ACCT3600 Lec 9 Subsequent Events and Going Concern Flashcards
When should the auditor’s report be dated?
- When it is actually signed
* No earlier than the date of direct’s declaration.
What are the 2 types of events that may materially affect financial reports?
- ADJUSTING EVENTS - provides evidence that further elucidates conditions that existed at balance date - adjust material items by journal entry. (current FS misstated).
- NON-ADJUSTING EVENTS - provides evidence of conditions that arose after balance date - disclosure of effects (even though financial effects will be reflected in nxt yrs FS, users would want to know now, but doesn’t mean current FS misstated).
Examples of ADJUSTING EVENTS?
- Subsequent collection of material AR that was treated as uncollectable (i.e. bad debt written off) at balance date - record AR again.
- Legal determination that establishes a claim was in existence at balance date.
- Legislation that retrospectively changes company income tax rate - adjust tax expense.
- Ascertainment of selling prices for inventory, which was previously uncertain - relates to NRV of inv.
Examples of NON-ADJUSTING EVENTS?
- Fire loss not fully covered by insurance - destroyed inventory, but inv at balance date still correct.
- Raising of additional shares / loan capital after balance date.
- Mergers / acquisitions after balance date
What are the auditor’s responsibilities:
- Between balance date and auditor report date
- After auditor report date
- ACTIVELY SEARCH: apply audit procedures sufficient to enable auditor to determine whether all material adjusting and non-adj events have been appropriately adjusted / disclosed for.
- PASSIVELY RESPOND: had the fact been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report (i.e. you or management made a mistake), the auditor shall (a) discuss with management / those charged with governance, (b) determine whether FS needs amendment, (c) RECALL FS, issue new auditor’s report with EMPHASIS OF MATTER / OTHER MATTER PARAGRAPH. If management does not amend, auditor will take appropriate action to PREVENT RELIANCE on the AUDITOR’S REPORT.
What are the procedures performed to “actively search” for events after balance date?
- Read minutes of meetings of those charged with governance.
- Read company’s director’s report for info regarding significant events occurring after the balance date.
- Obtain legal advice as to any current material litigation involving the entity
- Consider implications of changes in legislation
- Consider financial considerations which may impact company’s going concern.
- Inquire directors whether there have been any material changes in major accounts, or sales of assets planned.
What are the 2 types of representation letters that are commonly sought?
- SOLICITOR’S LETTER: from solicitors consulted by client as a means of confirming management’s assertions.
- MANAGEMENT REPRESENTATION LETTER: prepared by auditor, signed by management, formally documents management’s responses to inquires, COMPLEMENT rather than SUBSTITUTE for audit procedures.
What audit procedures should an auditor conduct before distribution of a SOLICITOR’S PROCEDURE?
- Review internal control for bringing claims to management’s attention, and system for recording legal expenses.
- Obtain from management list of legal matters referred to solicitors, including description of the matter and an estimate of possible liabilities.
- Read minutes of management and director’s meetings for reference to legal matters.
- Review docs in management’s possession concerning legal matters, and correspondence with solicitors.
What does PERVASIVE mean?
- effects not confined to specific account.
- represent a substantial proportion of the FS
- disclosure fundamental to user’s understanding of the FS.
What are the 4 types of AUDIT OPINIONS that can be issued? Give examples
- Unmodified: prepared in accordance with Corp Act, provides T/F view, obtained REASONABLE ASSURANCE that FS free from material misstatement by fraud or error, any uncorrected misstatements are immaterial, both individually and in aggregate.
- Qualified: materially misstated or unable to collect sufficient appropriate evidence, relates to specific accounts.
“In our opinion, EXCEPT FOR… , FS is in accordance with Corp Act.”
- Adverse: materially misstated, and pervasive (rendering the whole FS misleading / little use to users) (e.g. FS prepared on going concern basis).
“NOT in accordance with Corp Act.”
- Disclaimer of opinion: unable to obtain sufficient appropriate evidence, and pervasive.
“unable to and do not express an opinion”
If an auditor wants to draw user’s attention to an issue, what are the 2 ways they can do this?
- EOM: matter appropriately presented / disclosed and considered relevant to users, but does not affect auditor’s opinion. (e.g.new amended report).
- OTHER MATTER: allows auditor to draw attention to matters not presented or disclosed in FS, but relevant to enhancing user’s understanding of the audit, to the auditor’s responsibilities, or to the auditor’s report (nothing to do with FS’s).
What matters should the auditor COMMUNICATE with management and those charged with governance in WRITING on a TIMELY basis?
If SIGNIFICANT DEFICIENCY in INTERNAL CONTROL
Any UNCORRECTED misstatements and effects it may have on the auditor’s report.
What is the MANAGEMENT LETTER?
Summarises auditor’s recommendations resulting from their assessment of entity’s business risk and inherent risk, and any recommended improvements in INTERNAL CONTROL.
