Historical context and the clarified standards
Audit Practice Bulletin 2 of 2011 was issued on 13 December 2011 for approaching year-end audits amid global uncertainty. It supplements the 16 March 2009 downturn bulletin, which used standards subsequently replaced by clarified SSAs for periods beginning on or after 15 December 2009. Many provisions were retained and some strengthened, so readers using the earlier guidance must refer to the clarified requirements. The source groups its additional discussion into seven specific areas rather than prescribing one generic response to every downturn.
Communicate early with management and governance
Maintain regular contact throughout the audit with management, directors and audit committees. Understand how conditions affect the entity and its response, enabling timely risk-based planning. Communicate significant internal-control deficiencies under SSA 265, particularly those affecting material misstatement or going concern, so remedial action can occur. Discuss material accounting estimates and ensure governance receives consistent information about management’s reporting process. SSA 260 provides the broader communication framework.
Pressure, management override and fraud procedures
Pressure to meet targets can increase fraudulent-reporting risk even where normal controls appear effective. Override may alter assumptions, estimation judgements, consolidation adjustments or reclassifications outside ordinary journal entries. SSA 240 requires scepticism despite a history of honest management. Irrespective of the assessed override risk, test journal entries and other reporting adjustments, review estimates for bias, and evaluate the business rationale of significant or unusual transactions outside the ordinary course.
Non-financial asset impairment and realistic forecasts
Lower profitability and cash generation may create impairment indicators, requiring detailed testing rather than unsupported claims that no indicator exists. Critically assess revenue growth, margins, terminal values and discount rates against supportable market evidence, documenting the evaluation. Use the latest business plan reflecting downturn effects and check that impairment forecasts agree with budgets supplied to management and governance. The bulletin also refers readers to ACRA’s 2010 non-financial-asset impairment bulletin.
Qualitative and quantitative financial disclosures
FRS 107 requires information enabling users to assess financial instruments’ significance to financial position/performance, the nature and extent of associated risks during the period and at year-end, and how the entity manages them. The discussion includes uncertainty, credit-risk concentration and contingent liabilities. Audit both quantitative and qualitative adequacy, with extra supervision of disclosures that are judgemental, complex or qualitative; economic uncertainty can increase incomplete or inaccurate reporting in these areas.
Subsequent events across three timing windows
Rapid changes after the statement date can concern commitments, borrowing, credit ratings, capital increases, debt issuance, contingencies or key risks. Under SSA 560.6, obtain sufficient appropriate evidence to identify all events between the statement and audit-report dates requiring adjustment or disclosure. Also consider SSA 560’s separate requirements for facts becoming known after the report but before issue of the statements, and after the statements have been issued. The bulletin does not treat report signing as the end of every possible responsibility.
Modified opinions and governance communication
A downturn can make the going-concern assumption inappropriate or expose material uncertainties that are not disclosed. These circumstances can require a modified opinion; the precise reporting outcome depends on the actual accounting basis and evidence. SSA 705.28 requires communication of the circumstances and proposed modification wording to governance when modification is expected. This allows agreement on factual matters and an opportunity for additional information and explanations under paragraph A25; it does not make governance consent a prerequisite to the auditor’s independent conclusion.
Substantive senior involvement and status of the guidance
Engagement partners must direct, supervise and review work substantively and promptly throughout the audit. Quality reviewers also need timely participation so significant issues are resolved before the report date; the source points to the 2011 quality-review bulletin. Economic uncertainty can increase material-misstatement risk, requiring vigilance, judgement and scepticism. This bulletin supplements professional standards and explains inspection considerations; it is not an ACRA rule or a substitute for the prescribed auditing standards and procedures.
Official source
This article independently explains the substantive contents of the official PDF, including the relevant conditions, procedures and annexes. The linked document remains the authoritative source for its original wording, and later changes should be checked separately.
Read the official PDF ↗