Audit finalisation and the final review

Audit and Assurance (AA) · ACCA · 6 min read

Welcome to the Finish Line: Audit Finalisation and the Final Review

Hello there! You’ve made it to one of the most critical stages of the audit. Think of Audit Finalisation as the "final check" before a pilot takes off or the last proofreading of a very important essay. We’ve done the testing, we’ve gathered the evidence, and now we need to step back, look at the big picture, and ask: "Do these financial statements actually make sense?"

In this chapter, we will learn how auditors wrap up their work, handle events that happen after the year-end, and make sure the "Going Concern" status of the company is rock solid. Don't worry if this seems like a lot—we’ll break it down into simple, bite-sized pieces!

1. Subsequent Events (ISA 560)

In the world of accounting, the "Year-End" isn't a magic wall where everything stops. Things happen after the balance sheet date but before the audit report is signed. These are Subsequent Events.

Adjusting vs. Non-Adjusting Events

To keep this simple, let’s use an analogy. Imagine you are selling a car on December 31st.
Adjusting Event: On January 5th, you find out the engine was actually broken on December 31st, but you just didn't know it yet. This provides evidence of conditions that existed at the year-end. You must change the numbers in the accounts.
Non-Adjusting Event: On January 5th, a tree falls on the car and crushes it. The car was fine on December 31st. This is a new condition. You don't change the numbers, but you might need to add a note to explain it to the readers.

Quick Review: Common Examples

Adjusting:
- A customer who owed money at year-end goes bankrupt (the debt was already bad, we just didn't know).
- A court case settled after year-end that confirms the company owed money on December 31st.
- Finding out the inventory was worth less than we thought (NRV issues).

Non-Adjusting:
- A fire or flood destroying a warehouse after the year-end.
- Issuing new shares to the public.
- Announcing a plan to close a part of the business.

Auditor’s Responsibilities (The Timeline)

The auditor’s duty changes depending on when the event happens:
1. Up to the date of the Auditor’s Report: The auditor must actively look for these events (reading minutes, checking latest management accounts).
2. After the Report is signed but before Accounts are issued: The auditor has a passive duty. They don't have to look, but if they find out about something major, they must act!
3. After Accounts are issued: Only if the auditor becomes aware of a fact that would have changed the report if they knew it earlier.

Key Takeaway: Adjusting events change the numbers; Non-adjusting events (if material) only require a disclosure note.

2. Going Concern (ISA 570)

Going Concern is the assumption that the company will stay in business for the "foreseeable future" (at least 12 months from the reporting date). If a company isn't a going concern, its financial statements look very different because assets are valued at what they could be sold for tomorrow in a "fire sale."

Indicators of Going Concern Problems

How do we know a company is in trouble? Look for these "red flags":
- Financial: High debts that can't be repaid, negative cash flows, or losing a major bank loan.
- Operating: Losing a major customer, losing key staff, or a massive strike.
- Other: New laws that make the business illegal or huge pending legal cases.

Audit Procedures for Going Concern

If you're worried about a client, you should:
1. Review cash flow forecasts for the next 12 months.
2. Read minutes of board meetings for signs of financial distress.
3. Check bank loan agreements to see if the company is breaking any rules (covenants).
4. Ask management for a Written Representation confirming their belief that the company is a going concern.

Did you know? Even if a company is in trouble, as long as they disclose the uncertainty clearly in the notes, the auditor can still give an "unmodified" (clean) opinion, though they will add an "Emphasis of Matter" or "Material Uncertainty Related to Going Concern" paragraph to point it out to readers.

3. Written Representations (ISA 580)

Sometimes, the auditor can’t "see" or "touch" the evidence. For example, how do you prove what management is intending to do? This is where Written Representations come in. This is a formal letter signed by management, sent to the auditor.

What’s in the letter?

Management confirms:
- They have fulfilled their responsibility for preparing the accounts.
- They have given the auditor all relevant information.
- They believe any uncorrected mistakes are not important (immaterial).

Common Mistake to Avoid: Written representations are not a substitute for other evidence. If you can count the cash in the safe, you don't just take a letter saying "the cash is there." You must count it! The letter is the last resort or a way to support other evidence.

Key Takeaway: If management refuses to sign this letter, the auditor usually cannot give a clean audit opinion because it casts doubt on everything management has said.

4. Final Analytical Procedures

Just before finishing, the auditor performs Analytical Procedures one last time.
- Why? To ensure that the final figures (after all audit adjustments) make sense and match the auditor's understanding of the business.
- How? Comparing the final draft accounts to last year's accounts and looking for unexpected "blips" or trends that were missed earlier.

Analogy: It’s like stepping back from a painting to see if the proportions are right after you’ve spent all day focusing on the tiny details of one corner.

5. Evaluating Misstatements (ISA 450)

During the audit, you will find errors. Some are small, some are big. The auditor keeps a list called the Schedule of Uncorrected Misstatements.

The Process:
1. Total up all the small errors found.
2. Compare the total to the Materiality level.
3. If the total of the errors is greater than materiality, the auditor must ask management to fix them.
4. If management refuses to fix "material" errors, the auditor will have to modify (qualify) the audit report.

Quick Review Box:
- Subsequent Events: Adjusting (evidence of old conditions) vs. Non-adjusting (new conditions).
- Going Concern: Can the business survive for 12 months?
- Written Representations: Management's "letter of truth" to the auditor.
- Final Review: The "big picture" check using ratios and comparisons.

Final Encouragement

Audit finalisation is all about connecting the dots. Don't let the technical names like "ISA 560" scare you. Just keep asking yourself: "Is there anything that happened late that changes the numbers?" and "Is this company going to survive?" If you can answer those, you're thinking like an auditor! You're doing great—keep pushing forward!

Quick check

Can you answer these now?

Open each question to check the key ideas from this chapter.

What are subsequent events according to ISA 560?

Subsequent events are events occurring between the date of the financial statements and the date of the auditor's report, and facts that become known to the auditor after the date of the auditor's report.

What is the difference between an adjusting and a non-adjusting event?

Adjusting events provide evidence of conditions that existed at the year-end, while non-adjusting events relate to conditions that arose after the year-end.

What is the auditor's duty regarding subsequent events up to the date the audit report is signed?

The auditor has an active duty to perform audit procedures designed to identify all events requiring adjustment or disclosure in the financial statements.

What is the auditor's duty regarding subsequent events after the audit report is signed but before accounts are issued?

The auditor has a passive duty, meaning they are not required to perform any search procedures but must act if they become aware of a fact that would have changed their report.

What is the 'Going Concern' assumption (ISA 570)?

Going Concern is the assumption that the entity will continue its operations for the foreseeable future, usually defined as at least 12 months from the reporting date.

What are some financial indicators of going concern problems?

Indicators include high debt levels that cannot be repaid, negative operating cash flows, and the withdrawal of financial support by banks.

Which audit procedures are specific to evaluating going concern?

Procedures include reviewing cash flow forecasts, reading board minutes for signs of distress, checking loan agreements (covenants), and obtaining a written representation from management.

What is a Written Representation (ISA 580)?

A formal letter provided by management to the auditor to confirm certain matters or to support other audit evidence.

Are Written Representations sufficient audit evidence on their own?

No, they are not a substitute for other audit evidence that can be obtained and should only be used to support other evidence or when no other evidence is expected to exist.

What is the purpose of final analytical procedures?

To assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor's understanding of the entity.

How does an auditor evaluate misstatements found during the audit?

The auditor totals all uncorrected misstatements and compares them to materiality; if the total is material, they must ask management to fix them or they will modify the audit report.

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