Question Tag: ISA 570

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  • 5 Marks

AA – May 2016 – L2 – Q4a – Completion Procedures and Reporting

This question outlines the external auditor's responsibilities and the work required regarding the going concern status of a company.

(a) Describe external auditor’s responsibilities and the work that the auditors must perform in relation to the going concern status of companies. (5 marks)

The external auditor’s responsibilities in relation to the going concern status of a company are guided by ISA 570. The following responsibilities must be carried out:

  1. Evaluate Management’s Assessment:
    • The auditor must evaluate management’s assessment of the company’s ability to continue as a going concern, considering whether management’s process is thorough and adequately supported with appropriate evidence.
  2. Consider Events or Conditions:
    • The auditor must remain alert throughout the audit for any events or conditions that may cast significant doubt on the company’s ability to continue as a going concern. This includes reviewing financial indicators, operational issues, and external factors such as market conditions.
  3. Obtain Sufficient Appropriate Evidence:
    • If events or conditions suggest uncertainty about the company’s ability to continue as a going concern, the auditor must gather sufficient appropriate evidence to determine if a material uncertainty exists. This may include analyzing cash flow forecasts, reviewing loan agreements, or checking the company’s ability to raise additional funds.
  4. Evaluate Assumptions and Plans:
    • The auditor must assess the reasonableness of the assumptions made by management and evaluate the adequacy of the plans for future actions to mitigate the going concern risk, such as planned cost-cutting measures or fundraising activities.
  5. Reporting:
    • The auditor must consider whether adequate disclosure of going concern issues has been made in the financial statements. If a material uncertainty exists, the auditor will report it appropriately in the audit opinion, either by adding an emphasis of matter paragraph or modifying the audit opinion if necessary.
  • 7 Marks

AA – Nov 2015 – L2 – Q2c – Audit and Assurance Risk Environment, Completion Procedures and Reporting

This question covers auditors’ responsibilities for subsequent events and going concern assessments, as well as internal control reporting.

c) Technolab has an internal audit department. The partner in charge of the audit is seeking clarification regarding how any deficiencies in internal control should be identified and communicated to management. The partner feels the report produced by the external auditors may duplicate the report produced by the internal audit function.

Required:
Explain how the purpose and content of an internal auditor’s report on internal control deficiencies differ from one prepared by the external auditor.
(7 marks)

c) Differences between internal and external auditors’ reports on internal control deficiencies:

  • External auditor’s report:
    The external auditor’s report to management only details significant deficiencies in the internal control systems that have come to the auditor’s attention as part of their normal audit procedures. It is not a comprehensive list of all deficiencies, reflecting the auditor’s broader role focused on the accuracy of the financial statements. External auditors only review internal controls insofar as they impact the reliability of financial reporting.
  • Internal auditor’s report:
    Reporting on internal control deficiencies is one of the main roles of the internal audit function. They carry out tests on systems and controls according to the needs of the business to ensure effective control and use of resources. Internal auditors may conduct a series of assignments, focusing on specific operational aspects of internal controls.
  • Differences:
    Internal auditors have a wider scope and focus compared to external auditors. They not only look at financial reporting but also at operational efficiency, risk management, and compliance with company policies. Their reports typically contain a more detailed analysis of deficiencies, including a broader range of control issues than just those affecting financial reporting. Internal audit reports often include:

    • Executive summary: Summarizing the objectives of the assignment and major findings.
    • Body of the report: Detailing the work done, observations made, and recommendations given, including timelines for implementation.
    • Appendices: Containing the tests carried out, results, and potential impacts of the deficiencies.
  • 14 Marks

AA – Nov 2015 – L2 – Q2a and b – Audit and Assurance Risk Environment, Completion Procedures and Reporting

This question covers auditors’ responsibilities for subsequent events and going concern assessments, as well as internal control reporting.

You are an audit senior for an audit firm and are currently working on the audit of Technolab, a company that produces sophisticated electronic laboratory equipment. The company imports a high proportion of the components it uses from China. The equipment is used by some laboratories dealing with hazardous chemicals.

As the audit draws to a close, the partner in charge has asked you to ensure that all procedures relating to subsequent events and going concern are properly performed. You are to consider the audit work to be performed in relation to ISA 560 Subsequent Events and ISA 570 Going Concern.

Required:

a) Describe the auditor’s responsibilities for subsequent events occurring between:
i. The year-end date and the date the auditor’s report is signed.
ii. The date the auditor’s report is signed and the date the financial statements are issued.
(6 marks)

b) Going concern relates to the judgment that an entity will continue to trade for the foreseeable future.
i. Explain the responsibilities of directors and auditors in relation to going concern.
(3 marks)
ii. Explain the audit procedures that the auditor could carry out when conducting the going concern review of Technolab.
(4 marks)

c) Technolab has an internal audit department. The partner in charge of the audit is seeking clarification regarding how any deficiencies in internal control should be identified and communicated to management. The partner feels the report produced by the external auditors may duplicate the report produced by the internal audit function.

Required:
Explain how the purpose and content of an internal auditor’s report on internal control deficiencies differ from one prepared by the external auditor.
(7 marks)

Total: 20 marks

a) Auditor’s responsibilities for subsequent events:

i. Between the year-end date and the date the auditor’s report is signed:

  • The auditors shall perform audit procedures to identify and detect all material subsequent events that require adjustment of, or disclosure in, the financial statements.
  • Additional audit procedures are not required where satisfactory audit evidence has already been gained.

ii. Between the date the auditor’s report is signed and the date the financial statements are issued:

  • The auditor has no obligation to perform any audit procedures between the date the auditor’s report is signed and the date the financial statements are issued.
  • However, if a fact becomes known that would have influenced the auditor’s report had the auditor known it at the date the report was signed, the issue shall be discussed with management to determine whether the financial statements need amendment.
  • If the financial statements need amending, additional audit procedures shall be conducted, and the original subsequent events review should be extended to the date of the new auditor’s report.
  • If management refuses to amend the financial statements, and the auditor’s report has already been provided to the entity, the auditor shall take steps to prevent reliance on the report. This might include speaking at the AGM or resigning.

b) Going concern:

i. Responsibilities of directors and auditors in relation to going concern:

  • It is the directors’ responsibility to make an assessment of an entity’s ability to continue as a going concern and to prepare the financial statements on a going concern basis if they believe that is appropriate. This may require the directors to make judgments about inherently uncertain future outcomes of events or conditions.
  • It is the auditor’s responsibility to obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements and to conclude whether there is material uncertainty about the entity’s ability to continue as a going concern.

ii. Audit procedures for the going concern review of Technolab:

  • Obtain a copy of the cash flow and statement of profit or loss forecasts for the year ahead.
  • Discuss with management the basis on which these forecasts have been prepared and obtain supporting documentation for any assumptions that are inconsistent with the current period’s performance.
  • Compare the company’s performance post-year-end with the forecasts.
  • Discuss with management whether there have been any breaches of health and safety regulations or potential litigation that may affect Technolab’s ability to trade.
  • Review the company’s order book in the post-year period to verify continued demand for Technolab’s products.
  • Discuss with management whether there are any supply problems and whether there are alternative suppliers available in case such problems arise.
  • 10 Marks

AA – May 2017 – L2 – Q3c – Completion Procedures and Reporting

Audit procedures for determining if PharmaCo can continue as a going concern.

PharmaCo provides scientific services to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers.

The annual audit is nearly complete. As audit senior, you have reported to the engagement partner that PharmaCo is having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases by customers who bought drugs from the company.

Required:
Explain the audit procedures that may be carried out to determine whether or not PharmaCo has the ability to continue as a going concern entity.

Audit procedures for determining PharmaCo’s ability to continue as a going concern include:

  1. Reviewing cash flow forecasts: Assess whether PharmaCo has sufficient liquidity to meet its obligations over the next 12 months.
  2. Reviewing directors’ assessments: Examine the directors’ view on PharmaCo’s ability to continue as a going concern and the assumptions they have used.
  3. Evaluating financing arrangements: Check the availability of additional finance that may be required to support PharmaCo’s operations.
  4. Analyzing interim financial statements: Review interim financial statements to identify any further decline in profitability or liquidity.
  5. Assessing reliance on key customers: Examine the company’s reliance on major customers and the impact of the loss of contracts due to the adverse publicity.
  6. Solicitor’s letter: Obtain confirmation from the company’s solicitors regarding the status of ongoing legal cases and any potential liabilities.
  7. Reviewing events after the reporting period: Identify any events that may impact PharmaCo’s financial stability after the year-end.
  8. Management representations: Obtain a formal representation from management regarding the company’s going concern status.
  9. Bank letters: Request confirmation from the company’s bank regarding overdraft facilities and any covenants that might affect PharmaCo’s liquidity.
  • 10 Marks

AA – May 2020 – L2 – Q4a – Audit and Assurance Evidence

Identify who is responsible for ensuring the going concern basis in preparing financial statements.

Your audit firm has almost completed the audit of SG Ltd. At the review stage, the audit manager assembled the engagement team and wanted to find out whether the audit evidence obtained shows that the company is a going concern.

Required:
i) Outline whose responsibility it is to ensure that the going concern basis used in the preparation of the financial statements is reasonable and acceptable.
(7 marks)

ii) Outline with examples the THREE (3) broad classifications of going concern indicators. (3 marks)

Management’s Responsibility: The responsibility for preparing the financial statements, including the assessment of whether the going concern basis is appropriate, lies with the management of the company. Management must perform a thorough assessment to ensure that the entity can continue its operations for the foreseeable future.

Assessment of Going Concern: Management must evaluate the entity’s ability to continue as a going concern, considering both internal and external factors that could impact the company’s financial health. This involves projecting future cash flows, profitability, and operational risks.

Auditor’s Responsibility: The auditor is responsible for evaluating the reasonableness and acceptability of the going concern basis used in preparing the financial statements. While the auditor does not prepare the financial statements, they must assess whether management’s evaluation is reasonable and sufficient to support the going concern assumption.

Impact on Audit Opinion: If the auditor concludes that the going concern assumption is inappropriate and management has not adopted an alternative basis for presenting the financial statements, the auditor may need to express a modified opinion.

(7 marks)

ii)
The three broad classifications of going concern indicators are:

Financial Indicators: Examples include the company’s inability to pay debts as they fall due, recurring losses, negative cash flows, and breaching loan covenants.

Operational Indicators: Examples include the loss of key management personnel or technical staff without suitable replacements, significant labor disputes, or substantial interruptions in operations.

Other Indicators: Examples include government actions or regulations, such as expropriation or new laws that make the entity’s operations illegal, as well as natural disasters or environmental catastrophes.

(3 marks)

  • 10 Marks

AA – Aug 2022 – L2 – Q4a – Completion Procedures and Reporting

Defines going concern and discusses the auditor's responsibilities and procedures in relation to going concern.

Pinto Ltd (Pinto) provides analytical services to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers.

The annual audit is nearly complete. As Audit Senior, you have reported to the Engagement Partner that Pinto is having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases, where Pinto’s services to assist the prosecution were found to be in error. Not only did this provide adverse publicity for Pinto, but a number of clients did not renew their contracts. A senior employee then left Pinto, stating lack of investment in new analysis machines thus increasing the risk of incorrect information being provided by the company.

A cash flow forecast prepared internally showed Pinto requiring significant additional cash within the next 12 months to maintain even the current level of services and operations. Pinto’s auditors have been asked to provide a negative assurance report on this forecast.

Required:
i) Define going concern and discuss the auditor’s responsibilities in respect of going concern.
(4 marks)

ii) State FIVE (5) audit procedures that may be carried out to determine whether or not Pinto is a going concern.
(6 marks)

i) Definition of Going Concern:
Going concern refers to the assumption that an entity will continue its operations for the foreseeable future without the intention or necessity of liquidation or ceasing trade. It is a fundamental accounting concept used in the preparation of financial statements as per IAS 1 – Presentation of Financial Statements.
(2 marks)

Auditor’s Responsibilities in Respect of Going Concern (ISA 570):
The auditor has three key responsibilities regarding going concern:

  • Evaluate Management’s Use of the Going Concern Assumption:
    The auditor should evaluate whether management’s use of the going concern assumption in the preparation of financial statements is appropriate.
  • Perform Appropriate Audit Procedures:
    The auditor must carry out procedures to assess whether the organization can continue as a going concern.
  • Report on the Going Concern Assumption:
    If the auditor believes that management’s use of the going concern assumption is inappropriate or that there are material uncertainties, the auditor must modify their audit report accordingly.
    (2 marks)

ii) Audit Procedures to Assess Going Concern:

  1. Review the Cash Flow Forecast:
    Obtain and review Pinto’s cash flow forecast for the next 12 months, analyzing assumptions and discussing with management to assess liquidity issues.
  2. Inquire of Management:
    Discuss with management their plans to obtain additional financing or take other measures to address the cash shortfall and evaluate the feasibility of these actions.
  3. Review Interim Financial Statements:
    Obtain and review interim financial statements to evaluate post-year-end performance and whether sales or income levels align with the forecast.
  4. Examine Legal Claims:
    Obtain a solicitor’s letter and review the details of legal claims against Pinto, assessing their potential financial impact.
  5. Review Post-Year-End Orders and Contracts:
    Review Pinto’s order book and contracts with clients to determine whether future revenue streams are sufficient to support continued operations.
  6. Assess Capital Investment and Equipment Needs:
    Consider whether lack of investment in new machines or equipment may further weaken Pinto’s financial position and ability to generate revenue.
  • 5 Marks

AA – May 2021 – L2 – Q2b – udit and Assurance Risk Environment, Completion Procedures and Reporting

State audit tests necessary to determine if an entity is a going concern.

ISA 570: Going Concern guides auditors to ensure that an entity can continue to operate into the foreseeable future.

Required:
State TWO (2) audit tests necessary to ascertain whether an entity is a going concern. (5 marks)

Audit tests necessary to ascertain whether an entity is a going concern:

  • Review management’s plans for future actions based on its going concern assessment.
  • Gather additional sufficient and appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists regarding the going concern concept.
  • Seek written representations from management regarding its plans for future action.
  • Obtain information from company bankers regarding the continuance of loan facilities.
  • Review receivables ageing analysis to determine whether there is an increase in days, indicating cash flow problems.
    (5 points @ 1 mark each = 5 marks)
  • 10 Marks

AA – May 2018 – L2 – Q3b – Audit and Assurance Risk Environment, Completion Procedures and Reporting

Explains the importance of professional skepticism and audit procedures for subsequent events in the audit process.

ii) Auditors are required to plan and perform an audit with professional skepticism, to exercise professional judgment, and to comply with ethical standards.

Required:
Explain what is meant by ‘professional skepticism’ and why it is so important that the auditor maintains professional skepticism throughout the audit. (5 marks)

b)
i) International Standard on Auditing (ISA) 560: Subsequent Events deals with the auditor’s responsibility towards events that occur after the reporting date and especially before the auditor’s report is issued.

Required:
Explain FIVE audit procedures to test subsequent events. (5 marks)

(ii) Professional Skepticism:
Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and critically assessing audit evidence. Auditors should not simply accept the information provided by management at face value, but instead, should seek corroborative evidence.

Professional skepticism is crucial because:

  • Risk of Misstatement: It helps reduce the risk of overlooking unusual transactions or anomalies, which could be signs of material misstatement.
  • Fraud Detection: It ensures that the auditor remains vigilant to potential fraud or deliberate misstatements, particularly in areas where management judgment or estimates are involved.
  • Independence: Maintaining skepticism supports auditor independence, as it ensures that evidence is objectively evaluated, rather than relying solely on management representations.
  • Judgment: It ensures that professional judgment is applied rigorously in determining the nature, timing, and extent of audit procedures and in evaluating their results.

(Total: 5 marks)

(i) Audit Procedures for Subsequent Events (ISA 560):

  1. Inquiries of Management:
    Auditors should inquire with management about any significant post-balance-sheet events, new commitments, borrowings, or any unusual transactions after the reporting period.
  2. Review of Board Minutes:
    The auditor should review minutes of meetings held by the board of directors, shareholders, and relevant committees to identify any major events or decisions that occurred after the reporting date.
  3. Examination of Interim Financial Statements:
    Reviewing the client’s interim financial statements prepared after the year-end helps identify significant events that might impact the financial statements under audit.
  4. Lawyer’s Letters:
    Auditors should obtain confirmations from the company’s legal counsel concerning litigation and claims that may have arisen after the balance sheet date.
  5. Subsequent Receipts and Payments:
    Auditors should test transactions that occur after the reporting date, such as payments received from customers or payments made to suppliers, to confirm the completeness and accuracy of year-end balances.

(Total: 5 marks)

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