ACCA AA Syllabus E. Review And Reporting - Auditor responsibility for Subsequent Events - Past Papers ^{2 / 4}

You are an audit manager at Blenkin & Co and are approaching the end of the audit of Sampson Co, which is a large listed retailer. The draft financial statements currently show a profit before tax of $6·5m and revenue of $66m for the financial year ended 30 June 20X6. You have been informed that the finance director left Sampson Co on 31 May 20X6.

As part of the subsequent events audit procedures, you reviewed post year-end board meeting minutes and discovered that a legal case for unfair dismissal has been brought against Sampson Co by the finance director. During a discussion with the Human Resources (HR) director of Sampson Co, you established that the company received notice of the proposed legal claim on 10 July 20X6.

The HR director told you that Sampson Co’s lawyers believe that the finance director’s claim is likely to be successful, but estimate that $150,000 is the maximum amount of compensation which would be paid. However, management does not intend to make any adjustments or disclosures in the financial statements.

If, after the financial statements have been issued, Blenkin & Co becomes aware of a fact which may have caused its report to be amended, the firm should consider several possible actions.

Which of the following are appropriate actions for Blenkin & Co to take?

(1) Discuss the matter with management and, where appropriate, those charged with governance
(2) Obtain a written representation from management
(3) Consider whether the firm should resign from the engagement
(4) Enquire how management intends to address the matter in the financial statements where appropriate

A. 1 and 2
B. 1 and 4
C. 2 and 3
D. 3 and 4

Cannavaro.com is a website design company whose year end was 31 December 20X4. The audit is almost complete and the financial statements are due to be signed shortly. Profit before tax for the year is $3·8 million and revenue is $11·2 million.

The company has only required an audit for the last two years and the board of directors has asked your firm to provide more detail in relation to the form and content of the auditor’s report.

During the audit it has come to light that a key customer, Pirlo Co, with a receivables balance at the year end of $285,000, has just notified Cannavaro.com that they are experiencing cash flow difficulties and so are unable to make any payments for the foreseeable future. The finance director has notified the audit team that he will write this balance off as an irrecoverable debt in the 20X5 financial statements.

The audit assistant assigned to the audit of Cannavaro.com wants a better understanding of the effect subsequent events have on the audit and has made the following statements:

(1) All material subsequent events require the numbers in the financial statements to be adjusted

(2) A non-adjusting event is a subsequent event for which NO amendments to the current year financial statements are required

(3) The auditor’s responsibilities for subsequent events which occur prior to the audit report being signed are different from their responsibilities after the audit report has been issued

(4) The auditor should request a written representation confirming that all relevant subsequent events have been disclosed

Which of the statements above in relation to subsequent events are true?

A. 1 and 3
B. 2, 3 and 4
C. 1, 2 and 4
D. 3 and 4 only

Grains 4U Co (Grains) manufactures breakfast cereals and has three factories, four warehouses and three distribution depots spread across North America. The audit for the year ended 31 December 2015 is almost complete and the financial statements and audit report are due to be signed shortly. Profit before taxation is $7·9 million. The following events have occurred subsequent to the year end and no amendments or disclosures have been made in the financial statements.

Event 1 – Fire
On 15 February 2016, a fire occurred at the largest of the distribution depots. The fire resulted in extensive damage to 40% of the company’s vehicles used for dispatching goods to customers; however, there have been no significant delays to customer deliveries. The company estimates the level of damage to the vehicles to be in excess of $650,000. Only a minimal level of inventory, approximately $25,000, was damaged. Grain’s insurance company has started to investigate the fire to assess the likelihood and level of payment, however, there are concerns the fire was started deliberately, and if true, would invalidate any insurance cover.

Event 2 – Inventory
On 18 February 2016, it was discovered that a large batch of Grain’s new cereal brand ‘Loopy Green Loops’ held in inventory at the year end was defective, as the cereal contained too much green food colouring. To date no sales of this new cereal have been made. The cost of the defective batch of inventory is $915,000 and the defects cannot be corrected. However, the scrapped cereal can be utilised as a raw material for an alternative cereal brand at a value of $50,000.

Required:
For each of the two subsequent events described above:

(ii) Describe audit procedures which should now be performed in order to form a conclusion on any required amendment.

Note: The total marks will be split equally between each event. (10 marks)

Kyanite Pizzas Co (Kyanite) operates a large chain of fast food restaurants. You are an audit supervisor of Jasper & Co and are currently preparing the audit programmes for the audit of Kyanite’s financial statements for the year ended 31 March 2016. You are reviewing the notes of last week’s meeting between the audit manager and finance director where two material issues were discussed.

(i) Property, plant and equipment
In the past Kyanite has received negative press reports over the condition of its fast food restaurants, with comments suggesting they are old fashioned and tired looking. Therefore during the year the company undertook a full review of all its assets and carried out extensive refurbishments to the majority of its restaurants. This review resulted in a significant amount of ageing fixtures and fittings being disposed of and a significant amount of capital expenditure was invested in all remaining restaurants. (6 marks)

Required:
Describe substantive procedures you should perform to obtain sufficient and appropriate audit evidence in relation to the above two matters.

Note: The mark allocation is shown against each of the two matters above. (10 marks)

Which of the following statements, relating to the auditor’s responsibilities regarding subsequent events, if any, is/are correct?

(1) Auditors do not have a responsibility to perform procedures to identify subsequent events after the date of the auditor’s report

(2) Where a material adjusting subsequent event is identified after the financial statements are issued, but prior to approval by the shareholders, the auditor should include a qualified opinion in their audit report if management refuses to adjust the financial statements for the event

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

Bullfinch.com is a website design company whose year end was 31 October 2014. The audit is almost complete and the financial statements are due to be signed shortly. Revenue for the year is $11·2 million and profit before tax is $3·8 million. A key customer, with a receivables balance at the year end of $283,000, has just notified Bullfinch.com that they are experiencing cash flow difficulties and so are unable to make any payments for the foreseeable future. The finance director has notified the auditor that he will write this balance off as an irrecoverable debt in the 2015 financial statements.

Required:
(i) Explain whether or not the 2014 financial statements require amendment; and

(ii) Describe audit procedures which should be performed in order to form a conclusion on any required amendment.

Note: The total marks will be split equally between each part. (6 marks)

The audit of Giggs Co’s financial statements for the year ended 31 October 2014 has been completed; the audit report and the financial statements have been signed but not yet issued.

The finance director of Giggs Co has just informed the audit team that he has received notification that a material receivable balance has become irrecoverable and Giggs Co will not receive any of the amounts owing.

What actions, if any, should the auditor now take to satisfy their responsibilities under ISA 560 Subsequent Events

A. No actions required as the audit report and financial statements have already been signed
B. Request management to adjust the financial statements, verify the adjustment and provide a new audit report
C. Request management to make disclosure of this event in the financial statements
D. Request that management adjust for this event in the following year’s financial statements as it occurred in year ending 31 October 2015.

Describe the auditor’s responsibility for subsequent events occurring between:

(i) The year-end date and the date the auditor’s report is signed; and

(ii) The date the auditor’s report is signed and the date the financial statements are issued. (5 marks)

The date is 3 December 2008. The audit of ZeeDiem Co is nearly complete and the financial statements and the audit report are due to be signed next week. However, the following additional information on two material events has just been presented to the auditor. The company’s year end was 30 September 2008.

Event 1 – Occurred on 10 October 2008

The springs in a new type of mattress have been found to be defective making the mattress unsafe  for use. There have been no sales of this mattress; it was due to be marketed in the next few weeks. The company’s insurers estimate that inventory to the value of $750,000 has been affected.

The insurers also estimate that the mattresses are now only worth $225,000. No claim can be made against the supplier of springs as this company is in liquidation with no prospect of any amounts being paid to third parties.

The insurers will not pay ZeeDiem for the fall in value of the inventory as the company was underinsured. All of this inventory was in the finished goods store at the end of the year and no movements of inventory have been recorded post year-end.

Event 2 – Occurred 5 November 2008

Production at the ShamEve factory was halted for one day when a truck carrying dye used in colouring the fabric on mattresses reversed into a metal pylon, puncturing the vehicle allowing dye to spread across the factory premises and into a local river.

The Environmental Agency is currently considering whether the release of dye was in breach of environmental legislation. The company’s insurers have not yet commented on the event.

Required:

(a) Explain the auditors’ responsibility and the audit procedures and actions that should be carried out according to ISA 560 (Redrafted) Subsequent Events. (12 marks)

(b) Assume that the date is now 20 December 2008, the financial statements and the audit report have just been signed, and the annual general meeting is to take place on 10 January 2009. The Environmental Agency has issued a report stating that ZeeDiem Co is in breach of environmental legislation and a fine of $900,000 will now be levied on the company. The amount is material to the financial statements.

Required:

Explain the additional audit work the auditor should carry out in respect of this fine. (4 marks)