Analyitical review procedures and going concern

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ANALYTICAL REVIEW
ISA 520 defines “Analytical procedures” to mean
evaluations of financial information made by a study of
plausible relationships among both financial and non-
financial data.Analytical procedures also encompass the
investigation of identified fluctuations and relationships that
are inconsistent with other relevant information or deviate
significantly from predicted amounts.
The auditor should apply analytical procedures as risk
assessment procedures to obtain an understanding of
the entity and its environment and in the overall review
at the end of the audit. Analytical procedures may
also be applied as substantive procedures

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ANALYTICAL REVIEW…
These are analysis of relationship between items
of financial data, or between items of financial
and non-financial data deriving form the same
period or between comparable financial
information deriving from different periods to
identify consistencies and predicted pattern and
or significant fluctuations and unexpected
relationships and the results of investigation
thereof.

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ANALYTICAL REVIEW…
Analytical procedures include the consideration of
comparisons of the entity’s financial information with,
for example:
– • Comparable information for prior periods.
– • Anticipated results of the entity, such as budgets or
forecasts, or
– expectations of the auditor, such as an estimation of
depreciation.
– • Similar industry information, such as a comparison of the
entity’s ratio of sales to accounts receivable with industry
averages or with other entities of comparable size in the
same industry.

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PURPOSE OF AR
Analytical procedures are used for the following
purposes:
– (a) As risk assessment procedures to obtain an
understanding of the entity and its environment
– (b) As substantive procedures when their use can be
more effective or efficient than tests of details in
reducing the risk of material misstatement at the
assertion level to an acceptably low level
– (c) As an overall review of the financial statements at
the end of the audit

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PURPOSES OF AR
Analytical Procedures as Risk Assessment
Procedures
The auditor should apply analytical procedures as risk
assessment procedures to obtain an understanding of
the entity and its environment.
Application of analytical procedures may indicate aspects of
the entity of which the auditor was unaware and will assist
in assessing the risks of material misstatement in order to
determine the nature, timing and extent of further audit
procedures.

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AR as risk assessment procedures
Analytical procedures applied as risk assessment
procedures use both financial and non-financial
information, for example, the relationship between sales
and square footage of selling space or volume of goods
sold.
ISA 315, “Understanding the Entity and Its Environment
and Assessing the Risks of Material Misstatement”
contains additional guidance on applying analytical
procedures as risk assessment procedures.

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ARP as substantive procedures
The auditor designs and performs substantive procedures to
be responsive to the related assessment of the risk of
material misstatement at the assertion level.
The auditor’s substantive procedures at the assertion level
may be derived from tests of details, from substantive
analytical procedures, or from a combination of both. The
decision about which audit procedures to use to achieve a
particular audit objective is based on the auditor’s judgment
about the expected effectiveness and efficiency of the
available audit procedures in reducing the assessed risk of
material misstatement at the assertion level to an
acceptably low level.

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ARP as substantive procedures
The auditor will ordinarily inquire of management
as to the availability and reliability of information
needed to apply substantive analytical
procedures and the results of any such
procedures performed by the entity. It may be
efficient to use analytical data prepared by the
entity, provided the auditor is satisfied that such
data is properly prepared.

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FACTORS TO CONSIDER IS USING ARP AS SUBSTATIVE PROCEDURES
• The suitability of using substantive analytical
procedures given the assertions
• The reliability of the data, whether internal or external,
from which the expectation of recorded amounts or
ratios is developed
• Whether the expectation is sufficiently precise to
identify a material misstatement at the desired level of
assurance.
• The amount of any difference of recorded amounts
from expected values that is acceptable

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FACTORS TO CONSIDER IS USING ARP AS SUBSTATIVE PROCEDURES
In determining the suitability of substantive
analytical procedures given the assertions, the
auditor considers the following:
– (a) The assessment of the risk of material
misstatement
– (b) Any tests of details directed toward the same
assertion

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FACTORS TO CONSIDER IS USING ARP AS SUBSTATIVE
PROCEDURES
The Reliability of the Data
(a) Source of the information available. For example,
information is ordinarily more reliable when it is obtained
from independent sources outside the entity.
(b) Comparability of the information available. For example,
broad industry data may need to be supplemented to be
comparable to that of an entity that produces and sells
specialized products.
(c) Nature and relevance of the information available. For
example, whether budgets have been established as
results to be expected rather than as goals to be achieved.
(d) Controls over the preparation of the information. For
example, controls over the preparation, review and
maintenance of budgets.

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PROCEDURES
Whether the Expectation is Sufficiently Precise
In assessing whether the expectation can be developed
sufficiently precise to identify a material misstatement at
the desired level of assurance, the audi torconsiders
factors such as the following:
• The accuracy with which the expected results of
substantive analytical procedures can be predicted. For
example, the auditor will ordinarily expect greater
consistency in comparing gross profit margins from one
period to another than in comparing discretionary
expenses, such as research or advertising.

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PROCEDURES
Whether the Expectation is Sufficiently Precise
• The degree to which information can be disaggregated. For
example, substantive analytical procedures may be more
effective when applied to financial information on individual
sections of an operation or to financial statements of components
of a diversified entity, than when applied to the financial
statements of the entity as a whole.
• The availability of the information, both financial and non-
financial. For example, the auditor considers whether financial
information, such as budgets or forecasts, and non-financial
information, such as the number of units produced or sold, is
available to design substantive analytical procedures. If the
information is available, the auditor also considers the reliability
of the information.

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PROCEDURES
Amount of Difference of Recorded Amounts from
Expected Values that is Acceptable
In designing and performing substantive analytical procedures, the
auditor considers the amount of difference from expectation that can
be accepted without further investigation.
This consideration is influenced primarily by materiality and the
consistency with the desired level of assurance.
Determination of this amount involves considering the possibility that
a combination of misstatements in the specific account balance, class
of transactions, or disclosure could aggregate to an unacceptable
amount. The auditor increases the desired level of assurance as the
risk of material misstatement increases by reducing the amount of
difference from the expectation that can be accepted without further
investigation

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FACTORS TO CONSIDER IS USING ARP AS SUBSTANTIVE
PROCEDURES
Analytical Procedures in the Overall Review at the End of the
Audit
The auditor should apply analytical procedures at or near the end
of the audit when forming an overall conclusion as to whether
the financial statements as a whole are consistent with the
auditor’s understanding of the entity.
The investigation of unusual fluctuations and relationships ordinarily
begins with inquiries of management, followed by:
(a) Corroboration of management’s responses, for example, by
comparing them with the auditor’s understanding of the entity and
other audit evidence obtained during the course of the audit; and
(b) Consideration of the need to apply other audit procedures based
on the results of such inquiries, if management is unable to provide
an explanation or if the explanation is not considered adequate.

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WORKED EXAMPLE
Score Supermarkets Ltd is a wholesaler of do-it
yourself Products. You are the manager responsible
for the audit of the company for the year ended 31st
December 2002. It operates in a rented premise; its
fixed assets comprise motor vehicles, a
microcomputer and some minor fixtures and fittings.
The accounting records (sales ledger, purchases
ledger, nominal ledger and payroll) are maintained on
a microcomputer by a bookkeeper, and a part-time
accountant prepares the annual accounts and
quarterly management accounts.
The summarized draft accounts(Not IFRS compliant)
for the year ended 31st
December 2002, and the
previous year’s audited accounts are as follows:

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2002 2001
Shs Shs
Sales 104,390,000.00 50,670,000.00
Cost of Sales 68,060,000.00 35,520,000.00
Gross profit 36,330,000.00 15,150,000.00
Overheads 27,210,000.00 14,740,000.00
Profit before tax 9,120,000.00 410,000.00
Taxation 2,280,000.00 110,000.00
Retained profit 6,840,000.00 300,000.00
BALANCE SHEET AS AT 31ST DECEMBER,2000
Fixed assets 2,040,000.00 890,000.00
Current assets
Stock 17,300,000.00 5,260,000.00
Trade Debtors 23,920,000.00 9,550,000.00
Prepayments 550,000.00 150,000.00
41,770,000.00 14,960,000.00
Current Liabilities
Trade creditors 17,880,000.00 7,130,000.00
Accruals 3,780,000.00 2,120,000.00
Taxation 2,280,000.00 110,000.00
Bank overdraft 8,610,000.00 2,070,000.00
32,550,000.00 11,430,000.00
Net current assets 9,220,000.00 3,530,000.00
Net assets 11,260,000.00 4,420,000.00
Director's loan account 1,540,000.00 1,540,000.00
9,720,000.00 2,880,000.00
Called up share capital 100,000.00 100,000.00
Profit and loss account 9,620,000.00 2,780,000.00
9,720,000.00 2,880,000.00
FOR THE YEAR ENDED 31ST DECEMBER,2002

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WORKED EXAMPLE….The company sells low value items to a larger number of
customers. Most of the sales are on credit, with less than
5% of sales being in cash. It has over 700 “live”
accounts on the sales ledger of which 70% are new
customers in the past year. You have carried out audit
checks on the accounting systems (ie compliance tests)
and these tests have shown that the systems are
generally reliable. However, there is no formal system of
recording receipts of goods; the only record of receipt of
goods is the suppliers delivery note, but this is not dated
by the goods received department , there is a greater
risk of purchases cut-off errors. Your review of goods is
to enable you to plan the audit of the year-end accounts,
so that guidance is given to the audit staff and more time
is spent in areas of highest audit risk.

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Required :
(a) Calculate appropriate ratios for both years, and comment on the
financial performance of Shoprite Ltd for the year ended 31st
December,2002, both in comparison with the previous year and in
absolute terms.
(b) From your review of the financial statements and other matters
included in the question, suggest the amount of audit work you should
perform and the particular procedures you should carry out to minimize
the audit risk of the following items appearing in the final accounts:
(a)               Stock and gross profit margin
(b)               Trade debtors
(c)               Trade creditors
(d)               Bank overdraft and cash flow forecasts
(c) state those matters you would wish , as auditors , to raise with
management
(d)   indicate why you would want to discuss these particular issues
(e)   in respect to each matter you wish to raise outline two questions
you would put to the management during this analytical review stage of
audit

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ENGAGEMENTS TO REVIEW F/S ISRE 2400
The purpose of this International Standard on Review
Engagements (ISRE) is to establish standards and provide
guidance on the auditor’s professional responsibilities when an
engagement to review financial statements is undertaken and on
the form and content of the report that the auditor issues in
connection with such a review.
This ISRE is directed towards the review of financial statements.
However, it is to be applied to the extent practicable to
engagements to review financial or other information. Guidance
in the International Standard on Auditing (ISAs) may be useful to
the auditor in applying this ISRE

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OBJECTIVE
The objective of a review of financial statements
is to enable an auditor to state whether, on the
basis of procedures which do not provide all the
evidence that would be required in an audit,
anything has come to the auditor’s attention
that causes the auditor to believe that the
financial statements are not prepared, in all
material respects, in accordance with an
identified financial reporting framework
(negative assurance).

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ISRE 2400
The auditor should plan and perform the review
with an attitude of professional skepticism
recognizing that circumstances may exist which
cause the financial statements to be materially
misstated.
For the purpose of expressing negative assurance
in the review report, the auditor should obtain
sufficient appropriate evidence primarily through
inquiry and analytical procedures to be able to draw
conclusions.

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SCOPE OF THE REVIEW
The term “scope of a review” refers to the review
procedures deemed necessary in the circumstances to
achieve the objective of the review. The procedures
required to conduct a review of financial statements
should be determined by the auditor having regard
to the requirements of this ISRE, relevant
professional bodies, legislation, regulation and,
where appropriate, the terms of the review
engagement and reporting
requirements.

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TERMS OF ENGAGEMENT
Matters that would be included in the engagement letter include the
following:
• The objective of the service being performed.
• Management’s responsibility for the financial statements.
• The scope of the review, including reference to this ISRE (or relevant
national standards or practices).
• Unrestricted access to whatever records, documentation and other information
requested in connection with the review.
• A sample of the report expected to be rendered.
• The fact that the engagement cannot be relied upon to disclose errors, illegal acts or
other irregularities, for example, fraud or defalcations that may exist.
• A statement that an audit is not being performed and that an audit opinion will not be
expressed. To emphasize this point and to avoid confusion, the auditor may also
consider pointing out that a review engagement will not satisfy any statutory or third
party requirements for an audit.

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TURN
GOING CONCERN CONSIDERATIONS
AND SUBSEQUENT EVENTS
ISA 570

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GOING CONCERN CONSIDERATIONS
. When planning and performing audit procedures
and in evaluating the results thereof, the auditor
should consider the appropriateness of
management’s use of the going concern
assumption in the preparation of
the financial statements.
MANAGEMENT RESPONSIBILITY
The going concern assumption is a fundamental principle in the preparation of
financial statements. Under the going concern assumption, an entity is
ordinarily viewed as continuing in business for the foreseeable future with
neither the intention nor the necessity of liquidation, ceasing trading or seeking
protection from creditors pursuant to laws or regulations. Accordingly, assets
and liabilities are recorded on the basis that the entity will be able to realize its
assets and discharge its liabilities in the normal course of business.

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GOING CONCERN
Some financial reporting frameworks contain an explicit
requirement for management to make a specific
assessment of the entity’s ability to continue as a going
concern, and standards regarding matters to be
considered and disclosures to be made in connection
with going concern. For example,International
Accounting Standard (IAS) 1 (Revised 2003),
“Presentation of Financial Statements” requires
management to make an assessment of an enterprise’s
ability to continue as a going concern

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Management’s assessment of the going concern assumption
involves making a judgment, at a particular point in time, about the
future outcome of events or conditions which are inherently
uncertain. The following factors are relevant:
– • In general terms, the degree of uncertainty associated with
the outcome of an event or condition increases significantly the further
into the future a judgment is being made about the outcome of an
event or condition.
– For that reason, most financial reporting frameworks that require an
– explicit management assessment specify the period for which management is
required to take into account all available information.
– • Any judgment about the future is based on information available at
the time at which the judgment is made. Subsequent events can
contradict a judgment which was reasonable at the time it was made.
– • The size and complexity of the entity, the nature and condition of its
– business and the degree to which it is affected by external factors all
• affect the judgment regarding the outcome of events or conditions.

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EXAMPLES OF EVENTS OR CONDITIONS CAST DOUBT TO GOING CONCERN
Examples of events or conditions, which may give rise to
business risks, that individually or collectively may cast significant
doubt about the going concern assumption are set out below.
This listing is not all-inclusive nor does the
existence of one or more of the items always signify that a
material uncertainty exists.
Financial
• Net liability or net current liability position.
• Fixed-term borrowings approaching maturity without realistic
prospects of renewal or repayment; or excessive reliance on
short-term borrowings to finance long-term assets.
• Indications of withdrawal of financial support by debtors and
other creditors.•

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Negative operating cash flows indicated by historical or
prospective financial statements.
• Adverse key financial ratios.
• Substantial operating losses or significant deterioration in
the value of assets used to generate cash flows.
• Arrears or discontinuance of dividends.
• Inability to pay creditors on due dates.
• Inability to comply with the terms of loan agreements.
• Change from credit to cash-on-delivery transactions with
suppliers.
• Inability to obtain financing for essential new product
development or other essential investments.
Operating
• Loss of key management without replacement.

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• Loss of a major market, franchise, license, or
principal supplier.
• Labor difficulties or shortages of important
supplies.
Other
• Non-compliance with capital or other statutory
requirements.
• Pending legal or regulatory proceedings against
the entity that may, if successful, result in claims
that are unlikely to be satisfied.
• Changes in legislation or government policy
expected to adversely affect the entity.

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MITIGATING FACTORS
The significance of such events or conditions often can be
mitigated by other factors. For example,
the effect of an entity being unable to make its normal debt
repayments may be counter-balanced by management’s
plans to maintain adequate cash flows by alternative
means, such as by disposal of assets:
rescheduling of loan repayments, or
obtaining additional capital.
Similarly, the loss of a principal supplier may be mitigated
by the availability of a suitable
alternative source of supply.

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GOING CONCERN
AUDITOR’S RESPONSIBILITY
The auditor’s responsibility is to consider the appropriateness of management’s use of
the going concern assumption in the preparation of the financial statements, and
consider whether there are material uncertainties about the entity’s ability to continue
as a going concern that need to be disclosed in the financial statements.
The auditor considers the appropriateness of management’s use of the going concern
assumption even if the financial reporting framework used in the preparation of the
financial statements does not include an explicit requirement for management to make
a specific assessment of the entity’s ability to continue as a going concern.
The auditor cannot predict future events or conditions that may cause an entity to
cease to continue as a going concern. Accordingly, the absence of any reference to
going concern uncertainty in an auditor’s report cannot be viewed as a guarantee as to
the entity’s ability to continue as a going concern.

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GOING CONCERN
Planning the Audit and Performing Risk Assessment
Procedures
In obtaining an understanding of the entity, the auditor should
consider whether there are events or conditions and related
business risks which may cast significant doubt on the entity’s
ability to continue as a going concern.
The auditor should remain alert for audit evidence of events or
conditions and related business risks which may cast
significant doubt on the entity’s ability to continue as a going
concern in performing audit procedures throughout the audit.
If such events or conditions are identified, the auditor should, in
addition to performing the procedures, consider whether they
affect the auditor’s assessment of the risks of material
misstatement.

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GOING CONCERN
Evaluating Management’s Assessment
The auditor should evaluate management’s
assessment of the entity’s ability to continue as a
going concern.
The auditor should consider the same period as that
used by management in making its assessment under
the applicable financial reporting framework.
If management’s assessment of the entity’s ability to
continue as a going concern covers less than twelve
months from the balance sheet date, the auditor should
ask management to extend its assessment period to
twelve months from the balance sheet date.

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GOING CONCERN
Period Beyond Management’s Assessment
The auditor should inquire of management as to its
knowledge of events or conditions and related business
risks beyond the period of assessment used by
management that may cast significant doubt on the
entity’s ability to continue as a going concern.
For example, IAS 1 (Revised 2005) defines this as a
period that should be at least, but is not limited to,
twelve months from the balance sheet date.

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GOING CONCERN
Further Audit Procedures when Events or Conditions
are Identified
When events or conditions have been identified which may
cast significant doubt on the entity’s ability to continue as a
going concern, the auditor should:
(a) Review management’s plans for future actions based
on its going concern assessment;
(b) Gather sufficient appropriate audit evidence to confirm
or dispel whether or not a material uncertainty exists
through carrying out audit procedures considered
necessary, including considering the effect of any plans of
management and other mitigating factors; and
(c) Seek written representations from management
regarding its plans for future action.

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GOING CONCERN
The auditor inquires of management as to its plans for
future action, including its plans to liquidate assets,
borrow money or restructure debt, reduce or delay
expenditures, or increase capital.
The auditor also considers whether any additional facts
or information are available since the date on which
management made its assessment. The auditor obtains
sufficient appropriate audit evidence that management’s
plans are feasible and that the outcome of these plans
will improve the situation.

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GOING CONCERN
Audit procedures that are relevant in this regard may
include the following:
• Analyzing and discussing cash flow, profit and other
relevant forecasts with management.
• Analyzing and discussing the entity’s latest available
interim financial statements.
• Reviewing the terms of debentures and loan agreements
and determining whether any have been breached.
• Reading minutes of the meetings of shareholders, those
charged with governance and relevant committees for
reference to financing difficulties.

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GOING CONCERN
• Inquiring of the entity’s lawyer regarding the existence of
litigation and claims and the reasonableness of management’s
assessments of their outcome and the estimate of their financial
implications.
• Confirming the existence, legality and enforceability of
arrangements to provide or maintain financial support with
related and third parties and assessing the financial ability of
such parties to provide additional funds.
• Considering the entity’s plans to deal with unfilled customer
orders.
• Reviewing events after period end to identify those that either
mitigate or otherwise affect the entity’s ability to continue as a
going concern.

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GOING CONCERNWhen analysis of cash flow is a significant
factor in considering the future outcome of
events or conditions the auditor considers:
(a) The reliability of the entity’s information system
for generating such information; and
(b) Whether there is adequate support for the
assumptions underlying the forecast.
In addition the auditor compares:
(a) The prospective financial information for recent
prior periods with historical results; and
(b) The prospective financial information for the
current period with results achieved to date.

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GOING CONCERN
Audit Conclusions and Reporting
Based on the audit evidence obtained, the auditor
should determine if, in the auditor’s judgment, a
material uncertainty exists related to events or
conditions that alone or in aggregate, 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 is such that, in the auditor’s judgment,
clear disclosure of the nature and implications of the
uncertainty is necessary for the presentation of the financial
statements not to be misleading.

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. If adequate disclosure is made in the financial
statements, the auditor should express an unqualified
opinion but modify the auditor’s report by adding an
emphasis of matter paragraph that highlights the
existence of a material uncertainty relating to the event
or condition that may cast significant doubt on the
entity’s ability to continue as a going concern and
draws attention to the note in the financial statements
that discloses the matters.
In evaluating the adequacy of the financial statement
disclosure, the auditor considers whether the information
explicitly draws the reader’s attention to the possibility that
the entity may be unable to continue realizing its assets and
discharging its liabilities in the normal course of business.

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The following is an example of such a paragraph when the auditor is
satisfied as to the adequacy of the note disclosure:
“Without qualifying our opinion, we draw attention to Note X in the
financial statements which indicates that the Company incurred a net
loss of ZZZ during the year ended December 31, 20X1 and, as of that
date, the Company’s current liabilities exceeded its total assets by
ZZZ. These conditions, along with other matters as set forth in Note
X, indicate the existence of a material uncertainty which may cast
significant doubt about the Company’s ability to continue as a going
concern.”
In extreme cases, such as situations involving multiple material
uncertainties that are significant to the financial statements, the
auditor may consider it appropriate to express a disclaimer of opinion
instead of adding an emphasis of matter paragraph.

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Audit Conclusion and Reporting
If adequate disclosure is not made in the financial
statements, the auditor should express a qualified or
adverse opinion, as appropriate (ISA 700,
“The Auditor’s Report on Financial Statements,”
The report should include specific reference to the fact
that there is a material uncertainty that may cast
significant doubt about the entity’s ability to continue
as a going concern.
The following is an example of the relevant paragraphs when a qualified opinion is
to be expressed:
“The Company’s financing arrangements expire and amounts outstanding are
payable on March 19, 20X1. The Company has been unable to re-negotiate or
obtain replacement financing. This situation indicates the existence of a material
uncertainty which may cast significant doubt on the Company’s ability to continue
as a going concern and therefore it may be unable to realize its assets and
discharge its liabilities in the normal course of business. The financial statements
(and notes thereto) do not disclose this fact.

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EXAMPLE OF QUALIFIED OPINION….
In our opinion, except for the omission of the
information included in the preceding paragraph,
the financial statements give a true and fair view
of (present fairly, in all material respects) the
financial position of the Company at December
31, 20X0 and the results of its operations and its
cash flows for the year then ended in
accordance with …”

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EXAMPLE OF ADVERSE OPINION
“The Company’s financing arrangements expired and the amount
outstanding was payable on December 31, 20X0. The Company has
been unable to re-negotiate or obtain replacement financing and is
considering filing for bankruptcy. These events indicate a material
uncertainty which may cast significant doubt on the Company’s
ability to continue as a going concern and therefore it may be unable
to realize its assets and discharge its liabilities in the normal course
of business. The financial statements (and notes thereto) do not
disclose this fact.
In our opinion, because of the omission of the information mentioned
in the preceding paragraph, the financial statements do not give a
true and fair view of (or do not present fairly) the financial position of
the Company as at December 31, 20X0, and of its results of
operations and its cash flows for the year then ended in accordance
with… (and do not comply with…) …”

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Going Concern Assumption Inappropriate
If, in the auditor’s judgment, the entity will not be able
to continue as a going concern, the auditor should
express an adverse opinion if the financial statements
have been prepared on a going concern basis.
If, on the basis of the additional audit procedures carried
out and the information obtained, including the effect of
management’s plans, the auditor’s judgment is that the
entity will not be able to continue as a going concern, the
auditor concludes, regardless of whether or not disclosure
has been made, that the going concern assumption used in
the preparation of the financial statements is inappropriate
and expresses an adverse opinion.

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ALTERNATIVE BASIS FOR PREPARING F/S
When the entity’s management has concluded that the
going concern assumption used in the preparation of
the financial statements is not appropriate, the financial
statements need to be prepared on an alternative
authoritative basis.
If on the basis of the additional audit procedures carried
out and the information obtained the auditor determines
the alternative basis is appropriate, the auditor can
issue an unqualified opinion if there is adequate
disclosure but may require an emphasis of matter in the
auditor’s report to
draw the user’s attention to that basis.

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GOING CONCERN
Management Unwilling to Make or Extend Its
Assessment
If management is unwilling to make or extend its
assessment when requested to do so by the auditor, the
auditor should consider the need to modify the auditor’s
report as a result of the limitation on the scope of the
auditor’s work. In certain circumstances, the auditor may
believe that it is necessary to ask management to make or
extend its assessment. If management is unwilling to do so, it is
not the auditor’s responsibility to rectify the lack of analysis by
management, and a modified report may be appropriate because
it may not be possible for the auditor to obtain sufficient
appropriate evidence regarding the use of the going concern
assumption in the preparation of the financial statements.

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GOING CONCERN
Significant Delay in the Signature or Approval of
Financial Statements
When there is significant delay in the signature or approval of
the financial statements by management after the balance
sheet date, the auditor considers the reasons for the delay.
When the delay could be related to events or conditions
relating to the going concern assessment, the auditor
considers the need to perform additional audit procedures, as
well as the effect on the auditor’s conclusion regarding the
existence of a material uncertainty.

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FULLY WORKED EXAMPLE
Mwananchi Engineering Company Ltd, company
dealing with construction of roads and renting
plaza is experiencing going concern problems.
You are auditing the company’s accounts to the
year up to June 2001.
The company prepares monthly, as well as
annual accounts and its accountant has supplied
you with the following forecasts to enable you to
assess whether the company will be a going
concern.
The forecasts have been prepared on a monthly
bases for the year to 30th
June 2002,and are :
(a)Capital expenditure /disposal forecast
(b)profit forecast;

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The capital expenditure /disposal forecast and profit forecast have
been used to prepare the cash flow forecast.
Required:
(a)   Briefly describe what you understand by the term “going
concern’ and state the minimum period you would expect the
company to continue in business for it to be considered a going
concern
(b)   List the factors which may indicate that a company is not a
going concern and briefly describe why each of these factors
indicates going concern problems.
(c)   Describe the work you would perform to verify that the value of
items in the following forecasts ,prepared by the company’s Chief
accountant ,are reasonable
1.      Capital expenditure /disposal forecast;
2.      Profit forecast;
3.      Cash flow forecast.
(d)Briefly describe further work, in addition to that described in (b)
and (c) above you would perform to enable you to determine
whether the company is a going Concern.

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TURN
SUBSEQUENT EVENTS
ISA 560

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SUBSEQUENT EVENTS
In this ISA, the term “subsequent events” is used to refer
events occurring between period end and the date of the
auditor’s report, and facts discovered after the date of the
auditor’s report.
The auditor should consider the effect of subsequent events
on the financial statements and on the auditor’s report.
International Accounting Standard 10, “Contingencies and
Events Occurring After the Balance Sheet Date” deals with the
treatment in financial statements of events, both favorable and
unfavorable, occurring after period end and
identifies two types of events:
(a) Those that provide further evidence of conditions that existed
at period end; and
(b) Those that are indicative of conditions that arose subsequent

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SUBSEQUENT EVENTS
Events Occurring Up to the Date of the Auditor’s
Report
The auditor should perform audit procedures designed to
obtain sufficient appropriate audit evidence that all events
up to the date of the auditor’s report that may require
adjustment of, or disclosure in, the financial statements
have been identified.
These procedures are in addition to procedures which may be
applied to specific transactions occurring after period end to
obtain audit evidence as to account balances as at period end,
for example, the testing of inventory cutoff and payments to
creditors. The auditor is not, however, expected to conduct a
continuing review of all matters to which previously applied audit
procedures have provided satisfactory conclusions.

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SUBSEQUENT EVENTS
The audit procedures to identify events that may require adjustment of, or
disclosure in, the financial statements would be performed as near as
practicable to the date of the auditor’s report. Such audit procedures take into
account the auditor’s risk assessment and ordinarily include the following:
• Reviewing procedures management has established to ensure that
subsequent events are identified.
• Reading minutes of the meetings of shareholders, those charged with
governance, including established committees such as relevant executive
committees and the audit committee, held after period end and inquiring about
matters discussed at meetings for which minutes are not yet available.
• Reading the entity’s latest available interim financial statements and, as
considered necessary and appropriate, budgets, cash flow forecasts and
other related management reports.
• Inquiring, or extending previous oral or written inquiries, of the entity’s
legal counsel concerning litigation and claims.
• Inquiring of management as to whether any subsequent events have
occurred which might affect the financial statements. Examples of
inquiries of management on specific matters are:

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SUBSEQUENT EVENTS
• Reading the entity’s latest available interim financial
statements and, as considered necessary and appropriate,
budgets, cash flow forecasts and other related
management reports.
• Inquiring, or extending previous oral or written inquiries, of
the entity’s legal counsel concerning litigation and claims.
• Inquiring of management as to whether any subsequent
events have occurred which might affect the financial
statements. Examples of inquiries of management on
specific matters are:

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SUBSEQUENT EVENTS
Inquiring of management as to whether any subsequent
events have occurred which might affect the financial
statements. Examples of inquiries of management on
specific matters are:
. The current status of items that were accounted for on
the basis of preliminary or inconclusive data.
. Whether new commitments, borrowings or guarantees
have been entered into.
. Whether sales or acquisition of assets have occurred
or are planned.
. Whether the issue of new shares or debentures or an
agreement to merge or liquidate has been made or is
planned.

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. Whether any assets have been appropriated by
government or destroyed, for example, by fire or flood.
. Whether there have been any developments regarding
risk areas and contingencies.
. Whether any unusual accounting adjustments have been
made or are contemplated.
. Whether any events have occurred or are likely to occur
which will bring into question the appropriateness of
accounting policies used in the financial statements as
would be the case, for example, if such events call into
question the validity of the going concern assumption.
When a component, such as a division, branch or
subsidiary, is audited by another auditor, the auditor would
consider the other auditor’s procedures regarding events
after period end and the need to inform the other auditor of
the planned date of the auditor’s report.

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SUBSEQUENT EVENTS
When the auditor becomes aware of events
which materially affect the financial
statements, the auditor should consider
whether such events are properly accounted
for and adequately disclosed in the financial
statements.

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SUBSEQUENT EVENTS
Facts Discovered After the Date of the Auditor’s
Report but Before the Financial Statements are
Issued
The auditor does not have any responsibility to perform
audit procedures or make any inquiry regarding the
financial statements after the date of the auditor’s
report.
During the period from the date of the auditor’s report to
the date the financial statements are issued, the
responsibility to inform the auditor of facts which may
affect the financial statements rests with management.

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SUBSEQUENT EVENTS
When, after the date of the auditor’s report but before the
financial statements are issued, the auditor becomes
aware of a fact which may materially affect the financial
statements, the auditor should consider whether the
financial statements need amendment, should discuss
the matter with management, and should take the action
appropriate in the circumstances.
When management amends the financial statements, the
auditor would carry out the audit procedures necessary in the
circumstances and would provide management with a new
report on the amended financial statements. The new
auditor’s report would be dated not earlier than the date the
amended financial statements are signed or approved and,
accordingly, the audit procedures would be extended to the
date of the new auditor’s report.

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SUBSEQUENT EVENTS
When management does not amend the financial
statements in circumstances where the auditor
believes they need to be amended and the auditor’s
report has not been released to the entity, the auditor
should express a qualified opinion or an adverse
opinion.

When the auditor’s report has been released to the entity,
the auditor would notify those charged with governance not
to issue the financial statements and the auditor’s report
thereon to third parties. If the financial statements are
subsequently released, the auditor needs to take action to
prevent reliance on the auditor’s report. The action taken
will depend on the auditor’s legal rights and obligations and
the recommendations of the auditor’s lawyer

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SUBSEQUENT EVENTS
Facts Discovered After the Financial
Statements have been Issued
After the financial statements have been issued,
the auditor has no obligation to make any inquiry
regarding such financial statements.

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SUBSEQUENT EVENTS
When, after the financial statements have been issued, the
auditor becomes aware of a fact which existed at the date of
the auditor’s report and which, if known at that date, may
have caused the auditor to modify the auditor’s report, the
auditor should consider whether the financial statements
need revision, should discuss the matter with management,
and should take the action appropriate in the
circumstances.
The new auditor’s report should include an emphasis of a
matter paragraph referring to a note to the financial
statements that more extensively discusses the reason for
the revision of the previously issued financial statements
and to the earlier report issued by the auditor.
The new auditor’s report would be dated not earlier than the
date the revised financial statements are approved

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SUBSEQUENT EVENTS
When management does not take the necessary steps to
ensure that anyone in receipt of the previously issued
financial statements together with the auditor’s report thereon
is informed of the situation and does not revise the financial
statements in circumstances where the auditor believes they
need to be revised, the auditor would notify those charged
with governance of the entity that action
will be taken by the auditor to prevent future reliance on the
auditor’s report. The action taken will depend on the auditor’s
legal rights and obligations and the recommendations of the
auditor’s lawyers.
It may not be necessary to revise the financial statements and
issue a new auditor’s report when issue of the financial
statements for the following period is imminent, provided
appropriate disclosures are to be made in such statements.

Analyitical review procedures and going concern

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