Audit completion, including going concern issues

This is David Hay from the University of Auckland, and this is Talk 7 in the principles of auditing. Today, we're going to talk about audit completion, and that includes such things as general procedures, after balance date events and the going concern concept. The procedures we talked about in Talk number 6 were the day-to-day procedures that the audit team does to make sure that the financial statements are fairly presented. When it comes to the end of the audit, there are certain specialized procedures that cover all of the financial statements. So we're going to talk about those procedures today.

We'll talk particularly about what's called general procedures, but they're more specific than that sounds. We'll talk about after balance dates events or subsequent events, as they're sometimes called, and we'll talk about the going concern issue.

So first, let's talk about those general procedures. General procedures are a mopping-up operation to cover any of the risks that are left. First, when you come to the end of the audit, you will need to do final analytical review procedures. We talked about analytical review in a previous talk. Auditors look at the financial statements again, make sure they make sense, and make sure they fit with your expectations. Then we start looking for other information. One key source will be the minutes of directors' meetings. We'll get the minutes of those board meetings, and see what the board has been discussing. Maybe they've been discussing the results, and that will give us some insight into the financial statements and what they say. But they're also going to be discussing their decisions. So there might be something in there that the board of directors has decided. There might be something in there that the board of directors has decided that's important for the financial statements. Maybe they've committed themselves to some major expansion, so there's some capital commitments that need to be disclosed in the financial statements or maybe they know something about a lawsuit that's going on, and so there's a contingent liability. So auditors look very closely at that, and will ask some serious questions, because they could affect the financial statements, they might affect the transactions in the balance sheet. But maybe they're just information that's disclosed in the notes of the financial statements. These notes, especially contingent liabilities might be very important even if they're not part of the income statement and the balance sheet. Regardless of whether they are there or not, we want to look at the risk of whether they should be. Of course, auditors have the right to ask for anything they want to. The next step is to get information from the company's legal advisor. This is a fairly difficult topic, because legal advisors don't always want to play ball. A company has its legal advisors a legal firm that's advising them, and what we would really like is for that legal firm to say these are the lawsuits that are in progress, for a large company, there's always going to be something in progress. So the legal firm could say these are the major claims that have been made against the company, and this is how much should be provided as a liability, and now it should be disclosed in the notes as a contingent liability. But no lawyer wants to say that kind of thing unless he or she really has to. Quite likely, the responders, the legal firm, will not be as helpful as we want. The auditing standards set out what we should ask the legal firm. We do that through the client. The auditor doesn't have any particular right to ask for a list of information, but the client does. So we get the client to write to the solicitor saying, this is what we want to know, and the standard letter won't actually tell us all of the cases that exist. It won't tell us all of the lawsuits or all of the legal activities that are going on. The standard letter will expect us to list them, so that the client needs to give us a list of what legal action there is. This is from the client. The auditor puts that on the letter and sends it to the legal adviser. The legal advisors, if they're cooperative, then write back and say, "Yes, we agree with that list. Those are the correct amounts. That's all there is." And maybe if the legal advisors think of something else, they'll tell us that as well. But we can't guarantee that we'll get the information that we need. We might get some very helpful stuff from that source, but it's not the easiest source that we can possibly use. Our objective that we're thinking about is whatever else can we get to think about contingencies, contingent liabilities that might be liabilities of the company. What else do we know about the company? There might be claims that we know about from other sources. Maybe we know about disputes from customers from the accounts receivable work. Maybe we have other sources that might come out through other procedures, such as our accounts receivable procedures, or our general transactions procedures. Or those general procedures where we looked at the minutes of the company's directors' meetings and just our risk analysis.