CHAPTER 8

COMPLETING THE AUDIT

The completion stage of the audit is of crucial importance. It is during the completion stage that
the auditor reviews the evidence obtained during the audit together with the final version of the
financial statements with the objective of forming the auditor’s opinion. This article explores
some of the key requirements of International Standards on Auditing (ISA) that is relevant at the
completion stage, and discusses the practical implications of those requirements.

8.1 Review of Contingent Liabilities and Commitments

How important are contingent liabilities in an audit?

Importance of Proper Contingent Liability Disclosure

Contingent liabilities are those future expenses that might occur. Common examples include
lawsuits, warranties on company products and unsettled taxes. Because of the risks they impose
and the increased frequency with which they occur in contemporary finance, contingent
liabilities should be carefully considered by every private and government auditor. Credit rating
agencies, creditors and investors rely on audits to expose hidden risks to counterparties. The
opposite risk is also present. A company might overstate its contingent liabilities and scare
away investors, pay too much interest on its credit or fail to expand sufficiently for fear of loss.

Review of audit files and evaluation of misstatements

All audit work should be subject to review. This is a basic quality control requirement of ISA
220, Quality Control for an Audit of Financial Statements, and serves to ensure that sufficient
appropriate audit evidence has been obtained in respect of transactions and balances included in
the financial statements.

In performing a file review, the reviewer should consider the sufficiency of evidence obtained
and may need to propose further audit procedures if evidence is found to be insufficient or

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contradictory. ISA 230, Audit Documentation requires that documentation of the review process
includes who reviewed the audit work completed and the date and extent of such review.

ISA 450, Evaluation of Misstatements Identified during the Audit is relevant during an audit file
review. The objective of the auditor when following the requirements of this ISA are to evaluate
both the effect of identified misstatements on the audit, and the effect of uncorrected
misstatements, if any, on the financial statements.

ISA 450 requires that all misstatements identified (other than those that are clearly trivial) shall
be accumulated during the audit. The auditor may need to perform further audit procedures in
response to an identified misstatement – for example, to determine whether further
misstatements exist – and it is required that all misstatements are communicated to management
on a timely basis, along with a request to amend the misstatement identified.

Typically, the auditor will present the client with a list of misstatements (often referred to as the
‘audit error schedule’), quantifying the amount of each misstatement, and proposing the
necessary adjustment to the financial statements. The proposed adjustment may be in the form of
a journal entry, an amendment to the presentation of the financial statements, or a correction to a
disclosure note. When management makes the necessary adjustments to the financial statements,
the auditor should confirm that the adjustments have been made correctly.

When misstatements remain uncorrected by management, the auditor is required to reassess the
level of materiality to confirm that it remains appropriate, and should then determine if the
uncorrected misstatements are material individually or in aggregate. The uncorrected
misstatements must be communicated to those charged with governance, and the potential
implications for the auditor’s report must also be communicated. The auditor must also obtain an
understanding of management’s reasons for not making the necessary corrections to the financial
statements.
ISA 450 also requires that the auditor must request that management provides a written
representation as to whether management believes the effects of uncorrected misstatements are
immaterial, both individually and in aggregate, to the financial statements taken as a whole. A

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summary of uncorrected misstatements should also be included within, or attached to, the written
representation.

Final analytical procedures

During the completion stage of the audit, the client should prepare the final version of the
financial statements, which, as discussed above, should incorporate any adjustments of
misstatements proposed by the auditor. The financial statements should be reviewed according to
the requirements of ISA 520, Analytical Procedures. One of the objectives of the auditor in
complying with ISA 520 is to design and perform analytical procedures near the end of the audit
that assist in forming an overall conclusion as to whether the financial statements are consistent
with the auditor’s understanding of the entity.

The analytical procedures performed at this stage of the audit are not different to those
performed at the planning stage – the auditor will perform ratio analysis, comparisons with prior
period financial statements and other techniques to confirm that trends are as expected, and to
highlight unusual transactions and balances that may indicate a risk of misstatement. The key
issue is that, near the end of the audit, the auditor should have sufficient audit evidence to
explain the issues highlighted by analytical procedures, and should therefore be able to conclude
as to the overall reasonableness of the financial statements.

When the analytical procedures performed near the end of the audit reveal further previously
unrecognized risk of material misstatement, the auditor is required to revise the previously
assessed risk of material misstatement and modify the planned audit procedures accordingly.
This means potentially performing further audit procedures in relation to matters that are
identified as high risk.

As well as reviewing the main elements of the financial statements, the auditor must at this stage
carefully review the notes to the financial statements for completeness and compliance with the
applicable financial reporting framework. In many situations, this will be the first opportunity for
the auditor to review this information, as clients often prepare the notes to the financial
statements towards the end of the audit process.

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At this stage, the auditor should also read the other information to be issued with the financial
statements for consistency with the financial statements. This is important as inconsistencies may
have implications for the auditor’s report.
8.2 Review of Subsequent Events
What is a Subsequent Event?
A subsequent event is an event that occurs after a reporting period, but before the financial
statements for that period have been issued or are available to be issued. Depending on the
situation, such events may or may not require disclosure in an organization's financial
statements. The two types of subsequent events are noted below.
Subsequent events and going concern procedures

There are two ISAs that are particularly relevant near the end of the audit. The first is 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.

Typically, the auditor will follow a specific work programme dealing with subsequent events,
including procedures such as reviewing internal accounting records and minutes of management
meetings since the year-end and discussing subsequent events with management – particularly
the extent to which management has established procedures adequate to identify relevant
subsequent events. It is important that procedures dealing with subsequent events are performed
up to the date of the auditor’s report. If they are performed too early and not updated close to the
date of the auditor’s report, then a significant event may not be identified by the auditor.

Secondly, ISA 570, Going Concern 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. Therefore, the auditor will conclude on going concern matters near the end of
the audit having reviewed all evidence obtained and after reviewing the final version of the
financial statements.

8.3 Communication with the Audit Committee and Management

Written representations and communication with those charged with governance

Towards the end of the audit, the auditor must consider the matters to be included in
management’s written representation, according to ISA 580, Written Representations. This is a
matter to be dealt with towards the conclusion of the audit because it is a requirement of ISA 580
that the date of the written representation shall be as near as possible to, but not after, the date of
the auditor’s report. Written representations are necessary audit evidence, and therefore the
auditor’s opinion cannot be expressed and the auditor’s report cannot be dated before the date of
the written representations. Significant subsequent events may come to light very late in the
audit, and therefore the written representations should cover all of the subsequent events period,
right up to the date at which the audit report is dated.
Important outputs of the audit are the matters to be communicated in accordance with ISA
260, Communication with Those Charged with Governance. The matters to be communicated
include significant findings from the audit and matters relating to auditor’s independence. In
addition, the auditor must also consider whether the two-way communication between the
auditor and those charged with governance has been adequate for an effective audit, and have
taken appropriate action if not.
Audit clearance meeting
At the conclusion of the audit, a meeting will usually be held between the auditor and
management and/or those charged with governance of the client. At this clearance meeting the
audit or will explain the various matters that have been discussed in this article, and any other
matters to be discussed in respect of the financial statements and the audit. Typically, at the
clearance meeting the following matters may be discussed:

 The adequacy of the entity’s internal controls and process of preparing the financial statements,
 any proposed adjustments to the financial statements

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 any difficulties encountered during the audit process

 the details of ethical matters that may need to be clarified with the client

 confirmation of the matters to be included in management’s written representations

 An update on changes in financial reporting or other regulations that may impact the client’s
financial statements, and confirmation that the client’s accounting policies are appropriate.

The audit clearance meeting is not a requirement of ISAs, but is often used as a means to ensure
that there are no misunderstandings regarding the financial statements, the auditor’s report and
any of the other matters discussed.