Consider each of the following situations separately. Assume that all of the eve
ID: 2562590 • Letter: C
Question
Consider each of the following situations separately. Assume that all of the events are highly material. In all situations:
the balance date for the companies is 30 June 2010
the field work for the companies was completed 20 August 2010
the financial statements and audit report were signed on 3 September 2010
the financial statements and audit report were mailed to the members on 10 September 2010.
a) A draft investigative report commissioned by a government inquiry was leaked to the media on 25 August 2010. The report has questioned the continued need for a segment of your client’s business. Accordingly, there is significant uncertainty regarding the future necessity for one of the services offered by the company and its industry colleagues. There has been significant media attention and speculation on this issue.
b) On 20 October 2010, you discover that a debtor of NACD Limited at 30 June 2010 had gone bankrupt on 1 October 2010. The debt had appeared collectible at 30 June 2010 and 3 September 2010.
c) On 7 September 2010, you discover an uninsured legal action against the client that had originated in January 2007.
d) On 20 August 2010, you discover that a debtor had gone bankrupt on 3 August 2010. The last sale took place on 1 July 2010. The cause of the bankruptcy was a major uninsured fire at one of the debtor’s premises.
Required: For each of the situations above:
1. State which of the following actions should the auditor determine to be undertaken: a. Adjust the 30 June 2010 financial statements b. Disclose the information in the notes to the 30 June 2010 financial statements c. Request the client to recall the 30 June 2010 financial statements for revision d. No action is required
2. Give reasons as to why the particular action should be taken and any further action that the auditor should undertake prior to forming the audit opinion.
Explanation / Answer
Answer 1: Under Companies Act 1956, Companies were generally not permitted to revise their financial statement except in case of material misstatement due to occurence of fraud or error and were reported as prior period items in the financial statement in the year in which the error or fraud is discovered.
However, section 130 of the new Companies Act 2013, allows re-opening of financial statements on application made by certain stattory authorities to the Tribunal or Court and the Tribunal and Court ordering the reopening due the accounts being prepared in the fraudulent manner or operations of the Company were mismanaged during the period. The specific answer to each of the event is as below:
a) A draft investigative report commissioned by a government inquiry was leaked to the media on 25 August 2010.
Response: Since the accounts were signed on 3 September 2010, the auditor may disclose the information in the notes to the 30 June 2010 financial statements as matter is significant and it may affect the decision of the user of the financial statement.The Auditor may decide to give the Emphasis of Matter in the report.
b) On 20 October 2010, you discover that a debtor of NACD Limited at 30 June 2010 had gone bankrupt on 1 October 2010.
Response: No action required, as accounts are already signed by then and also the event of bankruptcy occured after the balance sheet date and hence no adjustment is required,
c) On 7 September 2010, you discover an uninsured legal action against the client that had originated in January 2007.
Response: The auditor owes a duty to the members of the company and this duty is completed when he addresses a report to the members. It is for the company to circulate the report to the members.No action required, as accounts are already signed on 3rd September 2010.
d) On 20 August 2010, you discover that a debtor had gone bankrupt on 3 August 2010. The last sale took place on 1 July 2010. The cause of the bankruptcy was a major uninsured fire at one of the debtor’s premises.
Response: Since the accounts were signed on 3 September 2010, the auditor may decide to adjust the 30 June 2010 financial statements if the impact is material and may affect the decision of the user of the financial statement. The disclosure may also be given in the financial statement if the said debtor is the major customer for the company.
Answer 2: Reasons as to why the particular action should be taken and any further action that the auditor should undertake prior to forming the audit opinion is given in response to Answer 1 above.
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