Question

It is September 2020 and you are considering a significant event that affects one of your audit clients, Falafel-tech Enterprises. The auditor’s report for Falafel-tech Enterprises for the year ended 30 June 2020 was signed on 30 August 2020. The financial report has not yet been issued to shareholders.

You have just discovered that one of Falafel-tech Enterprises’ major debtors at 30 June 2020 went into liquidation on 15 August 2020. The bankruptcy was the result of ongoing financial difficulties.

Required:

Explain what you should do in this situation. In your answer, identify how this should be treated in the financial report, and who this situation should be discussed with.

Answer 1

As per the definition of Events after the reporting period are events occurring between the balance sheet date and Approval of financial statements. Financial statements should be adjusted for events occurring after the reporting period that provides the evidence of conditions existed at end of the reporting period.

In the instant case the auditor of Falafel-tech enterprises identified after the reporting period that one of the major clients of Falafel-tech enterprises went into liquidation due to ongoing financial difficulties which reveals that nothing can be recovered from that client and falafel- tech enterprises has not created a specific or general provision of debtor which is considered as non impairment of asset so there is no event existed on the reporting period.Accordingly the bankruptcy of the debtor is considered as the non adjusting event.

If non- adjusting events after the reporting period are material non disclosure could influence the economic decisions that users make on the basis of the financial statements. Accordingly an entity shall disclose the following for each material category of non adjusting events after the reporting period .

a) nature of event

b) an estimate of its financial effect or a statement that such an estimate cannot be made.

Accordingly the auditor should discuss with management about this non adjusting event and if the impact of this non adjusting event is material i.e event of bankruptcy of debtor should be disclosed along with the estimated financial effect of the same in the financial statement.