You have noted following subsequent events in the audit of a client. State with reasons whether such events should be adjusted or disclosed. The year end of the company is December 31, 20×1. The accounts were approved by the directors on March 5, 20×2.

1. Rs.300,000 were receivable from a customer at December 31 20×01. Due to weak financial position, specific provision of 25% was made against this customer in the draft accounts.

In February 20×2, before the accounts were authorized for issue the customer was declared. Insolvent and nothing was recoverable.

2. 500 units of an inventory item were valued at unit cost of Rs.2,000 at December 31, 20×01. In January 20×02, the product was sold at Rs. 1,600 per unit.

3. Subsequent determination of the purchase price of the proceeds of sale of assets purchased or sold before the year end

4. The manager is entitled to a commission of 5% of net profit. Net profit was determined in February 20×2

5. It was discovered in February 20×2 that dummy sales invoices amounting to Rs. 800,000 ~ere put through in the accounts for 20×1

6. The receipt of evidence on February 10, 20×2 that the previous estimate of accrued profit on long term contract was materially inaccurate

7. The receipt of information regarding rates of taxation

8. On January 5, 20×2 the company decided to allow an increase of 10% in salaries effective November 1, 20xl Mergers and acquisitions

9. Reconstruction and proposed reconstruction

10. Issue of shares and debentures

11. Losses of fixed assets or inventories as a result of a catastrophe such as fire or flood

12. Opening new trading activities or extending existing trading

13. Closing significant part of the trading activities if this was not anticipated at the year end

14. Government action such as nationalization

15. Strikes and other labor disputes

1. This is an adjusting event as the value of asset had already declined prior to year-end. It was only confirmed late. The loss_of Rs. 225,000 should be recognized in the financial statements for year ended December 31, 20×1

2. This is an adjusting event. Loss of Rs. 200,000 should be recognized in the account of 20x 1, unless the management can demonstrate that the fall in the value does not relate to conditions existed at the balance sheet date

3. This is an adjusting event as the risks and rewards were transferred prior to year end

4. This is an adjusting event as the company had an obligation to pay commission

5. Fraud or error detected subsequently which could materially misstate the financial statements of the last year is an adjusting event

6. Adjusting event because the loss had already occurred prior to year end

 7. Adjusting event because obligation existed at year end

8. Adjusting event because salary increase is effective from last year

Item # 9 through 16 are all non adjusting events because they do not relate to conditions existed at balance sheet date.

ISA 560, Subsequent events requires that the auditor should apply procedures to specific transactions occurring after period end to obtain .audit evidence as to account balances as at period end. Give some examples of such procedures.? 

Example of audit procedures to be applied to specific transactions occurring after period end to obtain audit evidence as to account balances as at period end are:

– Sates invoices dated subsequent to year end should not be recorded before the year end .

– Subsequent collections from receivables to verify collectibility of receivables .at year end

– Verify selling price of inventories after year end. If some of inventory items have been subsequently sold below cost, such items should be valued at net realizable values

– Suppliers invoices relating to GRNs issued before year end should not be posted in purchase day book after year end

– Suppliers invoices relating to GRNs issued after year end should not be posted in purchase day book before year end

– Compare suppliers statements with their ledger balances to detect late issue of ~heques after year end

– Verification of bank reconciliation and bank statements of subsequent period .. Unusual delay in clearing the cheques issued before year end indicates that the cheques were actually sent after year end arid entered in the period before year end to improve current ratio.

– Sale of fixed assets shortly after year end to confirm that year end balaqces were not overstated

– Sales and purchase return shortly after year end to confirm accounting in correct period

– Current status of legal claims which were accounted for on the basis of preliminary or inconclusive data

– Reading minutes of shareholders and board of directors held after year end

– Inquiring of management as to whether any subsequent events have occurred which might affect validity of going concern at year end

– Search for unrecorded accruals by verifying cash book of subsequent period.

What procedures are adapted by an auditor to identify subsequent events up to the date of auditor’s report?

1. Obtain understanding of the procedures management has established to ensure that subsequent events have been identified.

2. Inquire of management whether any subsequent events have occurred:

(a) Current status of items that were accounted for on the basis of estimated facts.
(b) Issuance of new shares or debentures.
(c) Sales or acquisition of assets.
(d) Developments regarding contingencies.
(e) Going concern problem
(f) Changes in estimates

3 . Reading minutes of the meetings.

4. Reading latest interim financial statements

5. Obtain written representation from management.

State auditor’s duties for facts which become known to the auditor after the date of auditor’s report but before financial statements are issues? 

Refer to paragraph 1.2 of the text

Masoom & Co. Chartered Accountants have audited the financial statements of Cunning Limited. The financial statements have been issued after getting proper approval of the Board of Directors and audit report signed by the auditors. After some time, the auditors came ‘to know that a major law suit was decided against the company subsequent to year-end but before the audit report was signed by the auditors. The issue existed at the balance sheet date. The outcome of the law suit was not brought to the knowledge of the auditors. Had it been known to the auditors. The financial statements would have required proper adjustments in this respect. State auditor’s responsibilities in this  situation.

a) Request management to amend the financial statements and inform the shareholders of the situation.

b) Issue new audit report with an emphasis of matter paragraph which should refer to previous report.

c) Carry out subsequent events review up to the date of new auditor’s report.

If the management does not amend the financial statements there auditor should take appropriate action to prevent reliance on the audited accounts previously issued including obtaining legal advice.

Management may not be required to issue amended financial statements hen issuance of financial .statements of next period is imminent if appropriate disclosures are made in next year’s financial statements.

The management of Zafar Textile Limited (ZTL) has become aware of an error in its audited financial statements after its issuance to the shareholders. ZTL intends to rectify the error and have approached the auditor for issuance of a new audit report on the revised financial statements.

Describe the procedures which the auditor should adopt in the above circumstances.

When management revises the financial statements, the auditor undertake the following audit procedures:

(a) Carry out the audit procedures necessary in the circumstances.

b) The audit procedures should be designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor’s report that may require adjustment of, or disclosure in, the financial statements have been identified.

(c) Review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditors’ report thereon is informed of the situation.

(d) Issue a new report on the revised financial statements. The new auditors report should include an emphasis of a matter paragraph referring to a note to the financial statements that more extensively. discusses the’ reason for the revision of the previously issued financial statements and to the earlier report issued by the auditor.

e) The new audit report should be dated not earlier .than the date of
approval of the re.vised financial statements .

f) If the auditor is unable to obtain sufficient, appropriate audit evidence or if he is not satisfied with the steps taken by the management, he shall seek a legal opinion.

It was observed that a particular note of the financial statements was missed out in the published armual report. The auditor’s signed copy available in the audit working papers file contained the note, while the published financial statements did not. The amount involved in the note was not material.

What is auditor’s responsibility in such cases?

There is nothing in the accounting and auditing standards and in the Companies Ordinance, 1984 which deals particularly with the above mentioned issue. ISA 560 on Subsequent Events is also silent on this issue.

The auditors should communicate forthwith with the client and inform them about the omission. Further the auditors should also advise, their clients to inform the Securities and Exchange Commission of Pakistan and the relevant stock exchange.

If due to time constraint or any other reason it is not possible for the management to send corrigendum to the shareholders, the auditors should see that the management or board of the directors inform the shareholder about the omission at the AGM at least.

Further according to the explanation of section 255, auditors are entitled to attend Annual General Meeting and may inform the shareholders themselves if management fails to do so.

Fieldwork for the annual audit of Peach Textile Mills Limited (PTML) has been completed and the financial statements and the audit report are due to be signed next week. During the concluding meeting with the client, the auditor was informed that a fire has destroyed all the raw cloth placed in the warehouse at the mill. About 60% of the destroyed cloth was purchased after the reporting date. However, due to certain defect in the insurance policy, the insurance company settled the claim by paying 80% of the amount of loss.

Explain the auditor’s responsibility and the audit procedures and actions that should be carried out by the auditor in the above situation.

Auditor’s responsibility and the audit procedures and actions that should be carried out

The auditor is responsible to consider the impact on the financial statements, of all events that take place before the signing of the audit report.

The loss due to fire is a non-adjusting event as it is indicative of conditions that arose after the reporting period. Therefore in the above situation the auditor will need to carry out the following audit procedures:

(a) Assess the financial impact of the damage as may have been determined by the management by reviewing the accounting documents, board minutes, surveyor’s report etc.

(b) If the event needs to be disclosed in the financial statements, because of its materiality, advise the management to make appropriate disclosure.

(c) If appropriate disclosure is not made or the disclosure is inappropriate, consider modification of the audit report.

Posted on November 3, 2015 in Subsequent Events

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