Today we will look at the steps that external auditors need to take to complete an audit. Once the external auditors have completed their substantive testing, there are still many procedures that they need to complete before the audit report is provided to client. Here are the key steps in completing an audit engagement, with reference to respective ISA.
Step 1 - Final review of the audit file to ensure quality control is in place
Before the audit report is drafted, the audit engagement manager and partner will review the audit file to ensure proper procedures have been applied based on which the engagement partner can form an opinion. Reviewing the audit file is also necessary to ensure the quality of the audit.
ISA 220 Quality Control for an Audit of Financial Statements
Concerning quality control of audit documentation with regards to completion of an audit, 'ISA 220 - Quality Control for an Audit of Financial Statements’ states that:
The engagement partner shall take responsibility for reviews being performed in accordance with the firm’s review policies and procedures.
On or before the date of the auditor’s report, the engagement partner shall, through a review of the audit documentation and discussion with the engagement team, be satisfied that sufficient appropriate audit evidence has been obtained to support the conclusions reached and for the auditor’s report to be issued.
The standard requires the engagement partner to review the work performed by the members of the audit assignment team before completing an audit.
The audit engagement partner will generally review critical areas of judgement, areas of significant risk and other areas that they deem important to ensure compliance with the standard in regards to the quality of the audit.
The standard does not require the audit engagement partner to review all documentation related to the assignment but they may choose to do so if they deem necessary.
ISA 520 Analytical Procedures
ISA 520 – Analytical Procedures deals with the auditor's use of analytical procedures as substantive procedures in response to assessed risks, and as procedures that assist in arriving at the auditor's overall conclusion in an audit of financial statements.
Under the paragraph “Analytical Procedures that Assist When Forming an Overall Conclusion” states that:
The auditor shall design and perform analytical procedures, near the end of the audit, that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity.
Before forming an overall conclusion regarding the financial statements of the audit, the auditor should perform analytical procedures to verify their opinion formed during the audit of individual components or elements of the financial statements.
Analytical procedures may include different methods such as ratio analysis, trend analysis or comparisons with prior period financial statements. This can help the auditor identify any unusual transactions or balances that may indicate a risk of misstatement.
Through the use of analytical procedures, the auditor probably comes across any previously unknown information, then, it is required to revise the risk of material misstatement assessed before.
This may also require the auditor to perform further audit procedures according to the newly identified information. The auditor may also need to carefully consider the disclosures in the notes to the financial statements and any other information that is issued with the financial statements to ensure they are consistent with the financial statements.
Step 2 - Evaluation of misstatements
Next step to complete an audit assignment is to evaluate the misstatements identified during the audit. This is done under 'ISA 450 - Evaluation of Misstatements Identified During the Audit'. Regarding the steps taken before the completion of an audit, ISA 450 states that:
The auditor shall determine whether uncorrected misstatements are material, individually or in aggregate. In making this determination, the auditor shall consider:
(a) The size and nature of the misstatements, both in relation to particular classes of transactions, account balances or disclosures and the financial statements as a whole, and the particular circumstances of their occurrence; and
(b) The effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the financial statements as a whole.
The standard requires the auditor, before giving a report, to evaluate the effect of any uncorrected misstatements and if necessary, reassess the materiality per ISA 320.
The auditor must determine whether the uncorrected misstatements are material, individually or in aggregate. The auditor must also determine the effect of any uncorrected misstatements from prior accounting periods that may affect the current financial statements.
These misstatements are generally discussed with the client in the audit clearance meeting before providing the client with an audit report. If the misstatements remain uncorrected, the auditor will have to modify their report accordingly.
Step 3 - Review of subsequent events
During the process of completion of an audit, the auditor must also determine the effect of any subsequent events relevant to client’s financial statements.
This is done per 'ISA 560 – Subsequent Events' which requires the auditor to perform audit procedures to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the auditor’s report that require adjustment of, or disclosure in, the financial statements have been identified.
In regards to the completion of an audit, the standard states that:
[if] the auditor identifies events that require adjustment of, or disclosure in, the financial statements, the auditor shall determine whether each such event is appropriately reflected in those financial statements in accordance with the applicable financial reporting framework.
The standard requires the auditor to perform procedures to ensure that the events that occur between the date of the financial statement and the date of the auditor’s report, the require an adjustment or a disclosure within the financial statements are reflected in the financial statements.
The auditor can achieve this by reviewing the subsequent accounting records of the business or analyzing minutes of the management meetings after the year-end. These checks need to be carried out as close to the audit report date as possible to ensure all subsequent events are identified and adjusted.
Step 4 - Review of going concern
The auditor must also review the going concern status of the client business before providing an audit report. This is done following ISA 570 – Going Concern.
The standard states that the auditor shall remain alert throughout the audit for audit evidence of events or conditions that may cast doubt on the entity’s ability to continue as a going concern. Furthermore, it states that:
The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained regarding, and shall conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements.
Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s judgment, a material uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern. A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary for:
(a) In the case of a fair presentation financial reporting framework, the fair presentation of the financial statements, or
(b) In the case of a compliance framework, the financial statements not to be misleading.
This means that before providing the audit report to the client, the auditor must verify the going concern assumption of the management. The auditor must also ensure that sufficient appropriate audit evidence has been gathered to verify the going concern assumption. Based on this evidence, the auditor can conclude whether any material uncertainty exists related to events or conditions that may challenge the going concern ability of the business.
Step 5 - Obtaining written representations
The audit cannot be completed without obtaining written representations under ISA 580 Written Representations.
Written representations are written statements provided by the management of the business to the auditor to confirm certain matters or to support audit evidence. Before the completion of the audit, the auditor must obtain different written representations from the client business.
The objectives of auditors, per ISA 580 are:
To obtain written representations from management and, where appropriate, those charged with governance that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor;
To support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representations if determined necessary by the auditor or required by other ISAs; and
To respond appropriately to written representations provided by management and, where appropriate, those charged with governance, or if management or, where appropriate, those charged with governance do not provide the written representations requested by the auditor.
This means the auditors must obtain written representations from the management and, if necessary, from those charged with governance that regarding their duties when it comes to the preparation of financial statements and providing auditors with complete information.
Furthermore, the auditor is required to obtain written representations for matters relating to the financial statements, if the auditor deems necessary.
ISA 580 also requires the auditors to respond appropriately when a written representation is obtained or when the management or those charged with governance of the client business refuse to provide written representations.
Written representations are dealt with at the end of the audit competition cycle because the standard requires the date of these representations to be close to the date of the audit reports.
Step 6 - Audit clearance meeting
Last but not the least, audit clearance meeting is the final step in an audit completion process. An audit clearance meeting is not required by the International Standards on Accounting. However, these meetings can be used as a final communication channel between the auditors, and the management and those charged with governance of the business.
In addition, this meeting is used as a means to ensure there are no misunderstandings between the two parties regarding the financial statements, the auditor’s report and any other matters.
Matters discussed in a typical audit clearance meeting will include, but are not limited to:
The process of preparation of financial statements.
The adequacy of the internal controls of the business.
Proposed adjustments to the financial statements.
Difficulties encountered by the auditors during the assignment.
Confirmation of the matters to be included in the written representations to be provided by the management.
Confirmation regarding the client’s accounting policies appropriateness.
Details of ethical matters that may need to be clarified with the client.
Final words
When it comes to the completion of an audit, the auditor must plan the completion stage carefully. This is because the completion stage of the audit requires compliance with many different ISAs. The auditor may risk giving an inappropriate opinion if the completion stage is not carried out properly.
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