

● The threshold below which misstatements are

considered clearly trivial.
● All misstatements identified during the audit, whether
they have been corrected or not.
● The auditor’s conclusion on whether uncorrected
misstatements are material, along with the reasoning
behind that conclusion.