Question

Q4 - Week 9 a) What are key audit matters? How do these affect the format of the audit report? (2 marks, maximum 200 words) b) Stewart Jones is reviewing the results of the subsequent events audit procedures. Stewart is writing a report for his audit partner based on these results and will be attending a meeting tomorrow with the partner and representatives of the company to discuss them. The issue will be whether the financial report should be amended, or additional notes included for these subsequent events. Many of the items are not material and Stewart will recommend that no action be taken with respect to these. However, there are several items that Stewart believes are material and should be discussed at the meeting. These are as follows. (a) The board is planning to issue shares in a private placement on 15 August. (b) The share issue is to fund the purchase of a 60 per cent stake in another company. The negotiations are in the final stages and although the contract is not yet signed it will be signed by 15 August. (c) A writ was lodged in the Supreme Court in the week after year-end claiming damages for illness allegedly caused by chemicals used at a subsidiary company’s manufacturing plant in the 1990s. This is the tenth such writ lodged, and the client has denied responsibility in all cases because it was unreasonable to believe at that time that these chemicals had adverse health effects. The claimant has new scientific evidence that counters this defence. (d) The review of subsequent cash receipts has revealed that several of the trade receivables that were considered doubtful have now been paid. However, the audit procedures have shown that a large debtor that was considered safe at 30 June was unexpectedly declared bankrupt on 20 July. The year-end for the company is 30 June and the audit report is due to be signed on 20 August. Required: For each of the items above, explain what type of subsequent event it is and the appropriate treatment of the item in the financial report. (8 marks, maximum 300 words) Part A: Like an essay type presentation Part B: Issues Event/ Accounting Treatment (1 mark) Explanation (1 mark) (a)(/(b)/ Write 1 line about issue Types 1 Adjusting Subsequent Event – Adjust material items in financial report Or Type 2 Non-Adjusting Subsequent Event – Disclose effects of material items in financial report Or Type- No effect/ No impact Here you will mention about date, explain why you select this event with details explanation or accounting treatment and follow AASB 110 Event after the reporting period

Answer 1

Key Audit Matters:

Key audit matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.

Auditor is required to report in his report a further description of each of key audit matter by stating that

-Why the matter was considered to be one of the most significance in the audit

-How the matter was addressed in the audit

-Reference to the related disclosures

Generally, Key audit matters section is required to be placed after the Basis for opinion paragraph and before the Management responsibility paragraph.

Issue 1: A writ was lodged in the Supreme Court in the week after year-end claiming damages for illness allegedly caused by chemicals used at a subsidiary company’s manufacturing plant in the 1990s. This is the tenth such writ lodged, and the client has denied responsibility in all cases because it was unreasonable to believe at that time that these chemicals had adverse health effects. The claimant has new scientific evidence that counters this defence.

Eventhough it is subsequent event, the chances of winning the case has to be seen. Here the claimant hs evidence for the fact, The chances for wining the case has to be checked. If the case is settled against the compnat the compant has to pay the sufficeint compensation plus that might would affect the Going concern of the entity. SO the same needs to emphsied in the report

Issue 2: The review of subsequent cash receipts has revealed that several of the trade receivables that were considered doubtful have now been paid. However, the audit procedures have shown that a large debtor that was considered safe at 30 June was unexpectedly declared bankrupt on 20 July.

Here the auditor has to check whether it is a bogus receipts. Since it is in cash, there might be chances of manipulation of debtors balances by entering bogus receipts in their account. Here the auditor has to check whether it has material effect on financials as on 30th june. If it has effect on the going concern of the entity. the same needs to adjusted.