STUDY UNIT 11: COMPLETION OF

THE AUDIT
LEARNING OUTCOME
After completing this study unit you should be able to:

 Achieve all the outcomes in Study Section 11.1, 11.2 and 11.3. Please see
individual sections below for those outcomes.

STUDY SECTION
11.1: COMPLETION STAGE:
FRAMEWORK, EVALUATING
AUDIT DIFFERENCES AND FINAL
MATERIALITY
LEARNING OUTCOME
After completing this theme you should be able to:

 describe the steps in the completion of the audit;

 discuss in detail the matters that you will consider in order to determine whether
sufficient and appropriate audit evidence have been obtained;
 based on your EAGR271 knowledge, review a working paper supplied and evaluate
whether all information is included on the working paper;
 discuss in detail the evaluation (nature and amount) of audit differences and apply
these with reference to a case study;
 discuss in detail the evaluation (nature and amount) of audit differences and the
effect of these on the audit report; and
 calculate the final materiality figure based on your knowledge of EAGR271
(calculating overall planning materiality) in a case study in order to evaluate audit
differences.

COMPLETION OF THE AUDIT

TIMING

• Performed at the end of the audit after the

1. Audit work has been completed and
2. The draft financial statements have been received.
• This is the last step before the auditor issues the report.

REASONS FOR THE PERFORMANCE OF THE PROCEDURES

1. Ensure that sufficient and appropriate audit evidence was obtained to justify the
opinion on the financial statements and to limit the audit risk;
2. Form an opinion on the fair presentation of the financial statements; and
3. Be able to issue an audit report.

PERSONS RESPONSIBLE FOR THE COMPLETION OF AUDIT PROCEDURES

Staff with the necessary experience and competence to exercise professional judgement:

• Audit seniors
 Audit managers
 Audit partners

STEPS IN THE COMPLETION OF THE AUDIT

1. Evaluate the sufficiency and appropriateness of audit evidence
2. Evaluation of misstatements identified during the audit
3. Overall review of the financial information
4. Consider whether liabilities exceed assets (Going concern consideration)
5. Post-balance sheet events (Subsequent events)
6. Concluding and reporting
7. Post-audit review

STEPS IN COMPLETION OF THE AUDIT:

EVALUATE THE SUFFICIENCY AND APPROPRIATENESS OF AUDIT EVIDENCE

• Obtain as standard confirmation:

• Attorney’s letter (enquiry from legal advisors); and
• Management representation letter

EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT

• Determine final materiality (based on actual financial results)– all other steps stays
the same
• Consider the nature of the misstatements:
o Factual misstatements (amounts, accounting treatment,
disclosure)misstatements about which there is no doubt
o Judgemental misstatements (inherent uncertainties, scope limitation)-
Differences arising form the judgments of management including those
concerning recognition, measurement, presentation and disclosure in the
Financial statements (including the selection or application of accounting
policies) that the auditor considers unreasonable or inappropriate
o Projected misstatements (auditor’s best estimate of misstatements in
populations or the projection of misstatements identified in audit samples to
entire populations from which the samples were drawn)
• Consider the state of provisions and contingencies/contingent liabilities (properly
accounted for and disclosed in the FS)
• Consider the materiality of audit differences/misstatements (qualitative and
quantitative) and the effect thereof on the financial statements and audit report
(audit opinion):
o List all misstatements/differences on a Schedule of misstatements (overs and
unders)
 o Consider misstatements/differences separately (individually) and in total
(aggregate)
o Non-material misstatements (will not affect the fair presentation of the FS):
 report to management,
 consider whether cumulative effect is not material; and
 carry it forward to list of misstatements
 Material misstatements (request client to change FS):
 YES(if FS changed)– unqualified audit report
 NO(if FS not changed)– qualified audit report/modified
o Amounts below clearly trivial– not accumulate
• Search for information that could affect the fair presentation of the FS:
o Unrecorded liabilities (completeness)
o Related party transactions

OVERALL REVIEW OF THE FINANCIAL INFORMATION

• Obtain draft financial statements and:

 Test castings & calculations
 Cross-reference/agree draft FS to the TB and working papers
• Perform final analytical procedures based on draft FS (general reasonableness test)
• Consider the fair presentation of the financial statements. Factors to consider:
 Compliance with the fundamental accounting principles and Accounting
Framework requirements– matching, prudence, consistency, going concern
 Accounting policy applied
 Financial position and results of operations
 Fairness of presentation and disclosure
 Statutory requirements and regulations
 Whether all entities and transactions are correctly accounted for in the FS
• Consider if other information accompanying the financial statements is fairly stated
and contains no misstatements

CONSIDER WHETHER LIABILITIES EXCEED ASSETS (GOING CONCERN

CONSIDERATION)

• Auditor should consider whether the liabilities do not exceed the assets, based on the
fair value of the assets and liabilities
• Post-balance sheet events (Subsequent events)
• Auditor should consider events that occurred after the balance sheet date that could
affect the financial statements:
o Up to date of audit report
o Up to date of the issue of the statements
o After the date of the issue of the statement

POST-AUDIT REVIEW

• Perform a staff evaluation

• Consider aspects of importance in respect of audits and document them in the next
year’s working papers
• Consider the viability of re-engagement and issue a letter of engagement if necessary
• Invoicing the client
REQUIREMENTS OF WORKING PAPERS
Working papers should:

• have a heading;
• be dated;
• identify the compiler;
• identify the reviewer;
• identify the applicable information;
• be cross-referenced; and
• contain conclusions.
STUDY SECTION
11.2: COMPLETION STAGE:
SUBSEQUENT EVENTS
LEARNING OUTCOMES
On completion of this study section you should be able to:

• briefly describe what the overall review of financial information entails;

• distinguish between the two types of post balance sheet events as well as the
accounting treatment of each;
• name, or formulate in a case study, the procedures of the auditor to identify post
balance sheet events;
• discuss in detail the conduct of the auditor during the various periods of post balance
sheet events;
• name the factors that the auditor will consider to determine his/her conduct to
prevent users from any further reliance on the financial statements; and
• describe the effect of a case study on the audit report.

EVENTS AFTER THE BALANCE SHEET DATE (IAS 10):

These are events, favourable and unfavourable, that occurred between the balance sheet
date (end of the period) and the date on which the financial statements are
approved/authorised for issue.

SUBSEQUENT EVENTS (ISA 560):

These refer to events that occurred between the end of the period and the date of the
auditor’s report, or information discovered after the date of the auditor’s report. The
period after the date of the auditor’s report is split into two:

• After the date of the auditor’s report but before the date the financial
statements are issued, and
• After the financial statements have been issued to users

Auditors must consider the possibility that events may occur after the balance sheet date
that could impact the financial statements.
Therefore, the auditor needs to perform specific procedures to identify such events.

References:

 ISA 560 – Subsequent Events

 IAS 10 – Events After the Balance Sheet Date

DEFINITIONS

EVENTS AFTER THE BALANCE SHEET DATE: THESE ARE EVENTS,

FAVOURABLE AND UNFAVOURABLE, THAT OCCURRED BETWEEN THE BALANCE
SHEET DATE (END OF THE PERIOD) AND THE DATE ON WHICH THE FINANCIAL
STATEMENTS ARE APPROVED/AUTHORISED FOR ISSUE.

These events fall into two

categories:

1. Adjusting events – Those events

that provide additional evidence of
conditions that existed at the end
of the reporting period. Requires
adjustment of amounts in the
financial statements (write a
journal).

2. Non-adjusting events – Those

events that are indicative of
conditions that arose subsequent after to the period end.

Requires disclosure of material events in the notes of the financial statements (no
journal):

• Nature of event
• Estimate of the financial effect of the event, or
• A statement that such an estimate cannot be made (if this is the case)

EVENTS UP TO THE DATE OF THE AUDITOR’S REPORT

Objective:
The auditor must perform procedures to obtain evidence that all events up to the date
of the auditor’s report that require adjustment or disclosure in the financial
statements are properly reflected in them.

These procedures should be done as close as possible to the date of the auditor’s
report.

PROCEDURES TO IDENTIFY SUBSEQUENT EVENTS: PROCEDURESTO IDENTIFY

POST BALANCE SHEET EVENTS (PERIOD A)
1. Review management’s procedures for identifying such events.
2. Inspect minutes of meetings (shareholders, board of directors, audit committee,
executive committee) and enquire about matters where minutes are not yet
available.
3. Review the latest interim financial statements, budgets, and forecasts.
4. Enquire from legal advisers about pending litigation or claims.
5. Consider relevant information that comes to the auditor’s attention from sources
outside the entity.
6. Enquire from management whether subsequent events occurred which may affect
the financial statements. Example questions:
• the current status of items accounted for on preliminary or inconclusive data
(for example, bad debt allowance)
• whether new contracts, commitments, borrowings, guarantees etc., were
entered into;
• whether material assets were sold/disposed of;
• whether new issues of shares/debentures were made/planned, mergers,
liquidations;
• appreciation of assets;
• whether any assets were sold at lower than book value;
• developments in risk areas;
• whether any extraordinary/unusual accounting adjustments were made or
contemplated, and
• applicability of the going concern
7. In respect of group situations, if a component is audited by another auditor, the
principal auditor should:
• Consider the procedures performed by the other auditor to identify
subsequent events; and
• inform the other auditor of the planned date of the auditor’s report
Actions in Respect of Events Discovered

The auditor must ensure that these events are properly accounted for and disclosed in
the financial statements.

6.3 INFORMATION DISCOVERED AFTER THE DATE OF THE AUDIT REPORT BUT
BEFORE THE FINANCIAL STATEMENTS ARE ISSUED

Key point:
The auditor has no duty to perform further procedures during this period.
It is management’s responsibility to inform the auditor of any facts that may affect
the financial statements.

If the Auditor Becomes Aware of Material Facts During This Period:

1. Consider whether the financial statements should be adjusted.

2. Discuss the matter with management.
3. If management changes the statements:
o Perform audit procedures on the revised statements.
o Issue a new audit report, with a date not earlier than the revised statements.
4. If management refuses to change the statements and the auditor deems it
necessary:
o If the auditor’s report has not been issued: qualify the report.
o If the report has been issued to the entity: inform management not to
distribute it to third parties.
o If the report has already been released: take steps to limit reliance on the
report.

6.4 INFORMATION DISCOVERED AFTER THE FINANCIAL STATEMENTS HAVE

BEEN ISSUED

Key point:
The auditor has no duty to make enquiries after the statements have been issued.

If the Auditor Becomes Aware of Facts Affecting the Auditor’s Report:

1. Consider whether the financial statements should be changed.

2. Discuss the matter with management.
3. If management changes the statements:
o Perform audit procedures on the amended statements.
o Review procedures management used to inform holders of the old statements
that they’ve been replaced.
o Issue a new auditor’s report:
 Date must not be earlier than the revised statements.
 Include an emphasis of matter paragraph referring to a note in the
statements about the change.
4. If management refuses to change the statements and the auditor deems it
necessary:
o Inform management of intended action.
o Take steps to limit reliance on the report, based on legal advice and the
auditor’s responsibilities.

6.5 WHEN MANAGEMENT REFUSES TO AMEND THE STATEMENTS

Note:
ISA does not currently give guidance, but an earlier version suggested the following:

Factors Affecting the Auditor’s Actions:

 Steps taken by management to prevent reliance on the statements.

 Auditor’s certainty that people will rely on the statements.
 Auditor’s ability to contact persons in possession of the statements.
 Time elapsed since the auditor’s report was issued.
 Whether the next set of financial statements is about to be issued.
 Whether subsequent financial statements have already been issued.
 Auditor’s legal position based on legal advice.
Possible Actions to Prevent Reliance on the Auditor’s Report:

1. Attend the annual general meeting and state the case.

2. Inform each known holder of the original statements that reliance can no longer be
placed on the report.
3. Inform each known potential user of the statements not to rely on the opinion.
4. Make a public announcement that the report should not be relied upon.
5. Notify regulatory bodies with jurisdiction over the entity.
6. Act in terms of section 45 of the Auditing Profession Act.
7. Consider legal advisers’ recommendations.

SUMMARY:POST BALANCE SHEET

EVENTS
1. Overall Review of Financial Information
• Performed near the end of the audit to assess whether the financial statements are
consistent with the auditor’s knowledge of the entity.
• Ensures no material misstatements remain and all significant matters are
addressed.
2. Post Balance Sheet Events (PBSEs)
Types & Accounting Treatment
1. Adjusting events – Provide evidence of conditions existing at balance sheet date →
Adjust financial statements.
2. Non-adjusting events – Conditions arose after balance sheet date → No adjustment,
but disclose if material.
Auditor Procedures to Identify PBSEs
• Review minutes, management accounts, and correspondence.
• Enquire of management regarding significant events after year-end.
• Review subsequent receipts/payments.
• Read interim financial statements.
• Auditor’s Conduct in PBSE Periods
• Between year-end & audit report date – Perform normal PBSE procedures.
• After audit report but before issuance – Discuss with management, adjust/disclose
if necessary, amend report if needed.
• After issuance – If users may be misled, act to prevent further reliance (withdrawal,
public notice, etc.).
Factors Influencing Auditor’s Conduct
• Materiality of event.
• Probability of misleading users.
• Timing and ability to notify users.
• Effect on Audit Report
• Adjust wording for emphasis of matter or modify opinion depending on nature and
adequacy of disclosure.

STUDY SECTION
11.3: COMPLETION STAGE:
GOING CONCERN AND FACTUAL
INSOLVENCY
LEARNING OUTCOMES:
On completion of this study section you should be able to:

• define the concept "going concern";

• discuss the responsibility of management and the auditors with regard to the going
concern principle;
• name the stages of the audit process during which the going concern principle is
addressed as well as the considerations during each stage;
• discuss and identify in detail the factors that may cast doubt on the ability of the
entity to continue as a going concern;
• name the audit procedures for evaluating management's assessment of the
relevance of the going concern principle;
• name the audit procedures that the auditor will perform if there is a material
uncertainty about the relevance of the going concern principle;
• explain the effect of a going concern uncertainty on an audit report;
• explain the difference between going concern and factual insolvency;
• discuss the actions the auditor can take where liabilities exceed the assets of the
company;
• discuss the steps that management may take to satisfy the auditor that no
irregularity is taking place; and
• be able to apply all of the above-mentioned in a case study.

GOING CONCERN CONCEPT

• The concept accepts that the entity will continue in operational existence for the
foreseeable future.
• The income statement and the balance sheet are prepared on the assumption that no
intention or necessity exists to liquidate or curtail significantly the scale of operations.
• Assets and liabilities are recorded on the basis that the entity will realise its assets
and discharge its liabilities in the normal course of business.

RESPONSIBILITIES:

• Management:
• Assess whether the going concern assumption is appropriate.
• Prepare the financial statements based on this assumption.
• Auditor:
• Assess whether any uncertainty exists that could cause the financial
statements to be misstated.
• Perform audit procedures to evaluate this risk.

5.2 FORESEEABLE FUTURE

• Refers to a period of at least one year after the balance sheet date (per IAS 1).
• The auditor must consider this period, although the outcome of future events cannot
be certain.
• Financial statements should reflect the predictable position of the entity.

5.4 INDICATORS OF GOING CONCERN PROBLEMS

FINANCIAL INDICATORS

• Net current liability position.

• Substantial fixed-term borrowings approaching maturity without realistic renewal or
repayment plans.
• Excessive reliance on short-term borrowings to finance long-term assets.
• Adverse key financial ratios.
• Indications of withdrawal of financial support.
• Negative cash flows.
• Substantial losses.
• Arrear or discontinued dividends.
• Inability to pay creditors on due dates.
• Difficulty complying with loan agreements.
• Suppliers requesting a change from credit to cash-on-delivery terms.
• Inability to obtain financing for necessary new product development or investments.
OPERATING INDICATORS

• Loss of key management without suitable replacement.

• Loss of major markets, franchises, or licences.
• Loss of major suppliers or shortage of essential supplies.
• Significant labour difficulties.
• Management intends to liquidate the entity or to cease operations
• Technological obsolescence of products
• Threats from cheap imported goods
• Emergence of a highly successful competitor

OTHER INDICATORS

• Pending legal proceedings that could result in liabilities the entity cannot meet.
• Non-compliance with statutory requirements or regulations.
• A decision by management to discontinue the whole, or a substantial part of the
business;
• Changes in legislation that may adversely affect the entity;
• Negative perceptions about the company’s product in the marketplace;
• Negative publicity due to social media;
• Failure to satisfy BEE requirements

5.5 VALUATING MANAGEMENT’S ASSESSMENT & MATERIAL

UNCERTAINTY ABOUT RELEVANCE OF GOING CONCERN
• Analyse and discuss cash flow, profit and other relevant forecasts with management.
• Analyse and discuss the entity’s latest available interim financial information.
• Review the terms of debentures and loan agreements to determine whether they
have been and can be met (have not been breached).
• Read minutes of meetings of shareholders and those charged with governance
(directors and the audit committee) for reference to financial difficulties.
• Enquire from the entity’s lawyers regarding litigation and claims and the
reasonableness of management’s assessment of any financial implications for the
company.
• Confirm the existence, legality and enforceability of arrangements to provide or
maintain financial support with related and third parties and assess the financial
ability of such parties to provide additional funds.
• Consider the entity’s position concerning unfilled customer contracts/orders, for
example, penalties for failure to perform.
• Confirm the existence, terms and adequacy of the company’s borrowing facilities, for
example, the state of the relationship with its bankers/borrowings providers.
• Obtain and review reports of any regulatory actions, for example, SARS investigations
and investigations by industry controlling bodies.
• Review events after year-end for transactions or events which either mitigate or
aggravate conditions affecting the entity’s ability to continue as a going concern

AUDIT PROCEDURES: EVALUATING MANAGEMENT’S ASSESSMENT &

MATERIAL UNCERTAINTY ABOUT RELEVANCE OF GOING CONCERN
Audit procedures with regards to management’s plans if significant doubt exists about
the entity’s ability to continue as a going concern:

Evaluating management’s plans for future actions with regards to its going concern
assessment:

• whether the outcome of these plans is likely to improve the situation?

• whether management’s plans are feasible in the circumstances?

If a cash flow forecast is a significant factor in considering the future outcome of events
in the evaluation of management’s plans:

• evaluating the reliability of the underlying data generated to prepare the forecast
• determining whether there is adequate support for the assumptions underlying the
forecast • considering whether any additional facts or information have become
available since the date on which management made its assessment
• requesting written representations from management regarding their plans for future
action and the feasibility of these plans

NB! Work out questions!

5.6 EFFECT ON THE AUDITOR’S REPORT

Based on audit evidence, the auditor determines the impact of uncertainty or a going
concern failure:

• Entity is NOT a going concern and statements prepared on liquidation basis →

Unmodified opinion.
• Uncertainty about going concern:
• Adequately disclosed → Unqualified opinion with a Material Uncertainty
Related to Going Concern paragraph.
• Not disclosed or inadequately disclosed:
1. Material: Qualified opinion (Basis for Qualified Opinion paragraph
explaining uncertainty).
2. Pervasive/fundamental: Adverse opinion (Basis for Adverse Opinion
paragraph explaining uncertainty).
• Multiple uncertainties regarding going concern → Disclaimer of opinion.
• Certainty of nonapplication of the going concern basis (we are certain):
o Financial statements are prepared on the liquidation basis: Unqualified report
 o Financial statements are not prepared on the liquidation basis (prepared on
going concern basis): Adverse opinion

TRADING WHILE LIABILITIES EXCEED ASSETS (FACTUAL INSOLVENCY)

Source References:
 SAICA Guideline: Trading Whilst Factually Insolvent
 Circular 2/2002 – Subordination Agreements
 Circular 3/2002 – Letters of Support
 IRBA Guide – Reportable Irregularities in terms of the Auditing Profession Act
(2015)
This guideline applies when an entity continues to trade while its liabilities exceed its
assets—known as factual insolvency.

In such cases, there is a high risk of irregularities, including:

 Common law fraud
 Intent to defraud
 Reckless trading
It also outlines the auditor’s statutory reporting responsibilities under section 45 of the
Auditing Profession Act.

AUDITOR’S CONSIDERATIONS FOR MATTERS WHICH MAY QUALIFY AS A

REPORTABLE IRREGULARITY IN TERMS OF S45 OF THE AUDITING
PROFESSION ACT:

2.1 FINANCIAL POSITION

 Assess assets and liabilities at fair value, not book value.

 Consider going concern values (assume the business will continue operating).

2.2 WHEN THE CONDITION MAY LEAD TO IRREGULARITIES

The fact that liabilities exceed assets does not automatically mean an irregularity
exists. However, it may lead to:

FRAUD

• Common law fraud: Intents to act in a manner that may cause real or potential loss
(incurring debt knowing it cannot be paid for). Acting with intent to cause real or
potential loss.
Example: If directors place orders knowing there’s no ability or intention to pay, they are
committing fraud.
• Intent to defraud under the Companies Act: Operating with the intent to cheat
creditors. Consists of the fact that the company’s business is run with the express
and implicit intent to defraud the creditors (applies only to companies).

• Common law fraud applies to all entities.

• Companies Act provisions apply only to companies.
• Recklessness in terms of the Companies Act: Persons who participate in the reckless
carrying on of a business, or on a gross negligent manner, are guilty of an offence.

RECKLESSNESS UNDER THE COMPANIES ACT

 Carrying on business in a reckless or grossly negligent manner is an offence.

3. AUDITOR’S ACTIONS WHEN LIABILITIES EXCEED ASSETS

1. Reassess the financial position using fair value of assets and liabilities (going
concern values).
2. If liabilities still exceed assets, assess compliance with section 45 of the Auditing
Profession Act:
o consider the existence of an unlawful act or omission in terms of the common
law and the Companies Act relating to fraud, recklessness, and negligence;
o committed by any person responsible for the management of the entity;
o material financial loss to members or creditors: harmful or potentially harmful
practice resulting in monetary losses;
3. If YES — Reportable Irregularity:
o report the irregularity to the IRBA and within three (3) days to the
management in terms of section 45;
o state full particulars of the irregularity;
o discuss with management within 30 days;
o consider management’s reply carefully (consider the steps taken by
management to satisfy the auditor that no irregularity exists);
o report findings to the IRBA;
o document all considerations in full in the working papers; and
o obtain legal advice to support the opinion
4. If NO — Not a Reportable Irregularity:
o Document the findings/reasons in the working papers

4. POSSIBLE MANAGEMENT ACTIONS TO ADDRESS INSOLVENCY

To show that no irregularity exists or to prevent further loss, management may:
 Provide evidence that future profits will exceed liabilities.
 Convert loans to share capital or issue new share capital.
 Provide guarantees for debts.
 Sign subordination or back-ranking agreements.
 Obtain letters of support from the holding company.
 Apply for liquidation.
 Apply for business rescue.

5. SUBORDINATION AGREEMENTS
Definition:
A legally binding agreement in which a creditor agrees not to demand repayment for a
specified period.

AUDITOR MUST CONSIDER:

 Creditor’s intent and ability to honour the agreement.

 Creditor’s legal right to enter into the agreement.
 Creditor’s solvency after subordination.
 Potential for “disposition without value.”
 Written and legally compliant format.
 Proper authorisation and signatures.
 Whether the subordinated amount makes assets exceed liabilities (excluding the
subordinated amount).
 Adequate disclosure in financial statements.
 Agreement’s validity as of the audit report date.
 For overseas creditors—compliance with that country’s laws.

IF YOU AUDIT THE SUBORDINATE (THE CREDITOR):

 Consider the materiality of the amount.

 Make provisions for possible losses.
 Ensure proper disclosure in financial statements.

6. LETTERS OF SUPPORT
Definition:
A letter—often from a parent company—pledging financial support to the entity.

AUDITOR’S RESPONSIBILITY:

 Assess the legal enforceability and commitment in the letter.

 Seek legal advice if necessary.