- 20 Marks
AA – L2 – Q37 – Audit of Financial Statements
Question
(a) Describe external auditor’s responsibilities and the work that the auditors must perform in relation to an audit client’s ability to continue as a going concern.
(b) Describe the possible auditor’s reports that can be issued where the ability of a company to continue as a going concern status is called into question; your answer should describe the circumstances in which they can be issued.
(c) You have been asked by your client, a garage proprietor, to advise on a system of internal control for cash sales. Set out the points you would take into consideration before giving your recommendations.
Answer
(a) (i) Responsibilities
According to ISA 570 the auditor’s responsibilities are to:
- obtain sufficient, appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements
- conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, and
- report in accordance with ISA 570.
(ii) Audit work
As part of the overall risk assessment, the auditor must consider whether there are any events or conditions which may cast significant doubt on the company’s ability to continue as a going concern.
The auditor shall remain alert throughout the audit for events or conditions that may cast significant doubt on the company’s ability to continue as a going concern.
The auditor shall evaluate management’s assessment of the company’s ability to continue as a going concern.
The auditor must consider whether the period used by management to in their assessment of the company’s ability to continue as a going concern is sufficient. If the period covers less than twelve months from the date of the financial statements, the auditor shall ask management to extend the period to twelve months from that date.
The auditor shall consider whether management’s assessment of the company’s ability to continue as a going concern includes all relevant information of which the auditor is aware as a result of the audit.
The auditor shall enquire of management its knowledge of events or conditions beyond the period of the assessment that may cast significant doubt on the company’s ability to continue as a going concern.
If events or conditions have been identified which may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to confirm whether a material uncertainty exists through performing additional audit procedures. This will include: - Requesting management to make an assessment of the company’s ability to continue as a going concern if they have not already made one
- Evaluating management’s plans for future action in relation to its going concern assessment; are these likely to improve the situation and how feasible are they?
- Analysing any cash flow forecast prepared, including evaluating the reliability of the underlying data, and determining if the underlying assumptions have adequate support.
- Considering if any additional facts or information have become available since management made its assessment.
- Requesting written representations from management (and if appropriate, those charged with governance) regarding their plans for future action and their feasibility.
(b) (i) Where the use of the going concern basis of accounting is appropriate but a material uncertainty exists, provided that the auditor agrees with the basis of preparation of the accounts and the situation is adequately disclosed, an unmodified opinion is issued. The auditor’s report will however include a Material Uncertainty Relating to Going Concern paragraph referring them to the details in the disclosure note and stating that a material uncertainty exists but that the auditor’s opinion is not modified in respect of this matter.
(ii) Where the material uncertainty exists but the situation is not adequately disclosed the opinion should be modified on the grounds that there is insufficient disclosure and the financial statements are materially misstated. Depending on the specific circumstances this may be a qualified “except for” or adverse opinion.
(iii) If in the auditor’s judgement the company will not be able to continue as a going concern and the financial statements have been prepared using the going concern basis of accounting, the auditor shall express an adverse opinion.
(iv) If management is unwilling to extend its assessment where the period considered is less than twelve months from the date of the financial statements, the auditor shall consider the need to modify the opinion as a result of not obtaining this evidence.
(c) The points which might be taken into consideration before giving recommendations to a garage proprietor on a system of internal control for cash sales are as follows:
(i) The type of cash sales which might be made. The garage might, for instance, have cash sales from:
(1) Petrol;
(2) Sales of spares;
(3) Repairs to vehicles;
(4) Sale of motor vehicles;
(5) Vehicle hire;
(6) Sale of items from a shop on the forecourt.
(ii) The size of the garage and the number of staff available. This will affect the division of responsibilities and the possibility of one person’s work being proved independently by another.
(iii) The amount of control exercised by the proprietor over the day-to-day running of the garage.
(iv) The type of business (e.g. partnership, sole trader or company) and the effect which a breakdown in control may have over the need to publish certain information under statute.
(v) The documentation already available in the system and how this can be used to good effect under new recommendations.
(vi) The possibility of discounts being given and how this can be controlled and recorded.
(vii) The need not to overburden non-administrative staff with time-consuming administrative duties but to keep forms (e.g. Showing total cash sales) as simple as possible.
(viii) The availability of tills which can accumulate total cash sales during a period.
- Tags: Audit Evidence, External auditor, Going Concern, ISA 570, Risk Assessment
- Level: Level 2
- Uploader: Samuel Duah