Module 4

Completing the field work page 228

- After audit planning , performing test controls and substantive procedures (discuss in M2
and M3), it is time to complete the fieldwork, evaluate findings and complete reporting
requirements
- Procedures performed when completing fieldwork has distinct characteristics
 Auditor making significant judgements
 Often involve poteitnally high-risk issues
 Do not relate to specific accounts of transaction cycles
- Performaned by senior members, such as audit managers, and reviewed by audit partners,
who have extensive audit experience with the entity
- When completing field work, auditor conducts specific auditing procedures to gain more info
on
1. Significant areas (Accounting estimates used by management, Related party
transactions, Identified material misstatements due to fraud)
2. Reviewing for evidence of pending litigation and claims
3. Considering factors that may have an impact on going concern assumptions
4. Obtaining the management representation letter
5. Reviewing for subsequent events that may have an effect on financial statements
6. Preforming analytical procedures

1. Significant areas pg 229

 Accounting estimates pg229

 Related parties pg 229

- Of particular interest to auditors: Transactions outside normal course of business and the
possibility of fraud
- During field workstage auditor needs to ascertain whether sufficient appropaite avidence
obtained to determine whether material misstatement exists and adquature discloasures
repored
- Field work entailing: Review management info, reviewing working papers, shareholder
records, and minutes of shareholders in directors meetings
- Auditor should be on look out for material related party transaction that have abnormal
conditions, lack logical reasons, have substance different from form.
- Auditor to consider nature and size

 Fraud page 230

2. Litigation and Claims pg 231

- Contingency liability either:
 Possible obligation that arise from past events that will be confirmed by
occurrence/non-occurrence of another event not in control of the entity
 Present obligation that arises from past event but no probable outflow or amount of
obligation cannot be measured reliability
- Of interest to the auditor because risk they may not be completely and properly disclosed
- Eg of contingent lib
 Tax disputes
 Product warranties
 Guarantees of obligations of others
 Litigation and claims
- Contingent lib review happens towards the end because auditor needs complete info
- Contingent lib with the highest risk are LITIGATIONS
- Solicitor representation letters: Auditor requires by ISA 501, to design and perform
procedures to identify litigation claims with the entity. These include pg 232
 Inquiry of management
 Reviewing minutes of meetings and external legal council
 Reviewing legal accounts
- If auditor identifies a risk of material misstatement regarding litigation or claims, auditor
should seek direct communication with the entities eternal legal team counsel. This is done
by letter of enquiry prepared by management and sent by the auditor.
- Contacting legal team help gain information to whether potential material litigation and
claims are known and management estimates of financial implication and costs are
reasonable.

3. Going Concern pg 232

- ISA 570 requires auditor to obtain sufficient appropriate evidence to determine whether or
not a material uncertainty exists related to events or conditions that may cast significant
doubt over the going concern of audit.
- Mangagement should performance an assessment of entitiy ability to continue as a going
concern. If they haven’t auditors should ask mangmenet too.
- When they have made an assesmement auditors should review managmement plans for
furutre actions these include:
 Liquidation of assets
 New borrowings
 Restructuring of debt facilities
 Reductionof debt faciltiies
 Increasing capital
- Audit procedures revant to determining existing of material going concern unertraininty are:

- Management might produce favourable budgets to hide the fact there is going concern
issues
- Auditor can assess accuracy of budgets by comparing budget prepared in recent periods
- Auditor should look out for price changes, profit margins, interest rates, collection of trade
debtors, loan repayment commitments, and activity levels in new budgets
- Mitigating factors with going concern uncertainty: pg 234

- Financial support: Auditor must be satisfied that third party financial support can be relied
upon
- Letter of support: Parent company agrees to provide financial assistance to subsidiary for a
fixed period (Usually 12 months)
- Letter of subordination: Parent company agrees not to demand repayments of debts fro
subsidiary for a fixed period (usually 12 months)
- Auditor determine how much reliance can be place in these letters by considering the
following issues. Pg 235
 Letter formally drafted, and under seal
 For letter to be binding to parent company, should be passed by resolutions and
minuted in books
 Details of agreement minuted in books
 Other issues to consider on page 235
4. Management of Representation letter pg 235
- Towards end of audit, Auditor to obtain representation letter from organisations
management
- Management representation letter contains representations from management to auditor
during audit
- The purpose of the letter is to: 1. Impresses ultimate responsibility on management for
content of FS and 2. Confirms in writing any representations made by management during
audit.
- Auditor shall request written representation about management responsibilities using same
word as in the terms of audit engagement

- If management letter inconsistent with other audit evidence auditor will need to undertake
further audit procedures to resolve the matter
5. Subsequent events pg 236

- Specific procedures aimed at detecting subsequent events on page 238

- Examples of enquires of management on specific matter on page 238
 6. Performing analytical procedures pg 239

- Analytical procedures in the fieldwork stage is performed to arrive at an overall conclusion

as to whether the financial report is consistent with the auditor’s understanding of the
entity.
- Typical analytical procedures conducted are:
 Comparing entity data with expected entity results
 Comparing company data with available industry data
 Using relevant non-financial data, such as units sold or number of employees to
analyse relationships with financial data
- Used to see if any unusual relationships exists
- In carrying out overall review, auditor reads financial statements and accompying notes.
Auditors considers adequacy of evidence gathered.
- Auditor partner or manager will conduct the review because auditor will be too close to the
work and may miss any unusual relationships and inconsistences.
- Audit partner or manger should have comprehensive knowledge of entity business and not
directly involved with the field work.

Final Review page 242

- When evaluating finding during final review stage, auditor has two objectives:
1. To ensure audit process has compiled with auditing standards
2. To determine type of opinion to be expressed
- To meet these objectives auditor
 Makes the final evaluation of materiality and audit risk
 Undertakes the technical review of the financial statements
 Undertakes the final review of the financial statements
 Form an opinion and drafts the auditor’s report
- In addition, engagement quality review must also be performed.

- Misstatement = when amount, classification, presentation, or disclosure of balance differs

from balance applicable to reporting framework.
- Three types of misstatements:
 Factual misstatement: Misstatements are known as a certainty. 100% of population
tested. Audit data analytics. Auditors request management to make adjusting
entries with factual misstatements because should be no excuse.
 Judgemental misstatements: Typically involve accounting estimates where
uncertainty is a factor. Eg auditor estimate a different value to management. If
management doesn’t adjust then must be recorded as misstatement. Discussions
documented with management, including management’s reasons for not adjusting.
 Project misstatements: Audit sampling where 100% of population is NOT tested.
Statistical and non-statistical methods used to project the sample misstatement to
entire population. If projected misstatements material, then management requested
to examine population of transactions and make adjusting entries to correct.
1. Makes the final evaluation of materiality and audit risk pf 243

- Unmodified opinion issued when auditor believes no material misstatements exist

- Modified opinion issued when auditor believes material misstatements exist
- Pervasive material misstatements: if affects many facts of the financial statements

2. Technical review of Financial Statements pg 245

- Conducted by audit partner or manger

- Ensures form and content of financial statements in accords with reporting framework,
corporations act and ASEX
- Conducted at end of engagement as a final check that all significant issued identified and
addressed.
- Also ensures all work outlined in the audit plan and audit program has be completed and
signed off

3. Final Review of working papers pg 245

- Working papers must include work undertaken by the engagement partner includes:
 Evidence of a review by the auditor manger, with notes covering significant matters
raised by the engagement partner
 The signed auditors report
- Should be an audit log of all data analytics should be integrated with audit programs and
working papers. Audit program > working papers > audit data analytics process should be all
linked for easy review
- Audit completion checklist customary – ensures all review points completed
- Before audit report issued engagement partner through review of audit documentation and
discussion with engagement team should be satisfied that sufficient appropriate evidence
obtained to support conclusions reached.
- Audit review conducted on two levels: pg 246
 Level 1: Detailed review of all working papers by the person conducting the audit
(auditor in charge). The person responsible for carrying out the audit
 Level 2: A higher level reviewer by the individual is ultimately responsible for the
audit and who signs the auditor report – can be delegated to audit manager but
ultimately engagement partner is responsible and is the one that signs the auditor
report.
- Objectives of audit review for level 1 and level 2 are on page 246.

4. Engagement quality control review page pg 247

- Engagement quality review must be performed at end of the audit of all listed and other
public interest companies
- Must be undertake by someone not associated with audit engagement – usually audit
partner
- EQCR (quality control review) provided objective and independent evaluation
- Audit partner will discuss significant matters before signing off
- Discusses more on page 248 about what an quality review involves.
Final Check list page 248.
 Preparing the Audit Report pg 251

Unmodified Auditor’s report pg 251

- Issuing of a standard (Unmodified) audit report signifies auditor has opinion that all financial
statements in all material respects prepared in accordance with framework
- Reasonable assurance FS as a whole free of material misstatement, free from fraud or error.
- Standard format structure on page 252

Fair Presentation Framework pg 253

Two Types:

 Fair presentation Framework ( A conceptual framework) More flexible – adv makes report
more relevant to meet needs of users
 Compliance framework (Rule based framework) Must strictly comply.

Material Uncertainty related to going concern pg 254

- Management is responsible for making assessment on going concern

- Auditor responsibility to gather evidence to conclude on appropriates of management
assessment
- If auditor satisfied = unmodified opinion
- When auditor concludes going concern is appropriate but has reasonable doubts the auditor
will determine if these doubts are adequately disclosed in the FS
- The auditor will also express an unmodified opinion but will have a separate section under
heading Material uncertainty

Key Audit Matters pg 255-256

- Auditor must disclose Key Audit Matters (KAMs) in the Audit Report.
- KAMS are matters in the auditors professional judgement we of most significant in the audit
- KAMS selected are those that were communicated to those charge with governance of the
entity
- Usually only a small number of KAMs disclosed 2-4 and usually relate to impairment,
investment valuation and revenue recognition.
- KAMS are often areas of complexity and areas with significant management judgment.
- In Making the determination of KAMS the auditors take in to account the reasons
 Areas of higher assessed risk of material misstatement
 Significant Auditor Judgments relating to areas that required significant
management judgement
 The effect on the auditor of significant events that occurred during the period
- Page 256 shows a good flow diagram depicting this

Other information contained in the Annual Report pg 259

 - The auditor is required to read and consider the other information contained in the annual
report produced by management
- Information that is materially inconsistent with the report with the FS may indicate material
misstatement
- Examples of other information found in the report are:
 Management report, management commentary, financial review
 Chairman statement
 Corporate governance statement
 Internal control and risk assessment reports

Remedies what to do when material misstatements found in the other info contained in the
annual report on bottom on Page 259

Independence Declarations pg 260

- Standard Audit report will have the heading “Independent Auditors Report”
- In Australia a further independence declaration is required by the Auditor that
communicates to the financial statement users of their independence.
- Declares that Auditor has not contravened independence requirements of the Corp Act or
any applicable ethic or professional codes.
- Failure to give deceleration is a strict liable offence.
- Page 261 example 4.9 has example of the independence declaration statement.

Modified Auditors Report pg 262

- 2 situations to modify the standard report
1. Matters that modify the auditor’s report but do not affect the auditors opinion pg
262/3
 Purpose to draw users attention to matters disclosed in the FS that are of such
importance fundamental to users understanding.
 Another purpose is to draw users attention to other matters not disclosed in FS
 This is done by a Emphasis of Matter paragraph in the report.
 Should contain any new info/should have sufficient evidence to back
up/matter cannot be materially misstated in FS/ doesn’t modify auditors
opinion
 Written in a separate section of the auditor report with heading “Emphasis of
Matter”
 The paragraph should clearly communicate the matter emphasised doesn’t
change auditors opinion.
 Examples of Emphasis of matter are:

2. Matters that modify the auditor’s report and affect the auditors opinion pg 265

- Modified opinions can be classed in three ways:

1. A qualified opinion
2. An Adverse opinion
3. A disclaimer of opinion
- The nature of the matter and how persuasive determined which modified opinion to be
classed.
- Heading of the classed opinion should clearly stated eg “Basis for Qualified opinion” as
well as an additional section outlining the reason for modification.
- There are two main categories of matters that give rise to modification
1. Financial statements are materially misstated
2. Auditor is usable to obtain sufficient appropriate audit evidence
Flow chart on how to determine which modified opinion to use pg 266
 Qualified opinion pg 268

- Material misstatements but not pervasive to FS

- Auditor will issue this opinion when after obtaining sufficient evidence, individual or
uncorrected misstatements are material but not pervasive to the FS. Or if unable to obtain
sufficient evidence the possible effects of undetected misstatements are potentially material
but not pervasive.
- Most common opinion
- Eg of qualified opinion on pg 269

Disclaimer of Opinion pg 270

- Expressed when auditor is unable to obtain sufficient evidence on which to base the opinion,
and the possible effects of the adjustments could be both material and pervasive.
- Also expressed when serious questions about the integrity of management and when they
do not provide a written representation.

Adverse Opinion pg 272

- Very Serious
- Auditor concludes that misstatements are both material and pervasive.
- Main message from auditor is that the FS are misleading or of little use to users.

Communication and Reporting Responsibilities pg 277

Communicating with the entity pg 277

- Management letter:
 Written communication between auditor and management.
 Issued at conclusion of audit engagement
 Letter outlines: Significant issues identified by audit, especially issues around
business and inherent risk, recommendations improvements in risk identification
and internal control.
 Deficiencies in internal control can be communicated earlier orally but need to also
be written in the management letter after
 Management letter is reviewed first by operational management, then audit
committee or governing body.
 Issues around Fraud should communicated immediately and to the appropriate level
of management

- Communicating Internal control matter pg 278

 First need to determine if they are significant before communicating.
 Examples of significant on page 278
 - Communicating identified or Suspect Fraud pg 278
 Fraud suspected need to communicate immediately to Management unless
prohibited by law. If management suspected need to communicate to governing
body unless prohibited by law. If governing body then communicate to relevant
authorities.

Communicating with the Audit Committee pg 279

- Committed form by the entity for the entity.

- Page 279

Reporting to those charged with Governance and management pg 280

- Matters communicated to those charged with governance

 Auditors responsibilities in relate to Financial statement audit
 Planned scope and timing of audit
 Significant findings of audit
 Auditor independence

Reporting to shareholders pg 282

- Reporting responsibilities to shareholders listed on pg 282

Reporting to regulatory bodies pg 283

Subsequent event procedures: