Completion and final review: formula sheet

Key formulas

Three periods under ISA 560

Period end → report date (active duty) → issue date (act if you learn of a fact) → after issue (no duty to enquire; act if you learn of a fact)

Name the period first. It decides what you must do.

Adjusting event test

Adjusting = evidence of a condition that existed at the period end

Examples: a customer's insolvency confirming a receivable was impaired at year end; settlement of a court case for a past event.

Non-adjusting event test

Non-adjusting = condition arose after the period end; disclose if material

Examples: a fire after year end, a major acquisition, a fall in market value of investments. No change to the numbers.

Modification rule

If management will not adjust a material adjusting event, or will not disclose a material non-adjusting event → qualified or adverse opinion (ISA 705)

Qualified if material but not pervasive; adverse if material and pervasive.

Facts after the report date, before issue

Discuss with management and TCWG → if amended, extend procedures to the new report date and issue a new or dual-dated report

If management does not amend and you think it should, consider the options for preventing reliance on your report.

Required representation 1

Management has fulfilled its responsibility for the financial statements and for providing information and access

Refers to the terms of the engagement. Always required.

Required representation 2

All transactions have been recorded and are reflected in the financial statements

Always required. Other ISAs add specific required representations.

Evidence limit

Representations ≠ sufficient appropriate evidence alone

They do not replace evidence that could reasonably be expected to exist.

Timing

Date of letter ≤ date of auditor's report (as near as practicable)

Never after the report date. It covers all periods reported on.

Integrity doubt or refusal

Doubts on integrity → disclaim; refusal of required representations → disclaim

If integrity doubts are so serious that representations are unreliable, or management will not give the two required ones, disclaim an opinion where possible.

Accumulation threshold

Accumulate all misstatements > clearly trivial threshold

Clearly trivial is not the same as immaterial. It is set well below materiality at planning, and you must not treat it as a free allowance.

Aggregate of uncorrected misstatements

Total = factual + judgemental + projected misstatements (uncorrected)

Compare the total, and each item, with materiality, and with performance materiality when judging whether more work is needed. Effects on profit and on net assets are looked at separately.

Adjusted profit after correcting misstatements

Adjusted profit = reported profit + profit understatements − profit overstatements

Always state the direction. Correcting an understated expense reduces profit.

Overall analytical review requirement

ISA 520: overall review near the end must help form a conclusion that the financial statements are consistent with the auditor's understanding of the entity

If it finds unusual relationships, investigate them.

Misstatement size test

Uncorrected total ≥ materiality → material; close to materiality → consider extra work

Qualitative factors can make a smaller item material.

ISA 260 matters to communicate

Responsibilities + planned scope and timing + significant findings + independence (listed entities)

Significant findings include views on accounting practices, difficulties during the audit, uncorrected misstatements, and matters affecting the report.

ISA 265 significant deficiency

Significant deficiency = a deficiency, or combination, important enough to merit TCWG's attention (auditor's judgement)

Must be communicated in writing to TCWG on a timely basis. Judgement is not based on a fixed money threshold.

ISA 265 written communication content

Description of deficiency + its potential effects + enough information to understand the context + recommendation (where useful)

Also state that the audit was not designed to identify all deficiencies, so others may exist.

Rules on form of communication (ISA 260)

Significant findings: written only where oral communication is not adequate; independence for listed entities: ISA 260 requires it to be communicated but does not set its form, so a written statement is good practice

Oral communication must still be documented. Include clear timing so TCWG can act before sign-off.

Engagement quality review timing

EQR completed before the report is dated

ISQM 2 requires the reviewer to evaluate significant judgements and the conclusions reached. Under ISQM 2 and ISA 220 (Revised), the engagement partner must not date the auditor's report until the EQR is complete.

Quick revision

• Subsequent events are events occurring between the period end and the report date, plus facts discovered after the report date, where the auditor has specific responsibilities depending on whether the financial statements have been issued.
• Adjusting events give evidence of conditions at the year end. Non-adjusting events arise after it and may need disclosure.
• Going concern is a management assumption. The auditor evaluates management's assessment and considers whether a material uncertainty exists.
• If a material uncertainty is adequately disclosed, the result is an unmodified opinion that includes a separate section headed Material Uncertainty Related to Going Concern.
• Where a material uncertainty exists but disclosure is inadequate, give a qualified or adverse opinion (ISA 570/705), depending on materiality and pervasiveness.
• If the going concern basis is inappropriate but the financial statements are still prepared on that basis, the opinion is adverse.
• Written representations support other evidence but cannot replace it.
• If management refuses to give requested representations, consider the effect on the opinion and on reliance on management's integrity.
• Final analytical review checks that the financial statements make sense overall and agree with your understanding of the entity.
• Evaluate uncorrected misstatements individually and in total, and ask management to correct them.
• Communicate significant findings and uncorrected misstatements to those charged with governance.
• Under ISA 720, read the other information and consider whether it is materially inconsistent with the financial statements or with your knowledge from the audit. The Other Information section of the audit report is required for listed entities and where other information is obtained before the report date. It must state that there is nothing to report, or describe the uncorrected material misstatement of the other information.

Common mistakes

• Classifying an event by what happened, not by when the condition arose. Fix: Ask if the condition existed at the period end. A fire after year end is non-adjusting. A customer going bust over a debt that was already doubtful is adjusting.
• Saying the auditor has no responsibility after the report date. Fix: State the duty properly: no duty to enquire after the report date, but you must act if you learn of a fact that would have changed your report.
• Saying a representation letter is enough evidence on a matter. Fix: State that it is not independent and cannot replace evidence that should exist. Say further procedures are still needed.
• Dating the letter after the auditor's report. Fix: The letter is dated as near as practicable to, but not after, the report date.
• Treating 'clearly trivial' as meaning 'below materiality' and ignoring items between the two. Fix: Remember that clearly trivial is a much lower threshold. Items above it must be accumulated and considered in aggregate.
• Judging each misstatement on its own and never adding them up. Fix: Always total the uncorrected items and compare the total with materiality. Then consider nature as well as size.
• Treating all control deficiencies as needing a letter to TCWG. Fix: Separate significant deficiencies (written to TCWG) from other deficiencies (to management). Show your judgement using size, likelihood and effect.
• Saying communication goes only to management. Fix: Say that significant findings and independence go to TCWG, while less important points go to management. Name the audit committee where one exists.

Exam tips

• Always state the period (before report date, between report and issue, or after issue) before you give any advice. Examiners reward this structure.
• Quantify every event against materiality using the scenario numbers. A ratio or multiple shows commercial acumen.
• Tailor the procedures to the event. Generic lists score poorly.
• Link to going concern when the event is large, such as the loss of a major customer or a covenant breach.
• Finish with the effect on the auditor's report. Name the opinion type and the reason.
• Always say that representations support but never replace evidence. Markers look for it.
• In refusal questions, separate required representations from optional ones, then link to ISA 705 outcomes.
• Tie the scenario to the right ISA-specific representation, such as related parties or going concern.