Question

Question 5 – Subsequent Events
WYN Limited (trading as Import Warehouse) is an audit client with a 31 March year end (balance date). As part of your accelerated professional development, your audit engagement partner has asked you to review the following four transactions and events that happened after 31 March but before the financial report declaration was made by the Directors and she signed the audit report (8 June).
For each transaction or event, your audit partner has asked you to:
• present your judgement about the type of subsequent event being illustrated and therefore how we would expect to the client has treated it in their financial report; (1 mark each)

• indicate two types of audit procedure that should have brought the matter to our attention as audit engagement team members (she requires this in order to include these examples as part of future professional development activities). (2 marks each)

(a) 5 April: Import Warehouse settled and paid a wrongful dismissal claim with a former employee that had been disclosed as a contingent liability at year-end. The claim was lodged in October of last year.
Type of subsequent event:

Two types of audit procedure bringing transaction/event to our attention:



(b) 10 April: Import Warehouse received a shipment of goods from China that had been sent on 3 January from the supplier’s warehouse. Import Warehouse terms of trade with that supplier specify title (ownership) passes on shipment.
Type of subsequent event:

Two types of audit procedure bringing transaction/event to our attention:



(c) 20 May: One of Import Warehouse’s 15 company owned outlet stores (each of similar size and inventory holdings) suffered severe storm damage to the building and inventory. Insurance covered the building, but only 40% of the damaged inventory.
Type of subsequent event:

Two types of audit procedure bringing transaction/event to our attention:




(d) 1 June: As part of an expansion strategy, the company paid cash for a controlling interest in Onliner to provide an expected additional 50% sales volume.
Type of subsequent event:

Two types of audit procedure bringing transaction/event to our attention:

Answer 1

(a) 5 April: Import Warehouse settled and paid a wrongful dismissal claim with a former employee that had been disclosed as a contingent liability at year-end. The claim was lodged in October of last year.

Type of subsequent event: Recognized event (adjusting event), because the dismissal claim was lodged in last year and contigent liability was disclosed. So the company should alter the financial statement to record the settlement of wrongful dismissal.

Two types of audit procedure bringing transaction/event to our attention:

• Fair value and probability of contigent liabilities should be re-evaluated in intervals.
• Inquire with the management regarding settlement of any contigent liabilities.

(b) 10 April: Import Warehouse received a shipment of goods from China that had been sent on 3 January from the supplier’s warehouse. Import Warehouse terms of trade with that supplier specify title (ownership) passes on shipment.
Type of subsequent event: Non recognized event (Non adjusting), since the ownership title passes on date of shipment, the company might already have recorded it in the financial statement. So no adjustments required.

Two types of audit procedure bringing transaction/event to our attention:

• Take physical count of inventories on reporting date and take note of goods in transit.
• Vouch, verify and countercheck the goods received note with actual invoice.

(c) 20 May: One of Import Warehouse’s 15 company owned outlet stores (each of similar size and inventory holdings) suffered severe storm damage to the building and inventory. Insurance covered the building, but only 40% of the damaged inventory.
Type of subsequent event: Non recognized event (Non adjusting), because storm damage is a god event and not expected as of reporting date. So the financial statements of previous year will not be adjusted. However if this event has effected the going-concern of the entity, the same should be reported.

Two types of audit procedure bringing transaction/event to our attention:

• Going-concern of the entity should be measure reliably after any go events
• Transactions under Insurance receipts ledger should be evaluated and cross-checked with insurance policy and actual receipt documents.

(d) 1 June: As part of an expansion strategy, the company paid cash for a controlling interest in Onliner to provide an expected additional 50% sales volume.
Type of subsequent event:Non recognized event (Non adjusting), as there were no on-going discussion or proposals to acquiree controlling interest, as of the reporting date. So financial statements need not be altered.

Two types of audit procedure bringing transaction/event to our attention:

• Latest minutes of board meeting, should be checked for any new investments.
• Related party register should be verified and management should be inquired about any new investments.