Completion, Going Concern and Subsequent Events
Completion
Completion, Going Concern and Subsequent Events
Syllabus tag: KASNEB CPA | Intermediate Level | CA24 Auditing and Assurance | Topic 8 Completion, Going Concern and Subsequent Events
Lesson objectives
By the end of this topic, you will be able to:
- List the procedures performed at the completion stage
- Evaluate the going concern assumption and the indicators against it
- Distinguish adjusting from non-adjusting subsequent events
- Explain the auditor's duty in three distinct periods after the year end
- Evaluate uncorrected misstatements
Why this matters
Completion is where the audit's separate findings are drawn together into one conclusion. Most of the judgement in an audit is exercised here, and so is most of the risk.
Completion procedures
- Review of the financial statements as a whole for consistency with the auditor's knowledge of the business
- Final analytical procedures — do the figures make sense together?
- Evaluation of uncorrected misstatements, individually and in aggregate
- Review of subsequent events
- Assessment of going concern
- Written representations from management
- Engagement quality review where required
- Partner review and sign-off
Final analytical review is the last chance to notice that something is wrong. A ratio inconsistent with everything the team has learned during the audit should prompt further work, not a note that it was considered.
Going concern
Financial statements are prepared on the assumption that the entity will continue in operation for the foreseeable future — at least twelve months from the date of approval.
Indicators of doubt:
| Financial | Operating | Other |
|---|---|---|
| Net liabilities | Loss of key management | Legal proceedings |
| Recurring losses | Loss of a major market or supplier | Regulatory breaches |
| Inability to pay creditors as they fall due | Labour difficulties | Uninsured catastrophe |
| Loans approaching maturity without renewal prospects | Shortage of key supplies | Change in law |
| Adverse key ratios |
Procedures: review cash flow forecasts and test their assumptions, inspect loan agreements and correspondence with lenders, review post-year-end management accounts, examine minutes for discussion of the position, and obtain a written representation on management's plans.
The auditor's duty is to evaluate management's assessment, not to make the assessment. Where management has not made one, the auditor asks them to.
The reporting consequences depend on two questions: is the going concern basis appropriate, and is any material uncertainty adequately disclosed?
| Situation | Report |
|---|---|
| Basis appropriate, no material uncertainty | Unmodified |
| Material uncertainty, adequately disclosed | Unmodified, with a Material Uncertainty Related to Going Concern section |
| Material uncertainty, not adequately disclosed | Qualified or adverse |
| Going concern basis inappropriate | Adverse |
The second row is the one most often answered wrongly. Adequate disclosure means there is no misstatement, so there is nothing to qualify.
:::checkpoint A company has net liabilities and recurring losses, but its parent has given a written undertaking to provide support for eighteen months. State what procedures you would perform on that undertaking before concluding. :::
Subsequent events
Events between the year end and the date the financial statements are issued.
Adjusting events provide evidence of conditions that existed at the reporting date. Adjust the figures.
- A customer becomes insolvent shortly after the year end, confirming the receivable was already doubtful
- Litigation settles, confirming an obligation existed
- Inventory sells below cost, confirming net realisable value
- Fraud is discovered showing the statements are misstated
Non-adjusting events relate to conditions arising after the reporting date. Disclose if material; do not adjust.
- A fire destroys a factory
- A major share issue or business combination
- A significant decline in the value of investments after the year end
The test is when the underlying condition arose, not how dramatic the event was.
Three periods, three duties
This distinction is examined regularly and answered poorly.
1. Year end to the date of the auditor's report. The auditor has an active duty to perform procedures designed to identify subsequent events.
2. After the report but before the statements are issued. No active duty to search. But if a matter comes to the auditor's attention that would have changed the report, the auditor must discuss it with management and, if the statements are amended, issue a new report.
3. After the statements are issued. No duty to perform any procedures. If a fact emerges that existed at the report date and would have changed the report, the auditor considers whether the statements need revision and whether to take steps to prevent reliance on the report.
The pattern: active search, then respond if told, then respond only in extremity.
Evaluating uncorrected misstatements
Misstatements found and not corrected are accumulated and assessed in aggregate against materiality — not one by one. Several individually immaterial errors can together exceed materiality.
The auditor also considers qualitative factors: whether the errors run consistently in one direction, whether they turn a loss into a profit, and whether they affect compliance with a covenant.
Errors that all push profit the same way suggest bias rather than accident, and that possibility must be considered even where the total is below materiality.
Management is asked to correct them. Where they refuse, the auditor considers the effect on the opinion, and the uncorrected items are listed in the written representation letter.
:::checkpoint Three uncorrected misstatements each overstate profit and total 85% of materiality. Explain why the auditor should not simply conclude that the total is below materiality and move on. :::