Completion, Misstatements and Auditor Reporting

Introduction and context

Audit completion is the point at which the auditor converts accumulated evidence into a professional conclusion. It is not a purely administrative stage. The auditor must determine whether the financial statements are materially misstated, whether disclosures are sufficient, whether the entity can continue as a going concern, whether events after the reporting date require adjustment or disclosure, and whether the audit report appropriately communicates the conclusion.

This chapter is based principally on the International Standards on Auditing (ISAs), including ISA 450, ISA 560, ISA 570 (Revised), ISA 700, ISA 701, ISA 705, ISA 706 and ISA 260. Local law, listing rules and the applicable financial reporting framework may impose additional requirements.

Learning objectives

By the end of this chapter, the reader should be able to:

• perform and interpret final analytical procedures;
• accumulate, classify and evaluate identified misstatements;
• distinguish corrected from uncorrected misstatements and assess their aggregate effect;
• evaluate the adequacy of presentation and disclosure;
• assess going concern and subsequent events;
• communicate significant matters to management and those charged with governance;
• formulate unmodified and modified audit opinions;
• determine when key audit matters and emphasis-of-matter paragraphs are appropriate.

1. The completion phase as an evidence-integration process

During fieldwork, audit evidence is obtained account by account and assertion by assertion. At completion, the auditor adopts an entity-wide perspective. The central question is whether the financial statements, taken as a whole, are prepared in accordance with the applicable framework and are free from material misstatement.

Completion normally includes:

1. updating the assessment of risks and materiality;
2. performing final analytical procedures;
3. evaluating identified misstatements;
4. reviewing the financial statements and disclosures as a complete set;
5. assessing going concern;
6. considering subsequent events;
7. obtaining written representations;
8. reviewing audit documentation and unresolved matters;
9. communicating with management and those charged with governance; and
10. signing and issuing the auditor’s report.

The auditor’s conclusion is based on reasonable assurance, not absolute assurance. A reasonable-assurance audit reduces audit risk to an acceptably low level, but does not eliminate the possibility that a material misstatement remains undetected.

2. Final analytical review

Final analytical procedures are designed to assist the auditor in forming an overall conclusion about whether the financial statements are consistent with the auditor’s understanding of the entity. They are not a substitute for substantive testing performed earlier in the audit.

The auditor compares the final financial statements with:

• prior-period financial statements;
• budgets and forecasts;
• industry information;
• operational data;
• relationships among financial and non-financial information; and
• expectations developed from audit evidence.

Useful relationships may include gross margin, receivables days, inventory turnover, payroll cost per employee, revenue per outlet and cash conversion. An unexpected relationship does not automatically prove an error. It is a signal requiring investigation.

For example, if revenue has increased by 20% but trade receivables have increased by 60%, possible explanations include relaxed credit terms, a change in customer mix, year-end cut-off errors, unrecorded credit notes or aggressive revenue recognition. The auditor should obtain explanations, corroborate them and reassess the risk of material misstatement where necessary.

Final analytical procedures should be sufficiently precise to identify previously unrecognised risks. The auditor documents the expectation, the source of data, the threshold for investigation, the results and the resolution of significant fluctuations.

Analytical procedures and professional scepticism

Management explanations are evidence, but explanations alone are generally insufficient when the fluctuation is significant or relates to a high-risk area. The auditor should seek corroboration from contracts, subsequent cash receipts, external confirmations, operational reports or other reliable evidence. A plausible explanation may still be incomplete or intentionally misleading.

3. Misstatements: identification, classification and evaluation

A misstatement is a difference between the amount, classification, presentation or disclosure of a reported financial-statement item and the amount, classification, presentation or disclosure required by the applicable framework. Misstatements include omissions.

They may arise from:

• factual errors, such as an incorrect invoice amount;
• judgemental differences, such as an unreasonable impairment estimate; or
• projected misstatements, where the auditor extrapolates an error from a sample to a population.

Misstatements may affect recognition, measurement, presentation or disclosure. A disclosure omission can be material even when the numerical amount is small, particularly where it concerns related parties, liquidity risk, legal proceedings, accounting policies or management judgement.

Audit materiality and the evaluation process

Materiality is assessed in relation to the needs of users. A misstatement is material if it could reasonably be expected to influence economic decisions made by users on the basis of the financial statements. Materiality involves both size and nature.

The auditor establishes:

• overall materiality for the financial statements as a whole;
• performance materiality, set below overall materiality to reduce the risk that aggregate uncorrected and undetected misstatements exceed overall materiality; and
• a lower threshold for particular classes of transactions, balances or disclosures where smaller errors could influence users.

There is no universally correct percentage for materiality. A benchmark may be selected using professional judgement, such as profit before tax, revenue, assets or equity, but the benchmark must reflect the entity’s circumstances and users’ needs.

The auditor accumulates misstatements other than those that are clearly trivial. The clearly trivial threshold is not a substitute for materiality and should be sufficiently low that individually and collectively trivial items cannot become material.

Corrected and uncorrected misstatements

Management should be asked to correct identified misstatements. The auditor then evaluates:

• the effect of each misstatement;
• the aggregate effect of uncorrected misstatements;
• the effect on prior periods;
• the effect on particular classes of transactions or disclosures;
• whether misstatements indicate management bias; and
• whether the misstatements affect compliance with loan covenants, regulatory requirements or contractual conditions.

A misstatement below overall materiality may nevertheless be material by nature. For example, an omitted related-party transaction or an undisclosed director benefit may influence users because of its nature, even if its monetary value is modest.

The auditor communicates accumulated misstatements to the appropriate level of management on a timely basis and requests correction. Uncorrected misstatements are communicated to those charged with governance, together with their effect individually and in aggregate, unless prohibited by law or regulation. The auditor should obtain a written representation about uncorrected misstatements where required by the applicable auditing standards.

Worked example: evaluating aggregate misstatements

Assume overall materiality is $500,000 and performance materiality is $350,000. The auditor identifies the following misstatements:

The aggregate quantified uncorrected misstatement is $320,000, calculated as $180,000 + $140,000. It is below overall materiality of $500,000, but the conclusion cannot be based on arithmetic alone. The auditor must consider the qualitative significance of the lease disclosure, whether the errors have a common direction, whether they indicate management bias and whether additional undetected errors are likely. If the lease disclosure is material by nature, an unmodified opinion may not be appropriate unless it is corrected.

4. Review of financial statement presentation and disclosure

The auditor reads the complete financial statements, including notes, accounting policies, reconciliations, tables and cross-references. The review considers whether:

• the statements comply with the applicable framework;
• accounting policies are appropriately described;
• classifications are consistent and understandable;
• estimates and judgements are adequately explained;
• commitments, contingencies and related parties are disclosed;
• liquidity, market and credit risks are presented appropriately;
• material events are described; and
• disclosures are consistent with audit evidence.

Disclosure quality has at least four dimensions: completeness, accuracy, understandability and neutrality. Excessive boilerplate can obscure material information, while selective disclosure can create a misleading impression even where individual statements are technically true.

The auditor should also consider whether disclosures compensate for an inappropriate accounting treatment. Disclosure cannot normally cure recognition or measurement that violates the reporting framework.

5. Going concern

Management is responsible for assessing the entity’s ability to continue as a going concern and for making appropriate disclosures. The auditor evaluates management’s assessment and determines whether sufficient appropriate audit evidence supports the conclusion.

Indicators of possible difficulty include:

• recurring losses or negative operating cash flows;
• significant loan maturities without realistic refinancing plans;
• covenant breaches;
• loss of a major customer or supplier;
• legal claims with potentially severe consequences;
• inability to obtain finance;
• severe liquidity constraints; and
• adverse regulatory, technological or macroeconomic developments.

The existence of an indicator does not automatically mean that the entity is not a going concern. The auditor evaluates management’s plans, including cost reductions, asset disposals, refinancing, capital injections and restructuring. Plans must be feasible, supported by evidence and sufficiently specific.

The auditor considers the period required by the applicable framework and auditing standards. Forecasts should be tested for mathematical accuracy, consistency with approved budgets, historical forecasting performance and sensitivity to changes in key assumptions. Where uncertainty is significant, sensitivity analysis can show how changes in revenue, margins, interest rates or cash collections affect liquidity.

The reporting consequence depends on the circumstances:

A going-concern paragraph is not automatically a modified opinion. It is essential to distinguish a material uncertainty disclosure from a qualification caused by inadequate disclosure or an inappropriate basis of accounting.

6. Subsequent events

Subsequent events are events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known after the report date.

Two categories are important:

1. Adjusting events provide evidence of conditions existing at the reporting date. The financial statements are adjusted. For example, a customer’s bankruptcy shortly after year-end may confirm that a receivable was impaired at year-end.
2. Non-adjusting events relate to conditions arising after the reporting date. They are not recorded in the financial statements but may require disclosure if material. For example, a major acquisition after year-end may require disclosure.

The auditor performs procedures such as:

• reading minutes of meetings;
• reviewing interim financial information;
• asking management and legal advisers about significant events;
• examining post-year-end transactions and cash flows; and
• obtaining written representations.

If a fact becomes known after the auditor’s report date that would have affected the report, the auditor considers whether the financial statements need amendment, whether management will make the amendment and what communication is necessary. The auditor is not required to perform continuing procedures after the report date, but cannot ignore reliable information that comes to attention.

7. Communication with management and those charged with governance

Communication is both a governance mechanism and an audit-quality safeguard. ISA 260 requires communication of significant matters, including the planned scope and timing, significant risks, significant findings, significant difficulties, significant internal-control deficiencies, significant accounting policies and uncorrected misstatements.

The auditor should communicate in a manner that is:

• timely;
• clear and proportionate;
• sufficiently detailed for governance oversight;
• independent of management’s preferred conclusion; and
• appropriately documented.

Communication does not transfer responsibility for the financial statements to those charged with governance. Nor does agreement by the audit committee make an inappropriate accounting treatment acceptable.

Written communication of control deficiencies should distinguish between the condition, the criterion, the cause, the effect and the recommendation. The auditor should avoid overstating weaknesses that do not meet the definition of a significant deficiency, while ensuring that serious matters are escalated promptly.

8. The auditor’s report

The auditor’s report communicates the audit conclusion in a standardised form. An unmodified opinion states that the financial statements present fairly, in all material respects, or give a true and fair view in accordance with the applicable framework.

A typical report contains:

• title and addressee;
• Opinion section;
• Basis for Opinion section;
• going-concern section where applicable;
• Key Audit Matters section for applicable listed entities or other entities where required;
• responsibilities of management and those charged with governance;
• auditor’s responsibilities;
• signature, address and date.

The report date cannot be earlier than the date on which the auditor has obtained sufficient appropriate evidence, including evidence that the complete financial statements and related disclosures have been prepared and that those with authority have taken responsibility for them.

Modified opinions

ISA 705 distinguishes modifications caused by a material misstatement from those caused by an inability to obtain sufficient appropriate audit evidence.

A qualified opinion uses wording such as “except for” and is appropriate where the matter is material but not pervasive. An adverse opinion is issued when misstatements are both material and pervasive, meaning they are not confined to specific elements, represent a substantial proportion of the statements, or are fundamental to users’ understanding. A disclaimer is issued when the auditor cannot obtain sufficient evidence and the possible effects could be both material and pervasive.

“Pervasive” is a judgement about the spread or fundamental nature of effects; it is not simply a numerical percentage.

Emphasis-of-matter and other-matter paragraphs

An emphasis-of-matter paragraph draws users’ attention to a matter appropriately presented or disclosed in the financial statements that is fundamental to their understanding. It does not replace a modified opinion.

Examples may include a major uncertainty arising from exceptional litigation or a significant subsequent event, provided the matter is adequately disclosed and does not require a modification. An emphasis-of-matter paragraph is not a mechanism for highlighting every important issue.

An other-matter paragraph refers to a matter not presented or disclosed in the financial statements that is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

9. Key audit matters

Key audit matters (KAMs) are those matters that, in the auditor’s professional judgement, were of most significance in the audit of the current period. They are selected from matters communicated with those charged with governance.

Selection generally involves:

1. identifying matters requiring significant auditor attention;
2. determining which involved significant auditor judgement or significant management judgement; and
3. selecting those of most significance.

KAMs commonly arise from significant risks, significant estimates with high uncertainty, major transactions and difficult evidence-gathering issues. The KAM section explains why the matter was significant and how it was addressed in the audit. It does not provide a separate opinion on each matter and does not replace a modified opinion or a going-concern section.

A matter giving rise to a modified opinion or a material uncertainty related to going concern is, by its nature, significant. It is described in the relevant report section, with a cross-reference where appropriate, rather than being misleadingly presented as an ordinary KAM.

10. Integrated completion workflow

Figure: Audit completion workflow from final evidence to the auditor’s report.

11. Illustrative case: Northbridge Technologies plc

Background

Northbridge Technologies plc, a listed software manufacturer, reports a substantial increase in revenue in the final month of the year. It has a bank covenant requiring a minimum interest-cover ratio. The audit team identifies a large contract signed before year-end, but customer acceptance occurs after year-end. Northbridge also has recurring losses, a refinancing requirement and an undisclosed lawsuit.

Problem

Management records the entire contract as year-end revenue and argues that customer acceptance is administrative. It refuses to accrue a disputed supplier invoice and provides a cash-flow forecast based on rapid growth. The draft financial statements contain only a generic liquidity-risk note.

Analysis

The auditor examines the contract, acceptance terms, correspondence, subsequent cash receipts and delivery records. The evidence indicates that control transferred only after customer acceptance. Revenue is therefore overstated and contract liabilities understated. The supplier invoice relates to services received before year-end and should be accrued. The lawsuit is material by nature and requires disclosure. Forecast assumptions are compared with historical performance and financing deadlines; the company has no committed refinancing facility.

The auditor communicates the misstatements and requests correction. Management corrects the revenue and accrual errors but refuses to disclose the lawsuit and refuses to revise the going-concern note. The uncorrected disclosure is material and pervasive to users’ understanding of liquidity and risk.

Reporting outcome

The auditor concludes that the financial statements contain a material and pervasive disclosure omission and issues an adverse opinion if the omission makes the statements as a whole misleading. The going-concern circumstances are described consistently with the reporting requirements. The revenue-recognition matter and liquidity uncertainty may also be relevant to KAM reporting, but KAM wording cannot soften or replace the adverse opinion.

Learning points

• A contract’s legal form does not determine the timing of revenue recognition.
• Corrected numerical errors do not eliminate the need to assess uncorrected disclosures.
• Covenant pressure increases the need for professional scepticism.
• Forecasts must be tested against financing evidence and historical reliability.
• KAMs and emphasis-of-matter paragraphs are communication devices, not substitutes for modified opinions.

12. Challenges, ethics and contemporary practice

Completion involves substantial judgement and is vulnerable to confirmation bias, deadline pressure and management influence. Ethical threats include self-interest, intimidation and advocacy threats. The auditor must maintain independence, challenge unsupported assumptions and escalate disagreements.

Technology can improve completion work through automated fluctuation analysis, journal-entry testing, contract review and disclosure completeness checks. Artificial intelligence may identify unusual patterns in large populations, but it does not replace the auditor’s responsibility to understand data provenance, assess model limitations, validate exceptions and apply professional judgement. Automated outputs are audit evidence only when their reliability and relevance have been evaluated.

Contemporary reporting increasingly emphasises entity-specific information rather than boilerplate. Audit committees and investors expect meaningful explanations of significant risks, estimates, liquidity and control deficiencies. Nevertheless, confidentiality must be preserved, and public reporting must remain consistent with the applicable standards.

Best practice is to maintain a completion memorandum linking each significant issue to evidence, management’s response, governance communication, materiality analysis and reporting consequence. A final independent review should challenge whether the conclusion is supported—not merely whether the file contains the required forms.

Chapter Summary

Audit completion integrates the evidence obtained throughout the engagement into an overall conclusion. Final analytical procedures identify unexpected relationships and possible unrecognised risks. Misstatements are accumulated, communicated and evaluated individually and in aggregate, with qualitative considerations applied to disclosures and sensitive matters.

The auditor reviews presentation and disclosure, assesses going concern, investigates subsequent events and communicates significant matters to management and those charged with governance. Reporting consequences range from an unmodified opinion to qualified, adverse or disclaimer opinions, depending on materiality, pervasiveness and the availability of evidence. Emphasis-of-matter and other-matter paragraphs provide focused communication but do not replace a modified opinion. Key audit matters explain matters of most significance and must remain consistent with the underlying audit conclusion.

Key Terms

Material misstatement: A misstatement that could reasonably influence users’ decisions.

Clearly trivial: A misstatement sufficiently small that it need not be accumulated under the auditor’s policy.

Performance materiality: An amount set below overall materiality to reduce aggregation risk.

Factual misstatement: A misstatement that is objectively identifiable.

Judgemental misstatement: A difference arising from an unreasonable accounting judgement or estimate.

Projected misstatement: An estimate of population error based on sample results.

Uncorrected misstatement: A misstatement that management has not corrected.

Final analytical procedures: Analytical procedures performed near the end of the audit to support the overall conclusion.

Going concern: The assumption that an entity will continue operating for the foreseeable future.

Material uncertainty: Significant uncertainty relating to events or conditions that may cast substantial doubt on going concern.

Subsequent event: An event occurring after the reporting date that may require adjustment or disclosure.

Qualified opinion: A modified opinion for a material but non-pervasive matter.

Adverse opinion: A conclusion that financial statements are materially and pervasively misstated.

Disclaimer of opinion: A conclusion not expressed because possible undetected effects are material and pervasive.

Emphasis-of-matter paragraph: A paragraph highlighting a properly disclosed matter fundamental to users’ understanding.

Other-matter paragraph: A paragraph addressing a matter outside the financial statements relevant to understanding the audit or report.

Key audit matter: A matter of most significance in the audit, selected from matters communicated to governance.

Pervasive: A term describing effects that are widespread or fundamental to users’ understanding.

Professional scepticism: An attitude involving a questioning mind and critical assessment of evidence.

Review Questions

Short Answer Questions

1. What is the purpose of final analytical procedures?
2. Distinguish a factual misstatement from a judgemental misstatement.
3. Why can a disclosure be material even when its monetary amount is small?
4. What is the difference between an adjusting and a non-adjusting subsequent event?
5. When is a qualified opinion generally appropriate?

Long Answer Questions

1. Explain the process for evaluating corrected and uncorrected misstatements, including qualitative considerations.
2. Discuss the auditor’s responsibilities when indicators of going-concern problems exist.
3. Explain the differences among qualified, adverse and disclaimer opinions.
4. Describe the selection and communication of key audit matters.
5. Evaluate the role of communication with those charged with governance during audit completion.

Analytical / Application Questions

1. An entity has an uncorrected inventory overstatement of $220,000, an uncorrected accrual understatement of $190,000 and an omitted related-party disclosure. Overall materiality is $500,000. Analyse whether an unmodified opinion is necessarily appropriate.
2. A customer becomes insolvent shortly after year-end because of financial difficulties that existed before year-end. Explain the accounting and audit implications.
3. A company has breached a loan covenant, has no signed refinancing agreement and presents an optimistic cash-flow forecast. Design the completion procedures and determine the possible reporting consequences.

Multiple Choice Questions with Answers

Question 1

What is the primary purpose of final analytical procedures?

A. To replace all substantive testing

B. To form an overall conclusion about the financial statements

C. To calculate management’s bonus

D. To determine the audit fee

Correct Answer: B. To form an overall conclusion about the financial statements

Question 2

Which item is generally a projected misstatement?

A. An incorrect invoice amount identified directly

B. An omitted accounting policy

C. An extrapolated sample error applied to a population

D. A subsequent acquisition

Correct Answer: C. An extrapolated sample error applied to a population

Question 3

Which factor can make a small monetary misstatement material?

A. It is clearly trivial

B. It concerns a sensitive related-party disclosure

C. It has been corrected

D. It is below performance materiality

Correct Answer: B. It concerns a sensitive related-party disclosure

Question 4

An event after year-end confirms that a receivable was impaired at year-end. What is it generally?

A. An adjusting event

B. A non-adjusting event

C. An other-matter event

D. A key audit matter automatically

Correct Answer: A. An adjusting event

Question 5

A material misstatement that is not pervasive generally results in which opinion?

A. Unmodified opinion

B. Qualified opinion

C. Adverse opinion

D. Disclaimer of opinion

Correct Answer: B. Qualified opinion

Question 6

An adverse opinion is appropriate when the financial statements are:

A. Immaterially misstated

B. Material but not pervasive in error

C. Material and pervasive in error

D. Unaudited but complete

Correct Answer: C. Material and pervasive in error

Question 7

What is the function of an emphasis-of-matter paragraph?

A. To replace a qualification

B. To highlight a properly disclosed matter fundamental to users’ understanding

C. To report an unknown audit scope limitation

D. To express a separate opinion on a KAM

Correct Answer: B. To highlight a properly disclosed matter fundamental to users’ understanding

Question 8

Key audit matters are selected from matters communicated to:

A. The tax authority only

B. Customers

C. Those charged with governance

D. The entity’s competitors

Correct Answer: C. Those charged with governance

Question 9

Which statement about going concern is correct?

A. Any loss automatically requires an adverse opinion

B. A material uncertainty adequately disclosed may be reported in a separate section without modifying the opinion

C. Management has no responsibility for going-concern assessment

D. Going concern is assessed only after the report date

Correct Answer: B. A material uncertainty adequately disclosed may be reported in a separate section without modifying the opinion

Question 10

Which response best reflects professional scepticism?

A. Accepting management’s explanation without corroboration

B. Ignoring an unusual fluctuation below overall materiality

C. Corroborating a significant explanation with reliable evidence

D. Allowing governance approval to determine the audit opinion

Correct Answer: C. Corroborating a significant explanation with reliable evidence