Question

The end of the financial year is December 31, 2020. The audit report was signed on February 15, 2021. The financial statements were approved by the board of directors on February 15, 2021, and released to the public that same day, along with the auditor's report Required You have been given a number of independent situations below. Describe what action should be requested of the client by the auditor in each of the following situations. Potential options include: requesting that the client make a disclosure in the notes to the accounts requesting that the client make an adjustment (name the account) advising the client of a change in audit opinion (what sort of opinion should be given) doing nothing Explain your answer. Include an accounting and/or auditing standard and paragraph reference to support your answer (a) You discover on January 15, 2021, that Shoez, a major customer, has become insolvent and Cloud 9 will not be able to collect amounts owing to it. (b) You discover on February 10, 2021, that a customer is suing Cloud 9 after they slipped and fell inside a Cloud 9 retail outlet. The accident occurred in November 2017. (c) On January 31, 2021, the federal government released a draft paper proposing an increase in import duties on all goods from China of 150 percent starting in July 2021. This increase in duties would increase the price of Cloud 9 shoes significantly above the prices of competitors (d) At the official launch of the financial statements, you overhear the Financial Controller discussing a situation where an employee has been stealing cash from Cloud 9 (e) In March 2021, you read a newspaper article about Cloud 9 possibly purchasing the shoe company Groovy Shooz (a competitor)

Canada Accounting System: CAS 560

Answer 1

Solution:
Situation	Auditor Should	Explanation	Reference
a	requesting that the client make an adjustment - Provision for doubtful debts	This is a subsequent event after the balance sheet date but before signing the audit report. It is now a known fact that the entity will not be able to recover the money and hence adequate provision for doubtful debts should be made. This has not gone has bad debts on balance sheet date and didn't become bad debts even on the date of signing audit report but the recovery is uncertain and doubtful. Therefore "Provision for doubtful debts" against trade receivable should be provided	Para 14 for CAS 560 require auditor to judge the financial impact of subsequent event and discuss with the management and determine if financial statement require amendment
b	requesting that the client make a disclosure in notes to accounts- contingent liabilities	This may or may not result into financial payment depending upon the result of suit which will be decided in future	This is a contingent liability which will depend on a future event (decision of court case)
c	do nothing	This doesn’t impact the financial report or its true and fair view in auditor report. It doesn’t even impact the going concern which auditor is suppose to analyse. This is merely a change in commercial aspects and that's too for future only	This is not a subsequent event that require any adjustment
d	do nothing	Auditor opinion is based on substantive checks the auditor carries out and if there was no evidence of stealing cash during the course of auditor, they shouldn't pay attention to such gossips or conversation. However he can make certain inquires in the next audit period	CAS 560 doesn’t require any amendment in financial or auditor opinion
e	do nothing	This is not a subsequent event because this is after the signing of audit report	CAS 560 doesn’t require auditor to consider event after the signing of audit report. This is outside the purview of subsequent events