Question

Assume that your client settled a major lawsuit, for a material amount of money, between the balance sheet date and the date you finished your audit. Briefly explain any two procedures that an auditor might have performed that would make the auditor aware of this event.

Answer 1

"IAS 10, Events After the Reporting Period stipulates the accounting and disclosure requirements concerning transactions and events that occur between the reporting date and the (expected) date of approval of the financial statements. Among other things, IAS 10 determines when an event that occurs after the reporting date will result in the financial statements being adjusted, or where such events merely require disclosure within the financial statements. Such events are referred to in IAS 10 as ‘adjusting’ or ‘non-adjusting’ events."

Auditor’s responsibility in relation to ensuring all events occurring between the reporting date and the expected date of the auditor’s report have been adequately taken into consideration, and adequate suitable review proof has been assembled to accomplish the target. Auditor has to perform an audit procedure that is designed to obtain sufficient appropriate audit evidence to give reasonable assurance that all events up to the date of the auditor’s report have been identified, properly accounted for disclosed in the financial statements.

The auditor can:

Obtain a copy of the court order or other correspondence confirming the company has a major lawsuit existing.

Obtaining written representation from management regarding any ongoing lawsuits.