Our client filed audited financial statements containing a significant tax debtor balance that supported the entity’s going concern basis of preparation. A week later, an HMRC response called into question the recognition of the debtor, as a result of an invalid calculation. At the time of providing the audit opinion, evidence had been obtained which had supported its recognition, even though there had been no formal response from HMRC. As auditor, what do I do now?

International Standard on Auditing, ISA (UK) 560 paragraph 14, states that the auditor has no obligation to perform additional procedures after the financial statements have been issued. However, if, after the financial statements have been issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall: 

1. discuss the matter with management and, where appropriate, those charged with governance;
2. determine whether the financial statements need amendment; and, if so,
3. inquire how management intends to address the matter in the financial statements.

The directors and the auditor should consider whether the judgments and estimates made by the directors at the date of signing were appropriate based on the information available to them, ie, were the accounts compliant with Generally Accepted Accounting Practice in the UK (UK GAAP). In addition, consider whether the accounts had sufficient disclosure about the judgements and estimates and the related going concern implications and therefore whether the accounts are materially true and fair.

If directors consider the filed accounts are not materially true and fair, either through lack of disclosure or inappropriate judgments or estimates, they will need to consider the best course of action under the defective accounts regime, as per Section 454 of Companies Act 2006, which includes an option to re-prepare and refile those accounts. Where this option is taken, a new audit opinion would be required to be issued on the amended accounts and ISA 560 paragraph 16 would require an Emphasis of matter or Other matter paragraph referring to the note which discusses the reason for the amendment.

If defective, and directors choose not to re-prepare and refile amended accounts then they may instead correct the error in the next set of financial statements they prepare. This would only be the case if the judgments or estimates were inappropriate – we cannot apply hindsight to make retrospective adjustments. This typically would be a restatement of comparatives. The audit team should ensure that they consider the directors course of action, and reasons for those actions in their reacceptance and risk assessment consideration for the following year.

From a risk management perspective, the auditor should use all information now available to consider how their judgments and conclusions may have changed and may also consider it necessary to inform their professional indemnity insurance provider.

A technical helpsheet is available to ICAEW members on navigating UK requirements for dealing with defective accounts and reports for private companies.

Although our client is in its second year as a large company, it decided not to include the Streamlined Energy and Carbon Reporting (SECR) disclosures this year, due to insufficient time to correct disclosures that were prepared but found to be incorrect during the audit. Under SECR reporting requirements the entity can exclude if it is impractical to obtain the data. Is it, therefore, acceptable for us not to qualify the audit opinion?

The directors’ report, and therefore SECR reporting, is the duty of directors as part of the requirement for them to prepare the financial statements for the year. It is the directors’ judgement as to whether they can obtain the information or whether it is impracticable to do so. The auditor can then audit that judgement.

The auditor needs to consider whether it’s practical for the company to obtain that information. The ‘practicality’ isn’t whether the directors can provide that information to auditors, it’s whether they can practically obtain the information to be able to prepare the report. Time delays in obtaining such information alone, would be unlikely to be considered to mean it is not practical to obtain the information.

ISA (UK) 720 provides relevant guidance on auditors’ responsibilities relating to other information. Paragraphs 17 and 18 provide guidance on action the auditors should take if they conclude that there is a material misstatement in the other information presented. Paragraph 12(b) confirms that, in the UK, a misstatement of other information also exists when the statutory other information has not been prepared in accordance with the legal and regulatory requirements applicable.

If, having communicated with those charged with governance, the error is not corrected, then the auditor needs to consider the impact on the audit report and (as per paragraph 22(e)) include the matter in a separate section with a heading ‘Other information’ as described in paragraph 21, or consider withdrawing from the engagement(s) where possible under law or regulation.

It should be considered that withdrawal from the audit is not an action expected to be taken in many instances. ISA (UK) 720 provides guidance in para A46, which concludes that withdrawal from the engagement may be appropriate when circumstances surrounding the refusal to correct the material misstatement casts such doubt on the integrity of management as to call into question the reliability of representations obtained from them during the audit.

Helpful guidance on carbon and energy reporting for UK companies is available from ICAEW. 

A client had a fire post year end and this destroyed a portion of fixed assets. We are currently undertaking the audit and trying to determine how to complete fixed asset verification tests, as the assets did exist at year end and so would have had a value.

Given the assets have been destroyed, there is not one specific way of getting comfort over the existence of the assets at the year-end date and therefore this may require a combination of tests and evidence.

Ultimately it is the responsibility of those charged with governance to provide auditors with audit evidence and for auditors to consider whether such evidence is sufficient and appropriate for them to be able to conclude upon the financial statements (see ISA (UK) 500).

You could inquire whether the insurance provider has made any compensation payments yet. If not, could you obtain any evidence directly from the insurer?

Did the audit team visit the site around year end? For stocktake attendance or planning meetings, for example. If so, were any of the key assets seen during that visit that could give some comfort over their existence?

It is also worth considering the significance of the assets in the business and whether the business could have functioned without them. For example, were the assets a key part of the production process? Did production continue throughout the year and up to the date of the fire? If yes and you tested the existence at the prior year audit, this may give you comfort over existence at the year end. 

You would likely need to consider whether there was any other way production could have continued, such as being outsourced, for example. It is potentially worth checking through bank transactions for anything unusual that might indicate such transactions.

If you have exhausted all avenues and are unable to obtain sufficient appropriate audit evidence over the existence of the assets then you would need to consider the implication of this on the audit opinion and whether that may require a modification to your opinion under ISA (UK) 705.

If the assets destroyed in the post-year-end fire were material then this would be a non-adjusting post balance sheet event for which disclosure would likely be required. Auditors would need to audit such a note and ensure this is consistent with their understanding of the event itself as well as its financial impact.