ting and Reporting on the Audit Year end for all HCHG entities is June 30 er rev
ID: 2413715 • Letter: T
Question
ting and Reporting on the Audit Year end for all HCHG entities is June 30 er reviewing the audit work papers for HCHG for the year ended June 2020. Today is July 13, 2020, and the audit report is due to be signed in three wee ks' time During your review, you note that the fixed-term borrowings of HCHG totalling $75 million are approaching maturity and HCHG does not seem to have renegotiated any terms of re financing. You are he same from your experience with other clients, that banks are reluctant to extend financing ont aware, terms in the current market. The financi who left the group six months ago and has not been replaced ng of HCHG was historically managed by the group's treasurer HCHG's financial controller, who has been with the group for nine months, has advised you that he has been busy renegotiating with some of HCHG's key suppliers, who recently requested cash on elivery for all orders, rather than extending the normal credit terms. You are also aware that a fire that occurred in the Shady Oaks cafeteria last week was not ade- quately covered by insurance. Fortunately, no one was seriously injured in the fire, but the cafeteria was o badly damaged that it had to be closed. When you are discussing this matter with HCHG's law firm they reveal that the centre is unlikely to have adequate professional indemnity insurance to meet the current demands of several malpractice cases that have been brought against it in the last 12 months Source: Adapted from the Institute of Chartered Accountants Australia's CA Program's Audit and Assurance Exam December 2008 and March 2009. Provided courtesy of Chartered Accountants Australia and New Zealand 13.15 Final review issues-subsequent events Moderate Mo LO 3 Required a. Explain your responsibilities with respect to the Shady Oaks cafeteria fire. b. How will this event be handled in the HCHG financial statements and the audit report? 13.16 Final review issues-going concern and reporting Challenging Lo 2,7 Required a. Are there any going concern issues for H b. How will you that CHG? Explain. If so, what are the mitigating circumstances? commend that the issues be handled in the financial statements and the audit report?Explanation / Answer
13.15 (a)
Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue. Two types of events can be identified:
(a) Those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and
(b) Those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period).
The term authorized for issue can be interpreted as the issue of financial statements to the shareholders and members of the company. Any event occurring between the yearend date and the date when the audit report has been signed are subsequent events.
In the given case, the fire in Shady Oaks cafeteria has occurred in the previous week, i.e. the event has occurred in the subsequent period. The auditor should assess the materiality of the event and assess whether a disclosure would be required in the report.
13.15 (b)
No indicative conditions for the fire, however, can be observed on the reporting date and hence, the event is a non-adjusting event and hence, no adjustment entry will be required in the financial statements. Disclosure may, however, be given in the financial statements indicating that such an event has occurred as the same seems material from the company perspective and the shareholders may find the same relevant. In the subsequent period, the company shall book the loss due to fire and the insurance claims received, if any and make any other adjustments as required.
13.16(a)
Following are some of the going concern issues that may surface:
The malpractice law suits along with the other issues listed above may cause serious cashflow problems in the future indicating that the going concern assumption may not hold true for the entity.
13.16(b)
An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.
In the given case, the auditor should obtain sufficient and appropriate audit evidence indicating the above-mentioned conditions. If the going concern assumption appears to be violated, the entity should not prepare the financial statements on a going concern basis. The auditor shall then audit such financial statements and give an opinion on the true and fair view of the same. If, however, the entity has prepared its financial statements on a going concern basis, the auditor should give a qualified opinion, provided the going concern assumption seems to be violated.
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