Question

FINAL CASE STUDY QUESTION IN AUDITING

Q11-15 You are currently completing the audit of Erbilek Co for the year ended 31 December 2018. It is planned that the financial statements will be approved on 18 March 2019 and the auditor’s report will be signed on that date. The financial statements will be issued on 5 April 2019. On 31 March 2019, you become aware that Erbilek Co’s major customer has ceased to trade. Audit documentation show that the customer’s account included invoices that were more than 9 days overdue. Although this material balance is expected to be inrecoverable. It does not affect the going concern basis for the preparation of the financial statements. However, it will significantly reduce future revenue.

1. Which TWO of the following are subsequent events according to ISA 560 Subsequent Events?

1. Facts that become known after the date of the auditor’s report
2. Events during the year that relate to the prior period’s financial statements
3. Events occuring after the period end, but before the date of the auditor’s report
4. Any event that provides evidenceof conditions that existed at the reporting date

2. Identify by drafting on the timeline, the date up until which you should perform subsequent events procedures.

31 December 2018                       18 March 2019                   31 March 2019                                    5 April 2019

3. Which TWO actions should the auditor take if a material event occurs between 31 December 2018 and 18 March 2019 that may require amendment to or disclosure in, Erbilek Co’s financial statements?

1. If not amended or disclosed in the financial statements, qualify the audit opinion because the matter is material
2. Write a memo for the audit file because subsequent events will affect next year’s financial statements but not this year’s
3. Advise management how to prorerly account for and adequately disclose the event in the financial statements
4. Require management to sign a management representation letter taking responsibility for the subsequent event and its effect on future financial statements.

4. Which of the following are actions the auditor should take concerning the facts about the major customer. Select all that apply.

1. Issue a qualified auditor’s report because the facts of the subsequent event were not made known to the auditor until after the date of the initial auditor’s report
2. Extend the subsequent event review process
3. If the financial statements are amended, provided a new auditor’s report dated not earlier than the date amended financial statements are approved
4. Request that the financial statements as they currently stand and the auditor’s report thereon should not be issued.

4. On 4 April 2019, the directors adjust the financial statements to write down the amount due from the major customer included in trade receivables. Which of the following audit opinions will be issued if there is NO disclosure of the matter in the financial statement?

1. A qualified audit opinion as the financial statements are materially misstated.
2. A qualified audit opinion as sufficient appropriate evidence has not been obtained
3. An unmodified audit opinion
4. An unmodified opinion with an emphasis of matter paragraph

Answer 1

1

Subsequent Events are:

1. Facts that become known after the date of the auditor’s report, and
2. Events occurring after the period end, but before the date of the auditor’s report.

2

______(*)_________________(*)__________________*____________________*_________

                   31^st Dec. 2018                 18^th March 2019              31^st March 2019                      5^th April 2019

Subsequent event procedures can be performed between 31^st Dec. 2018 and 18^th March 2019.

3

Since the event is of material nature which requires disclosure;

1. If not amended or disclosed in the financial statements, qualify the audit opinion because the matter is material.
2. Advise management on how to properly account for and adequately disclose the event in the financial statements.

4

The information about the major customer who discontinued its operations is material as it will affect the cash inflows of the company. Its disclosure is a must, and the auditor must take following actions:

1. Issue a qualified auditor’s report because the facts of the subsequent event were not made known to the auditor until after the date of the initial auditor’s report.
2. If the financial statements are amended, provided a new auditor’s report dated not earlier than the date amended financial statements are approved.

5

Any subsequent event which is material and requires disclosure, is either to be amended accordingly in the financial statements or disclosure must be mentioned in the board’s report.

Since the directors amended the books by treating the customer as a bad debt, the auditor can present an unmodified opinion with special reference to the above deed of the directors, so that the users of the financial statements are aware of this material fact.

Thus, the answer to this question is (d) An unmodified opinion with an emphasis of matter paragraph.