In: Accounting
International Standard in Auditing 560(ISA560) “Subsequent
Events”, stipulates that some subsequent events will result in
adjusting the financial statements while are non-adjusting.
Required
Explain what makes some events, Adjusting while others Non
adjusting items
II) For each of the following items, assume that the partner is
expressing an opinion on Lafarge’ financial statements for the year
ended December 31, 2018; that he completed fieldwork on January 21,
2019; and that he now is preparing his opinion to accompany the
financial statements. In each item, a subsequent event is
described. This event was disclosed to the partner either in
connection with his review of subsequent events or after the date
on which the auditor has obtained sufficient appropriate audit
evidence. Each of the five items is independent of the other.
1. A large account receivable from KCM (material to financial
statement presentation) was considered fully collectible at
December 31, 2018. However KCM has been put under liquidation so,
it is unlikely that the account will be paid.
2. The tax court ruled in favour of the company on January 25,
2019. Litigation involved deductions claimed on the 2012 and 2013
tax returns. In accrued taxes payable, Lafarge had provided for the
full amount of the potential disallowances. The Zambia Revenue
Authority will not appeal the tax court’s ruling.
3. Lafarge’s Manufacturing Division, whose assets constituted 45
percent of total assets at December 31, 2018, was sold on February
1, 2019. The new owner assumed the bonded indebtedness associated
with this property.
4. On January 15, 2019, BDO, a major investment adviser, issued a
negative report on Lafarge’s long-term prospects. The market price
of Lafarge’s common stock subsequently declined by 40
percent.
5. At its January 5, 2019, meeting, Lafarge’s board of directors
voted to increase substantially the advertising budget for the
coming year and authorized a change in advertising agencies.
Required
Describe the effect, any of each of the following subsequent events
will have on December, 31, 2018 financial statement further
describe the audit tests that the auditor should do. (You may
present the answers in the following format)
Item Number
Effect on the financial Statement
Audit Test
1.
2.
3.
4
5.
Adjusting events are those events that were present at the balance sheet date. These events needs to be adjusted in the financial statements.
Non-adjusting events are those events which were not present at the balance sheet. These events does not affect the financial statements. If they are material then they needs to be disclosed in the financial statements.
Items
(1) KCM balance was their at the balance sheet date, hence it is an adjusting event. Since KCM is now under liquidation, provision needs to be created against the balance of KCM.
Auditor should assess the credit risk and ask the management to provide adequate impairment on balance of KCM. After provision accuracy and disclosure of provision in financial statements needs to be ensured.
(2) The case was present at balance sheet date and hence it is also an adjusting event. The tax liability is no more payable to the government and should be reversed in the financial statements.
Auditor should record the responses of attorney for this case. If this is favorable as opined by the attorney, then accrued tax liability should be reversed.
(3) Sale took place after the balance sheet and there was no binding commitment for the sale before the year end. So it is a non-adjusting event. Since the event is material, the Company should make proper disclosure about the transaction and so the assets as assets held for sale in the balance sheet as required by IFRS 5.
Auditor should ensure proper disclosure of above non-adjusting event in the financial statements. Further assets under held for sale needs to be disclosed on the face of balance sheet. Auditor should further identify the assets and liabilities which should be sold by the Company for computing impairment losses.
(4) Non-adjusting event as change in market price does not have accounting effect in the books of the Company.
Auditor should ensure the value of collateral given to the banks. Compliance of debt covenants needs to be ensured by the auditors.
(5) This is not an event which requires any adjustment in the financial statement. Budgets are not included in the financial statements.
No procedures needs to be performed by the auditor for the FY 2019.