ACCT3014, Week 10

Subsequent Events

Semester 2, 2014

The University of Sydney

Business School

Learning Outcomes For Week 10

ACCT3014 - Auditing and Assurance

Semester 2, 2014
Eric Clubb

q Understand the completion of fieldwork phase of the audit

Week 10 Topic File

q Understand the issues and reporting of subsequent events

As there is no lecture on Monday 6th Oct

this powerpoint file provides the pre-reading
required on the topic of Subsequent Events
Business School
Auditing and Assurance

Completing the audit generally ...

Completing the audit

Recall 3 categories of audit objectives

- Transaction-related, balance-related and presentation & disclosure-related

Presentation and Disclosure Tests (see Table 17.1)

Examples of substantive procedures:
- Review debt contracts to determine that accounts receivable are pledged as
collateral (occurrence & R&O)
- Use a disclosure checklist to determine if the financial statements include all
required disclosures (completeness)
- Review financial statements to determine if assets are properly classified
between current and non-current categories (classification & understandability)
- Reconcile amounts included in the long-term debt footnotes to information in the
auditors working papers (accuracy & valuation)
3

Contingent Liabilities and Commitments

Potential future obligation to an outside party for an
unknown amount resulting from activities that have
already taken place but are conditional on some future
event.
Examples of considerable concern to the auditor:
Pending legal action for patent infringement
Income tax disputes
Product warranties
Notes receivable discounted
Guarantees of obligations of others
Unused balances in letters of credit.

Contingent Liabilities and Commitments

Commitments e.g.:
- To purchase raw materials; or
- To lease facilities at a certain price
- Agreements to sell merchandise at a fixed price
Procedures for finding contingencies e.g.:
- Inquire of management
- Review ATO correspondence
- Review minutes of meetings
- Analyse legal expense.

ACCT3014, Week 10
Subsequent Events

Semester 2, 2014

Litigation and Claims

Reviewing Subsequent Events

Auditors

responsibility for reviewing for subsequent events is

normally limited to the period:

Lawyers representation letter:

- Initiated by auditor

- Prepared and sent by management

Beginning with the balance sheet date

Ending with the date of the auditors report.

- Sent direct to auditor.

Some legal counsel may be reluctant:
- Lack of knowledge about matters
- Refusal to disclose due to confidentiality
(Westpac v 789Ten) breach of legal privacy
privilege.

3 options
- Events that require the financials to be adjusted
- Events that require disclosure in the financials
- Do nothing

Types of Subsequent Events

Types of Subsequent Events

Two Types of Subsequent Events:

Those events that have a direct effect on the financial

statements and require adjustment:

Adjusting events

Provide additional information to management and

auditors to the valuation of account balances.

Events which related to a condition which existed at

balance date
Impact must be reflected in the financial statements

Require an adjustment of account balances if

amounts are material:

Non-adjusting events

oBankruptcy/insolvency of a major debtor

Events creating new conditions

Financial effect is not related to year under audit
If auditor considers event is material to Financial
Statement user should be disclosed in notes to the
accounts and Directors report

oSettlement of litigation at a different amount

oDisposal of equipment below current book value.

Types of Subsequent Events (contd)

Those events that have no direct effect on the financial
statements but for which disclosure is advisable.

Subsequent Events Audit Tests

Inquiries of management
Corresponding with lawyers

- Provide evidence of conditions that didnt exist at the date

of the financial report - require disclosure.

Reviewing internal statements prepared after balance date

Reviewing records prepared subsequent to the balance sheet

- Ordinarily can be adequately disclosed in the notes:

oDecline in market value of securities
oIssuance of bonds or shares
oDecline in market value of inventory
oUninsured loss of inventory from fire

date
Examining minutes issued subsequent to the balance sheet date
Obtaining written representations from management (often
called a management representation letter).

oMerger or acquisition.

ACCT3014, Week 10
Subsequent Events

Semester 2, 2014

Final Evidence Accumulation

Performing final analytical procedures:
- Final review for material misstatements.
Evaluating going-concern assumption (in detail next week):
- Analytical procedures are important
- Adverse opinion where highly improbable the entity will
continue as a going concern.

ASA 580 Requirements

Auditor needs to obtain a management representation
letter acknowledging:
oResponsibility for the financial report
oCompleteness of information
oRecognition, measurement and disclosure
oSignificant risks and uncertainties
oSubsequent events.
Reading other information accompanying the financial
reports:
oTo ensure correspondence with information in the
financial reports.

Evaluate Results

Evaluate Results based on Evidence

Fig 17.7

Sufficiency of evidence:
- Reviewing the audit program.
Evidence supports auditors opinion:
- Summarising the misstatements uncovered in the audit.
Financial report disclosures:
Adequacy of financial statement disclosures.
Working paper review:
-
-

To evaluate performance of inexperienced personnel

To ensure the audit meets the public accounting firms standard
of performance
- To counteract the bias that often enters into the auditors
judgement.
Independent review:
- By a staff member with no experience on the engagement.

Communicating With the

Audit Committee and Management

Communicate any irregularities:

o Including fraud and other illegal acts.
Communicate significant deficiencies in internal control (reportable
internal control structure conditions).
Communicate auditor independence requirements.
Other communication with the audit committee:
o General approach and overall scope of the audit
o Selection of, and changes to, significant accounting
policies
o Material audit adjustments.
Management letter:
o To inform client management of the auditors
recommendations for improving the clients business.

Subsequent Discovery of Facts

After the auditor issues the audit report and completes
all communication with management and the audit
committee:
The audit is finished.
If the auditor becomes aware after the audited
financial statements have been issued that some
information included in the statements is materially
misleading:
The auditor is obliged to inform statement users
and may decide to re-issue the audit opinion
unless the report is changed.