Auditing — Going Concern, Subsequent Events, Completing the Audit and Quality Management
At the last stage of the audit, the auditor checks whether the company can continue operating, whether anything has happened after the period-end that should change the financial statements, and obtains written representations from management. This chapter covers these completion procedures and the system that safeguards the quality of the audit as a whole. The types of opinion were covered in chapter 7.
1. Going concern
Financial statements are prepared on the assumption that the entity will continue in operation (Intermediate Accounting chapter 1). Management assesses the entity’s ability to continue as a going concern for at least 12 months from the period-end, and the auditor evaluates whether that assessment is appropriate (KSA 570).
| Type | Examples |
|---|---|
| Financial | Net liabilities or net current liabilities, uncertain prospects of refinancing maturing debt, persistently negative operating cash flow, capital impairment |
| Operating | Loss of key management, loss of a major market, customer or supplier, loss of a key licence |
| Other | Breach of capital requirements, litigation the entity could not afford to lose, changes in law |
If there is doubt, the auditor obtains further evidence on whether management’s plans (asset sales, borrowing, share issues) are feasible. The conclusion is reported as follows.
- Material uncertainty exists and is adequately disclosed: unmodified opinion + a “Material Uncertainty Related to Going Concern” section
- Material uncertainty exists but disclosure is inadequate: qualified or adverse opinion
- The going concern assumption itself is inappropriate: adverse opinion
At the period-end, AO’s current liabilities exceed its current assets by ₩30 billion, and refinancing of ₩50 billion of borrowings maturing in three months is not yet confirmed. Operating cash flow has been negative for two consecutive years. If management has adequately disclosed the state of refinancing negotiations and its plans to sell assets in the notes, the auditor issues an unmodified opinion and draws users’ attention with a material uncertainty section.
2. Subsequent events
Events occurring between the period-end and the date of the auditor’s report are subsequent events (K-IFRS 1010, KSA 560).
| Type | Test | Treatment | Examples |
|---|---|---|---|
| Adjusting events | Further evidence of conditions that existed at the period-end | Adjust the amounts in the financial statements | Bankruptcy of a customer already in financial difficulty before the period-end; final judgement in a lawsuit pending at the period-end |
| Non-adjusting events | Conditions that arose after the period-end | Disclose in the notes if material | A fire after the period-end, announcement of a major acquisition, sharp moves in share prices or exchange rates |
Dividends declared after the period-end are not a liability at the period-end, so they are not recognized but disclosed in the notes. If facts become known after the date of the auditor’s report but before the financial statements are issued, the auditor discusses with management whether the statements need amending and, if necessary, issues a new report.
3. Management representations and completing the audit
The auditor obtains written representations (a management representation letter) from management (KSA 580). They acknowledge responsibility for preparing the financial statements, confirm that all information and transactions have been provided, and state management’s belief that the effects of uncorrected misstatements are immaterial. Representations do not substitute for other evidence. If management refuses to provide them, the auditor considers a disclaimer due to a scope limitation.
With those charged with governance (the audit committee), the auditor communicates the audit plan, significant findings, independence and internal control deficiencies.
4. Audit quality management
Audit firms support the quality of each audit through a quality management system. The quality management standard based on the international standard ISQM 1 requires firms to design their own quality objectives and responses on a risk basis. For audits of listed companies, an engagement quality reviewer independent of the audit team reviews significant judgements and conclusions. Because too few audit hours lower quality, Korea introduced a standard audit hours system in the 2018 revision of the External Audit Act.
Check your understanding
AP’s year-end is 31 December and its auditor’s report is dated 10 March of the following year. How should each of the following be treated? (1) On 20 January, a damages lawsuit pending at the period-end was finally decided against AP, fixing damages at ₩1.2 billion; the provision at the period-end was ₩700 million. (2) On 15 February, a factory fire destroyed ₩3 billion of equipment. (3) On 28 February, the board resolved a cash dividend of ₩500 per share.
(1) is evidence fixing the amount of an obligation that existed at the period-end, so it is an adjusting event: the provision is increased by ₩500 million to ₩1.2 billion. (2) arose after the period-end, so it is not adjusted but disclosed in the notes if material; the auditor considers an emphasis of matter paragraph if needed. (3) There was no obligation at the period-end, so it is not recognized as a liability but disclosed in the notes.
References
- Korean Institute of CPAs, Korean Standards on Auditing, KSA 570 Going Concern, KSA 560 Subsequent Events and KSA 580 Written Representations
- Korea Accounting Standards Board, K-IFRS 1010 Events after the Reporting Period
- Act on External Audit of Stock Companies, etc., Article 16-2 (standard audit hours) — Korea Law Information Center
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