Question

1. Muhd Hazmi is the Financial Controller of a public listed company, Touch and Die Bhd. Earlier on, he was notified that an audit firm, Fattah & Amin, has been engaged to audit the company's financial statements for the year ended 31 December 2017. In a recent meeting with the company's substantial shareholder, Datuk Hans, Muhd ​​Hazmi told him the status report of the audit, citing that most of the fieldwork has been completed, and that Fattah & Amin targeted the audit report to be issued on 15 February 2018. In response to a query regarding remaining work to be done, Muhd ​​Hazmi told Datuk Hans that to his best knowledge, the remaining major task that must be done by Fattah & Amin is a subsequent events review.

Meanwhile, in connection with the audit, Fattah & Amin is aware of certain events and transactions that may affect the financial statements. Those events and transactions took place after 31 December 2017, but before the issuance of the audit report dated 15 February 2018.

The three (3) material events are :

1. On 15 January 2018, Touch and Die Bhd settled and paid a personal severe injury claim of a former employee as a result of an accident that occurred during work on March 2017. Touch and Die Bhd. had not previously recorded or provided a liability for the claim

2. On 20 January 2018, Touch and Die Bhd agreed to purchase for cash, substantial outstanding inventories of another company The acquisition is likely to double the future sales volume of Touch and Die Bhd

3. On 1 February 2018, a warehouse owned by Touch and Die Bhd was severely damaged by a fire resulting in an uninsured substantial loss of inventories kept mside the warehouse

REQUIRED:

(a) Assuming you are Muhd Hazmi, describe the purpose of a subsequent event review to Datuk Hans.

(b) Explain to Datuk Hans, the responsibility of Fattah & Amin to discover the subsequent events after the completion of audit field work, but before the issuance of an audit report.

(c) Describe TW0 (2) types of subsequent events that require Fattah & Amin's consideration and evaluation.

Answer 1

a.

Subsequent events are the events that occur after the balance sheet date but before the financial statements and audit report are issued. These are conducted to assess the impact on company's financial statements. Subsequent events can be classified as adjusting events and non-adjusting events. The events whose impact can be adjusted in financial statements. Whereas the non-adjusting events are those whose impact can't be adjusted or accounted for in the financial statements.

b.

Auditors are responsible to perform audit procedure that provide sufficient appropriate audit evidence that all events up to the date of issuance of audit report that require adjustment or disclosed have been identified. If the auditor becomes aware that any adjusting events are in existence then these can be reported or disclosed in the financial statements.

c.

Injury claim of former employee is subsequent adjusting event as the employee suffered injury in March 2017 which have been paid by the company. Therefore auditor should require management to accrue the expense for the claim made subsequently.

Purchase of inventories of another company is adjusting event as the inventories involve are material to the financial statements are supposed to affect sales .Therefore the management should disclosed and if needed adjust the financial impact of this inventory purchase.