Question

a) What are key audit matters? How do these affect the format of the audit report? ( 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. (, 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

A) Key audit matters (KAM)

KAM are those matters that, in auditor's professional judgement, are of most importance and significance, in the audit of financial statements. They are selected from matters communicated with management and those charged with governance.

The main purpose of communicating KAM is to enhance the communicative value of the audit report by providing transparency about the audit performed. Such communication assists the intented users of financial statements in understanding those matters, which in auditor's judgement, are most significant. It also helps users in understanding the entity and areas of significant management judgement in financial statements.

However, auditor should note that communicating KAM is not a substitute for expressing a modified report where required based on the circumstances. Also it is not a substitute for reporting when a material uncertanity exists that may cast a significant doubt on entity's ability to continue as going concern.

The auditor shall determine, from the matters communicated to those charged with governance and management, those matters that require significant attention during audit. In such determination, auditor has to consider

- areas of higher assessed risk of material missstatement.

- effect on audit of significant events / transactions that occured during the audit period.

- significant auditor's judgements involving significant management judgement in financial statements (eg. accounting estimates)

The introductory language of KAM in audit report should state that

- KAM are those matters, as per auditor's professional judgement, were most significance in the audit of current year financial statements.

- These matters are addressed in the context of the audit of financial statements, and in forming auditor's opinion thereon, auditor does not provide a separate opinion on these matters.

Example: Presentation of KAM para in audit report when there are no KAM to be reported.

"Except for matter described in Basis of Qualified / Adverse opinion, we have determined that there are no other key audit matters to communicate in our report."