ACT501 Chap.11 Completing the Audit and the Auditor's Report
Completing the Audit and the Auditor's Report
What is still owed after the testing stops
The published teaching schedule gives week ten to completing the audit and week eleven to the auditor's reports. The syllabus names the completion issues it expects: the auditor's review and testing for subsequent events, the search for unrecorded contingent liabilities, management representation letters, and communications with audit committees.
It also lists the basic concepts of audit reporting and the use of the work of others.
Completion has a character of its own: everything earlier concerned individual captions and assertions, while completion concerns the statements as a whole and the passage of time.
Sorting subsequent events
Events occurring between the reporting date and the date the report is signed divide in two, and the division is not about size or recency.
It is about whether they provide evidence of a condition that existed at the reporting date. If they do, the statements are adjusted, because the condition was already there and the statements as drafted describe it wrongly. If they do not, the event belongs to the following period and the only question is whether a reader would be misled without disclosure.
The procedures used to find such events are ordinary rather than exotic: reading minutes of meetings held after the year end, reading the latest management accounts and comparing them with the audited figures, asking management and those charged with governance, reviewing receipts and payments after the date, and enquiring about litigation and claims.
Searching for what is not recorded
Contingent liabilities resemble the completeness work in the purchases cycle for the same structural reason: the item is absent from the records, so examining them cannot find it.
The auditor goes outside, to the entity's legal advisers, the minutes, correspondence with regulators and tax authorities, bank letters disclosing guarantees given, and the contracts themselves. What is sought is an obligation that may crystallise: a claim not yet quantified, a guarantee of another party's debt, a dispute that has not yet reached a demand.
The accounting question is whether it must be provided for, disclosed, or neither; the audit question is whether the search was wide enough to have found it.
Representations and communications
A management representation letter is written confirmation of matters material to the statements: that management has fulfilled its responsibility for preparing them, that all relevant information and access has been provided, that all transactions have been recorded, and confirmation of specific matters where other evidence cannot reasonably be expected to exist.
Its place in the reliability ranking is exactly where the rules put it: internal, generated by the party with the interest, therefore corroborating rather than substituting.
Communication with those charged with governance runs the other way, covering how far the work will reach and when it will happen, the significant findings, and anything the work turned up about internal control.
Using the work of others
The syllabus lists this among its indicative content, covering reliance on an internal audit function, use of an expert engaged by the auditor or by management for a valuation or actuarial estimate, and a group auditor relying on component auditors.
The pattern is identical across all of them: evaluate the other party's competence and objectivity, evaluate the work itself against the audit objective, and remain solely responsible for the opinion expressed.
The report, element by element
The opening lecture annotates a complete standard report and labels nine elements: the title; the addressee; the opinion; the basis for opinion; the responsibilities of management; the auditor's responsibilities; the signature and firm name; the location of the office; and the date of the report.
The order is part of the message.
The opinion comes third, before the basis for it and long before the description of responsibilities, so the reader is given a conclusion and then the grounds on which it rests rather than being taken through an argument.
Three elements worth extra attention
The addressee, because it decides who the report is written to, and the opening lecture ties that to liability: the report is addressed to the shareholders and the auditor is liable to them in negligence.
The date, because the opinion speaks from it and the active duty to search for subsequent events runs up to it.
And the responsibilities paragraphs, which do real work: management prepares and fairly presents the statements, designs and maintains the internal control relevant to that preparation, and evaluates whether conditions raise substantial doubt about going concern, while the auditor obtains reasonable assurance, exercises judgement and scepticism, assesses risks and designs responsive procedures, evaluates policies and the reasonableness of estimates, and concludes on going concern.
What this chapter covers
- 01
Completion as a view of the statements as a whole
- 02
Adjusting against non-adjusting events, and the sorting question
- 03
The ordinary procedures used to find subsequent events
- 04
The search for unrecorded contingent liabilities
- 05
Where a representation letter sits in the reliability ranking
- 06
Communication with those charged with governance
- 07
Using the work of internal audit, experts and component auditors
- 08
The nine elements of the report, in order
- 09
Why the opinion precedes the basis for it
- 10
The date of the report and what it fixes
Three events between the year end and the signature
- 4Ask of each event whether the condition existed at the reporting date.
- 3Decide adjust, disclose, or neither, and test against materiality.
- 3Name any further question the event raises beyond the accounts.
Key terms
- Adjusting Event
- An event after the reporting date that tells you about a state of affairs already present on that date, so the accounts have to be changed.
- Non-adjusting Event
- An event after the reporting date concerning a condition that arose afterwards, which may require disclosure but never a change to the reported figures.
- Contingent Liability
- A possible obligation whose existence or amount depends on uncertain future events, which by its nature is absent from the accounting records.
- Management Representation Letter
- Written confirmation from management of matters material to the statements, used to corroborate other evidence rather than to replace it.
- Those Charged with Governance
- The people or body who oversee where the business is going and how management discharges its duties, and to whom the auditor reports directly.
- Going Concern Basis
- The assumption that the entity will continue in operation for the foreseeable future, which management evaluates and the auditor concludes on.
Completing the Audit and the Auditor's Report FAQ
How do I decide whether an event after the year end changes the accounts?
Ask one question before any other: did the condition exist at the reporting date? If the event provides evidence about a state of affairs that was already there, the statements as drafted describe it wrongly and must be adjusted. If the condition arose afterwards, nothing in the reported figures can change, and the only remaining question is whether its size and nature mean a reader would be misled without disclosure.
Size never decides the sorting; it decides only what follows once the sorting is done.
Can a representation letter close a point on its own?
Almost never, and the reliability ranking explains why. A representation is internally generated evidence from the party with the interest in the answer, which places it near the bottom of the ranking. It is appropriate for matters where other evidence cannot reasonably be expected to exist, and it is used to corroborate a conclusion already supported by other work.
A team proposing to resolve a completeness question purely by written representation has substituted where the standards expect corroboration.
If an expert values a property, is the valuation the expert's responsibility?
The valuation is, but the opinion is not. The auditor evaluates the expert's competence and objectivity, evaluates the work itself against the audit objective, and remains solely responsible for the opinion expressed. That pattern is identical whether the other party is an expert engaged by the auditor, an expert engaged by management, the entity's internal audit function, or a component auditor in a group audit.
An answer that says the auditor relied on the valuer has stated a fact and missed the question.
Why does the report state a date at all?
Because it fixes two things. The opinion speaks from that date, so it covers everything the auditor knew by then and nothing afterwards. And the active duty to search for subsequent events runs up to it rather than to the end of fieldwork, which is why a gap between the two creates work rather than a holiday. The date is therefore an element of the report in the same sense as the opinion, and not a piece of administration.
Exam move
Collect five real events from any company news in the last year, invent a year end for each, and sort them: condition existing at the date, or not. Then write one sentence saying what happens to the accounts. Five minutes, and it builds the only habit this topic rewards, which is sorting before sizing. Add the report's nine elements to the same page and recite them until the order is automatic.
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