Section Procedures for a Review of an Interim Fi - ASRE 2410 - Review of an Interim Financial Report Performed by the Independent Auditor of the Entity - April 2006 - Procedures for a Review of an Interim Financial Report | Zoe
ASRE 2410 - Review of an Interim Financial Report Performed by the Independent Auditor of the Entity - April 2006
Procedures for a Review of an Interim FiProcedures for a Review of an Interim Financial Report
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Procedures for a Review of an Interim Financial Report
Understanding the Entity and its Environment, Including its Internal Control
19 The auditor shall obtain an understanding of the entity and its environment, including its internal control, as it relates to the preparation of both the annual and interim financial reports, sufficient to plan and conduct the engagement so as to be able to:
(a) identify the types of potential material misstatements and consider the likelihood of their occurrence; and
(b) select the enquiries, analytical and other review procedures that will provide the auditor with a basis for reporting whether anything has come to the auditor’s attention that causes the auditor to believe that the interim financial report is not prepared, in all material respects, in accordance with the applicable financial reporting framework.
20 Under ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, the auditor who has audited the entity’s financial report for one or more annual periods has obtained an understanding of the entity and its environment, including its internal control, as it relates to the preparation of the annual financial report that was sufficient to conduct the audit. In planning a review of an interim financial report, under paragraph 19 of this Auditing Standard, the auditor needs to update this understanding. Under paragraph 19 of this Auditing Standard, the auditor also needs to obtain a sufficient understanding of internal control as it relates to the preparation of the interim financial report as it may differ from internal control as it relates to the annual financial report.
21 Under paragraph 19 of this Auditing Standard, the auditor needs to use the understanding of the entity and its environment, including its internal control, to determine the enquiries to be made and the analytical and other review procedures to be applied, and to identify the particular events, transactions or assertions to which enquiries may be directed or analytical or other review procedures applied.
22 The procedures performed by the auditor to update the understanding of the entity and its environment, including its internal control, ordinarily include the following:
reading the documentation, to the extent necessary, of the preceding year’s audit and reviews of prior interim period(s) of the current year and corresponding interim period(s) of the prior year, to enable the auditor to identify matters that may affect the current-period interim financial report;
considering any significant risks, including the risk of management override of controls, that were identified in the audit of the prior year’s financial report;
reading the most recent annual and comparable prior period interim financial report;
considering materiality with reference to the applicable financial reporting framework as it relates to the interim financial report to assist in determining the nature and extent of the procedures to be performed and evaluating the effect of misstatements;
considering the nature of any corrected material misstatements and any identified uncorrected immaterial misstatements in the prior year’s financial report;
considering significant financial accounting and reporting matters that may be of continuing significance such as material weaknesses in internal control;
considering the results of any audit procedures performed with respect to the current year’s financial report;
considering the results of any internal audit performed and the subsequent actions taken by management;
enquiring of management about the results of management’s assessment of the risk that the interim financial report may be materially misstated as a result of fraud;
enquiring of management about the effect of changes in the entity’s business activities;
enquiring of management about any significant changes in internal control and the potential effect of any such changes on the preparation of the interim financial report; and
enquiring of management of the process by which the interim financial report has been prepared and the reliability of the underlying accounting records to which the interim financial report is agreed or reconciled.
23 Under paragraph 19, the auditor needs to determine the nature of the review procedures, if any, to be performed for components and, where applicable, communicate these matters to other auditors involved in the review. Factors considered ordinarily include the materiality of, and risk of misstatement in, the interim financial report components, and the auditor’s understanding of the extent to which internal control over the preparation of such reports is centralised or decentralised.
24 In order to plan and conduct a review of an interim financial report, a recently appointed auditor, who has not yet performed an audit of the annual financial report in accordance with Auditing Standards, shall obtain an understanding of the entity and its environment, including its internal control, as it relates to the preparation of both the annual and interim financial reports.
25 This understanding enables the auditor to focus the enquiries made, and the analytical and other review procedures applied in performing a review of the interim financial report in accordance with this Auditing Standard. As part of obtaining this understanding, ordinarily the auditor makes enquiries of the predecessor auditor and, where practicable, reviews the predecessor auditor’s documentation for the preceding annual audit and for any prior interim periods in the current year that have been reviewed by the predecessor auditor. In doing so, ordinarily the auditor considers the nature of any corrected misstatements, and any uncorrected misstatements aggregated by the auditor, any significant risks, including the risk of management override of controls, and significant accounting and any reporting matters that may be of continuing significance, such as material weaknesses in internal control.
Materiality
26 The auditor shall consider materiality, using professional judgement, when:
(a) determining the nature, timing and extent of review procedures; and
(b) evaluating the effect of misstatements.
27 Under paragraph 26 of this Auditing Standard, the auditor needs to use professional judgement and consider qualitative and quantitative factors in determining materiality.
28 Ordinarily the auditor’s consideration of materiality for a review of an interim financial report is based on the interim period financial data and accordingly materiality based on interim period financial data may be less than materiality for annual financial data. If the entity’s business is subject to cyclical variations or if the financial results for the current period show an exceptional decrease or increase compared to prior interim periods and expected results for the current year, the auditor may, for example, conclude that materiality is more appropriately determined using a normalised figure for the interim period.
29 The auditor’s consideration of materiality, in evaluating the effects of misstatements, is a matter of professional judgement and is affected by the auditor’s perception of the financial information needs of users of the interim financial report.
30 If the applicable financial reporting framework contains a definition of materiality, it will ordinarily provide a frame of reference to the auditor when determining materiality for planning and performing the review.
31 Under paragraph 26 of this Auditing Standard, the auditor needs, when relevant, to consider materiality from the perspective of both the entity and the consolidated entity.
Enquiries, Analytical and Other Review Procedures
32 The auditor shall make enquiries, primarily of persons responsible for financial and accounting matters, and perform analytical and other review procedures to enable the auditor to conclude whether, on the basis of the procedures performed, anything has come to the auditor’s attention that causes the auditor to believe that the interim financial report is not prepared, in all material respects, in accordance with the applicable financial reporting framework.
33 A review ordinarily does not require tests of the accounting records through inspection, observation or confirmation. Procedures for performing a review of an interim financial report ordinarily are limited to making enquiries, primarily of persons responsible for financial and accounting matters and applying analytical and other review procedures, rather than corroborating information obtained concerning matters relating to the interim financial report. The auditor’s understanding of the entity and its environment, including its internal control, the results of the risk assessments relating to the preceding audit and the auditor’s consideration of materiality as it relates to the interim financial report, affects the nature and extent of the enquiries made, and analytical and other review procedures applied.
34 The auditor ordinarily performs the following procedures:
Reading the minutes of the meetings of shareholders, those charged with governance and other appropriate committees to identify matters that may affect the interim financial report, and enquiring about matters dealt with at meetings for which minutes are not available that may affect the interim financial report.
Considering the effect, if any, of matters giving rise to a modification of the audit or review report, accounting adjustments or unadjusted misstatements, at the time of the previous audit or reviews.
Communicating, where appropriate, with other auditors who are performing a review of the interim financial report of the entity’s significant components.
Enquiring of members of management responsible for financial and accounting matters, and others as appropriate, about the following:
♦ whether the interim financial report has been prepared and presented in accordance with the applicable financial reporting framework;
♦ whether there have been any changes in accounting principles or in the methods of applying them;
♦ whether any new transactions have necessitated the application of a new accounting principle;
♦ whether the interim financial report contains any known uncorrected misstatements;
♦ unusual or complex situations that may have affected the interim financial report, such as a business combination or disposal of a segment of the business;
♦ significant assumptions that are relevant to the fair value measurement or disclosures and management’s intention and ability to carry out specific courses of action on behalf of the entity;
♦ whether related party transactions have been appropriately accounted for and disclosed in the interim financial report;
♦ significant changes in commitments and contractual obligations;
♦ significant changes in contingent assets and contingent liabilities including litigation or claims;
♦ compliance with debt covenants;
♦ matters about which questions have arisen in the course of applying the review procedures;
♦ significant transactions occurring in the last several days of the interim period or the first several days of the next interim period;
♦ knowledge of any fraud or suspected fraud affecting the entity involving:
○ management;
○ employees who have significant roles in internal control; or
○ others where the fraud could have a material effect on the interim financial report; and
♦ knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s interim financial information communicated by employees, former employees, analysts, regulators or others; and
♦ knowledge of any actual or possible non-compliance with laws and regulations that could have a material effect on the interim financial report.
Applying analytical procedures to the interim financial report designed to identify relationships and individual items that appear to be unusual and that may reflect a material misstatement in the interim financial report. Analytical procedures may include ratio analysis and statistical techniques such as trend analysis or regression analysis and may be performed manually or with the use of computer-assisted auditing techniques. Appendix 2 to this Auditing Standard contains examples of analytical procedures the auditor may consider when performing a review of an interim financial report.
Reading the interim financial report and considering whether anything has come to the auditor’s attention that causes the auditor to believe that the interim financial report is not in accordance with the applicable financial reporting framework.
35 The auditor may perform many of the review procedures before or simultaneously with the entity’s preparation of the interim financial report. For example, it may be practicable to update the understanding of the entity and its environment, including its internal control, and begin reading applicable minutes before the end of the interim period. Performing some of the review procedures earlier in the interim period permits also early identification and consideration of significant accounting matters affecting the interim financial report.
36 The auditor performing the review of the interim financial report is also the auditor of the annual financial report of the entity. For convenience and efficiency, the auditor may decide to perform certain audit procedures concurrently with the review of the interim financial report. For example, information gained from reading the minutes of meetings of the board of directors in connection with the review of the interim financial report also may be used for the annual audit. The auditor may decide also to perform, at the time of the interim review, auditing procedures that would need to be performed for the purpose of the audit of the annual financial report, for example, performing auditing procedures on:
significant or unusual transactions that occurred during the period, such as business combinations, restructurings, or significant revenue transactions, or
opening balances (when applicable).
37 A review of an interim financial report ordinarily does not require corroborating the enquiries about litigation or claims. It is, therefore, ordinarily not necessary to send an enquiry letter to the entity’s lawyer. Direct communication with the entity’s lawyer with respect to litigation or claims, or alternative procedures, may, however, be appropriate if a matter comes to the auditor’s attention that causes the auditor to question whether the interim financial report is in accordance with the applicable financial reporting framework.
38 The auditor shall obtain evidence that the interim financial report agrees or reconciles with the underlying accounting records.
39 The auditor may obtain evidence that the interim financial report agrees or reconciles with the underlying accounting records by tracing the interim financial report to:
(a) the accounting records, such as the general ledger, or a consolidating schedule that agrees or reconciles with the accounting records; and
(b) other supporting data in the entity’s records as necessary.
40 The auditor shall enquire whether management has identified all events up to the date of the review report that may require adjustment to or disclosure in the interim financial report.
41 Under paragraph 40 of this Auditing Standard, the auditor need not perform procedures to identify events occurring after the date of the review report.
42 The auditor shall enquire whether those charged with governance have changed their assessment of the entity’s ability to continue as a going concern. When, as the result of this enquiry or other review procedures, the auditor becomes aware of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall:
(a) enquire of those charged with governance as to their plans for future actions based on their going concern assessment, the feasibility of these plans, and whether they believe that the outcome of these plans will improve the situation; and
(b) consider the adequacy of the disclosure about such matters in the interim financial report.
43 Events or conditions which may cast significant doubt on the entity’s ability to continue as a going concern may have existed at the date of the annual financial report or may be identified as a result of enquiries of management or in the course of performing other review procedures. When such events or conditions come to the auditor’s attention, under paragraph 42 of this Auditing Standard, the auditor needs to enquire of those charged with governance as to their plans for future action, such as their plans to liquidate assets, borrow money or restructure debt, reduce or delay expenditures, or increase capital. Under paragraph 42 of this Auditing Standard, the auditor needs to enquire also as to the feasibility of the plans of those charged with governance and whether they believe that the outcome of these plans will improve the situation. Ordinarily, the auditor considers, based on procedures performed, whether it is necessary to corroborate the feasibility of the plans of those charged with governance and whether the outcome of these plans will improve the situation.
44 When a matter comes to the auditor’s attention that leads the auditor to question whether a material adjustment should be made for the interim financial report to be prepared, in all material respects, in accordance with the applicable financial reporting framework, the auditor shall make additional enquiries or perform other procedures to enable the auditor to express a conclusion in the review report.
45 For example, if the auditor’s review procedures lead the auditor to question whether a significant sales transaction is recorded in accordance with the applicable financial reporting framework, the auditor performs additional procedures sufficient to resolve the auditor’s questions, such as discussing the terms of the transaction with senior marketing and accounting personnel or reading the sales contract.
Comparatives – First Interim Report
46 When comparative information is included for the first time in an interim financial report, an auditor shall perform similar procedures on the comparative information as applied to the current period interim financial report.
47 When comparative information is included in the first interim financial report and the auditor is unable to obtain sufficient appropriate review evidence to achieve the review objective, a limitation on the scope of the review exists. Under paragraph 84 of this Auditing Standard, the auditor needs to modify[4] the review report. In such cases, ordinarily an auditor encourages clear disclosure, in the interim financial report, that the auditor has been unable to review the comparatives. An example of a modified review report is included in Appendix 4.
48 When comparative information is included in the first interim financial report and the auditor believes a material adjustment should be made to the interim financial report, under paragraph 72 this Auditing Standard, the auditor needs to modify the review report.
49 When an entity has come into existence only within the first interim period, comparative information will not be provided in the first interim financial report and no modified review report is required.
50 Accounting Standard AASB 101 Presentation of Financial Statements, provides requirements and explanatory guidance relating to comparative information included in a financial report prepared in accordance with Australian Accounting Standards. Accounting Standard AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, provides requirements and guidance relating to comparative information when an entity adopts Australian Equivalents to International Financial Reporting Standard (AIFRS) for the first time.