Question

You are performing an annual audit of a company with a December 31, 20X1 year-end. Your firm is planning to complete the audit on March 1, 20X2 and release the report on March 31, 20X2. On March 15, 20X2, two material subsequent events occur: • A fire caused extensive damage to the company’s manufacturing plant in New Jersey. • A large customer went bankrupt. At December 31, 20X1, the Company had a receivable of $2,500,000 from this customer; at December 31, 20X1 the Company had established an allowance for doubtful accounts of $700,000 for this customer

. Required: 1. Explain whether each subsequent event is a Type 1 or Type 2 Subsequent Event. 2. What is the impact of each subsequent event on the company’s audited financial statements for the year ended December 31, 20X1? Be specific as to whether (a) there will be an adjustment which will cause the company’s balance sheet and / or income statement to change plus footnote disclosure, (b) there will only be footnote disclosure, or (c) there will be no impact to either the financial statements or the footnote disclosures. 3. How should your Audit Firm date its audit report?

Answer 1

Answer:

Balance Sheet is closed on 31st Dec.

Contigency occurred on 15th of March.

Audit Report is planned to be submitted on 31st March.

Question 1: Explain whether each subsequent event is a Type 1 or Type 2 Subsequent Event.

Given event has occurred after the Balance Sheet date.

Events occurred are definitive and can have evidence. Therefore they both are Type 1 Subsequent Errors.

Type 2 Subsquent Event are ones which are only indicative in nature.

Question 2: What is the impact of each subsequent event on the company’s audited financial statements for the year ended December 31, 20X1?

Impact of Fire Damage: Given case clearly states that the fire caused extensive damage. This will bring down companies assets to a substantial level. Balance Sheet however predicts true events till 31st Dec. Audit Report will be a Qualified Report without the footnote and disclosure to the statement.

• Impact of customer went bankrupt: $2,500,000 is a subtantial amount for any company. If such large customer goes bankrupt, company will definitely suffer. Given case suggests that it has a doubtful allowance for receivables of $700,000. This is 3.57 times more than the allowed recievable. Yet, receivable other than this customer would have similar standing as earlier.

Be specific as to whether

(a) there will be an adjustment which will cause the company’s balance sheet and / or income statement to change plus footnote disclosure,

(b) there will only be footnote disclosure, or

(c) there will be no impact to either the financial statements or the footnote disclosures.

Companies must disclose the date when the financial statements were authorised for issue and who gave that authorisation. If the enterprise's owners or others have the power to amend the financial statements after issuance, the enterprise must disclose that fact. [IAS 10.17].

Option B. As particulars in the Balance Sheet cannot be changed as they were prepared till Dec 31.

Question 3: How should your Audit Firm date its audit report?

Audit Report must be dated on the date of its report submission. If Audit Report is prepared and finally submitted on the 31st of March, same date is considered.

Comment if more explanation is needed.

All the best !!!