Get premium membership and access questions with answers, video lessons as well as revision papers.

You are auditing the financial statements of Newbridge Trading plc, for the year-ended 31 October 1997. The senior partner of your audit firm has...

      

You are auditing the financial statements of Newbridge Trading plc, for the year-ended 31 October 1997.

The senior partner of your audit firm has asked you to consider the auditor‟s responsiresponsibilities for identifying subsequent events. Also, he has asked you to describe the audit procedures, which examine subsequent events. He has suggested that an example of one point in answer to part (b) below would be:

„Checking sales ledger cash received after the year-end to determine the realisability of debtors at the year-end and highlight doubtful debts.‟

The detailed audit work was completed on Friday 5 December 1997. It is proposed that:

a) The audit report will be signed on Friday 19 December;
b) The financial statements will be sent to shareholders on Monday 5 January 1998; and
c) The company‟s annual general meeting will be held on Wednesday 28 January 1998.

Required:
a) Consider the auditor‟s responsibilities for detecting material subsequent events in the periods:

i) 31 October to 5 December 1997 ii) 5 December to 19 December 1997 iii) 19 December 1997 to 5 January 1998
iv) 5 January 1998 to 28 January 1998
v) After 28 January 1998
b) List and briefly explain audit procedures, which involve examination of subsequent events.
c) Describe the audit work you will carry out in period (a) (ii) above.

  

Answers

johnson
Tutor’s hint: What your answer should demonstrate is that the date the detailed audit work is finished is irrelevant from the viewpoint of the
auditor?s responsibilities. What matters is the date the audit report is signed. The position after the audit report is signed may appear to be complicated, but you do need to be aware of the various possibilities and what the auditor should do in each set of circumstances. In (c) your answer should list various ways in which auditors can actively obtain evidence; they should not just rely on the representations of the directors.
Examiners comment: Candidates lost marks through discussing accounting for subsequent events rather than audit. Few candidates understood that auditors only have responsibilities after the audit report is signed if they become aware of any further subsequent events. Answers to (c) were poor.
(a)
(i) Between the year-end and the end of the performance of detailed audit work, auditors should identify and detect all material subsequent events which take place in that period. Such events which are non-adjusting should be disclosed in the notes to the accounts of the company, whereas all adjusting events should be incorporated in the accounts.
(ii) As the auditors? responsibility extends to the date on which they sign their report (which should be the same day as the directors signed the accounts), it follows that they must obtain reasonable assurance up to than date in respect of all significant events. Auditors should ensure that any such significant events are appropriately accounted for or disclosed in the financial statements. If not, a qualification of their report may be necessary. In other words, the auditors? responsibility is the same as it was during the detailed audit work.
(iii) Auditors? responsibilities after the date of the audit report are not as clear cut as they are in the period prior to the date of the audit report. After the date of the audit report auditors do not have a duty to search for evidence of subsequent events. However, auditors should ask the directors to let them know if any material post balance sheet events occur during this period. If, before the
AGM they become aware of information which might have made them give a different audit opinion had they known of it at the time, they should act as follows:
1. They should discuss the matter with the directors, carry out further procedures to obtain sufficient audit evidence and then consider whether the financial statements should be amended by the directors.
2. If the directors are unwilling to take action which the auditors consider necessary to inform the members of the changed situation, auditors should consider exercising their statutory rights to make a statement at the general meeting. They should also consider taking legal advice on their position.
3. If the directors wish to amend after the auditors have signed their report, the auditors will need to consider whether the proposed amendments affect their report. The audit report should not be dated before the date on which the amended financial statements are approved by the directors. Auditors should follow the procedures for auditing events after the balance sheet date before making their report on the amended financial statements.
(iv) If auditors become aware of subsequent events during this period that may affect the accounts, they should consider whether to withdraw their audit report. Legal advice may be required. As in (iii) the auditors should consider making a statement at the annual general meeting.
If the directors do decide to change the accounts, further post balance sheet work will be necessary to cover events up to the revised date of the audit report. In the later audit report, the auditors should refer to their original audit report, and to the note in the accounts which should give details of the changes.
(v) Auditors have no responsibility for identifying subsequent events during this period. If however the directors find material errors in the accounts and inform the auditors, similar procedures to those used in (iv) will be needed.
(b) The audit work for subsequent events will normally be concerned with balance sheet values at and after the year-end. The following procedures will be carried out.
ii) Fixed Assets
1. Check for any sales or proposed sales after the year-end which may mean a write down to net realizable value at the year-end.
2. Consider obsolescence of fixed assets, for example plant used to make a discontinued line, which might only become apparent after the year-end.
iii) Stock
1. Check post year-end selling price of major items of stock and compare to value in year-end accounts. Consider write-downs to net realizable value.
2. Consider the possible existence of obsolete, damaged or slow moving stock and the consequent value of any write down.
3. Perform a (limited) stock-take after the year-end if the existence of all stock is not known for certain.
iv) Debtors
1. Check sales ledger cash received after the year-end to determine realisability of debtors and highlight doubtful debts.
2. Take doubtful debts out of the provision and consider writing parts of the provision off for which no money has been received.
3. Review trade press and correspondence and consult the sales manager about any major customers who have become insolvent recently.
4. Check the issue of credit notes and return of goods after the year-end to determine the provision for credit notes required in the accounts.
v) Cash at bank
1. Check that outstanding items on the bank reconciliation have cleared promptly after the year-end (to spot teeming and lading and late payment to creditors).
2. Write back any stale cheques not cleared (over 6 months old).
3. Check all material payments and receipts around the year-end to check the completeness of both accruals and prepayments (including NI and PAYE sundry creditors).
vi) Trade Creditors
1. Check reconciling items on suppliers? statements have cleared promptly after the year-end.
2. If a creditors? circularisation has been carried out then verify balances by examining post year-end payments, in cases where there was no supplier?s statement and no reply.
vii) Going concern problems and other matters
1. Check profit and cash flow forecasts for evidence of future liquidity.
2. Review management accounts and reports after the year-end.
3. Review board minutes after the year-end.
4. Request any information on subsequent events and going concern matters from the directors and check their information.
5. The directors should also state they have given all such information in the letter of representation.
viii) Non-adjusting events
Look in board minutes and cash book for any matters which are non-adjusting but which should be disclosed in the accounts, for example, major sales of fixed assets, accidental losses and issues of shares and debentures.
d) I will check whether there have been any material subsequent events in this period, particularly if there is a significant delay between completing the detailed audit work and signing the report. I will not undertake such detailed enquiries as in (b) above, but I will perform the following procedures:
i) Ask the management or directors if any further material events have occurred which might affect my opinion on the accounts.
ii) Review the latest board minutes, reports and managements accounts issued since the end of the audit.
iii) Any matters which were uncertain at the end of the audit should be reviewed again to establish an outcome and any effect on the accounts. Examples would include doubtful debts, contingencies and stock obsolescence (perhaps due to new developments).
Consider any matters which have arisen in the industry or the economy which might affect the company.
johnson mwenjera answered the question on March 28, 2018 at 09:10

Next: (a) What is meant by the term "fraud"? Give four examples of fraudulent activities.
Previous: List four examples of business resources.

View More Accounting Questions and Answers | Return to Questions Index


Learn High School English on YouTube

Related Questions

© 2008-2024 by KenyaPlex.com. All Rights Reserved | Home | About Us | Contact Us | Copyright | Terms Of Use | Privacy Policy | Advertise