Question

a) What are key audit matters? How do these affect the format of the audit report? (2 marks, maximum 200 words) b) Stewart Jones is reviewing the results of the subsequent events audit procedures. Stewart is writing a report for his audit partner based on these results and will be attending a meeting tomorrow with the partner and representatives of the company to discuss them. The issue will be whether the financial report should be amended, or additional notes included for these subsequent events. Many of the items are not material and Stewart will recommend that no action be taken with respect to these. However, there are several items that Stewart believes are material and should be discussed at the meeting. These are as follows. (a) The board is planning to issue shares in a private placement on 15 August. (b) The share issue is to fund the purchase of a 60 per cent stake in another company. The negotiations are in the final stages and although the contract is not yet signed it will be signed by 15 August. (c) A writ was lodged in the Supreme Court in the week after year-end claiming damages for illness allegedly caused by chemicals used at a subsidiary company’s manufacturing plant in the 1990s. This is the tenth such writ lodged, and the client has denied responsibility in all cases because it was unreasonable to believe at that time that these chemicals had adverse health effects. The claimant has new scientific evidence that counters this defence. (d) The review of subsequent cash receipts has revealed that several of the trade receivables that were considered doubtful have now been paid. However, the audit procedures have shown that a large debtor that was considered safe at 30 June was unexpectedly declared bankrupt on 20 July. The year-end for the company is 30 June and the audit report is due to be signed on 20 August. Required: For each of the items above, explain what type of subsequent event it is and the appropriate treatment of the item in the financial report. (8 marks, maximum 300 words)

Part A: Like an essay type presentation

Part B: Issues Event/ Accounting Treatment (1 mark) Explanation (1 mark) (a)(/(b)/ Write 1 line about issue Types 1 Adjusting Subsequent Event – Adjust material items in financial report Or Type 2 Non-Adjusting Subsequent Event – Disclose effects of material items in financial report Or Type- No effect/ No impact Here you will mention about date, explain why you select this event with details explanation or accounting treatment and follow AASB 110 Event after the reporting period

Answer 1

1. Key Audit matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.

In an audit report, auditor is required to disclose the key audit matters, why those matters are key and what audit procedures have been performed to obtain sufficient audit evidence however no opinion is supposed to be given in those matters individually.

Audit report shall include seperate section on the Key Audit matter which shall provide more usefulness to the audit report and users shall also get a clear view of how an auditor has obtained evidence on key events affecting the financials statement of the Company leading to more reliability, trust on the auditor's work. Also, Key Audit Matters are invariably those items which an auditor communicates the matter to those charged with governance & KAM disclosure in audit report ensures that those charged with governance has been communicated of those events & provides better corporate governance.

2. IFRS provides following for the subsequent event matters in IAS 10 Events after reporting period:

Standard contains requirements for when events after the end of the reporting period should be adjusted in the financial statements.

Event after the reporting period: An event, which could be favourable or unfavourable, that occurs between the end of the reporting period and the date that the financial statements are authorised for issue.

Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate

Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the reporting period.

Accounting-

Adjust financial statements for adjusting events - events after the balance sheet date that provide further evidence of conditions that existed at the end of the reporting period, including events that indicate that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.

Do not adjust for non-adjusting events - events or conditions that arose after the end of the reporting period.

If an entity declares dividends after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period. That is a non-adjusting event.

(a) The board is planning to issue shares in a private placement on 15 August- The event is subsequent event as the issue of private placement occurs subsequent to Balance SHeet date. Further, shares shall be issued and money shall be received & there is no evidence as on balance sheet date that the Company had issued the shares as the legal compliance contained in the Companies Act/Corporation Act has been initiated subsequent to reporting date. Further, whether subsequent event will be material if the issue size & dillutes the earnings of existing share holder materially.

Considering the guidance presented in the standard, issue of private placement is not an ajusting event and disclosure in the financials will depend on the issue size & potential dilution impact on earnings.

(b) The share issue is to fund the purchase of a 60 per cent stake in another company. The negotiations are in the final stages and although the contract is not yet signed it will be signed by 15 August- Standard provides that subsequent event are those which occur subsequent to balance sheet date and may provide additional evidence of event existing on the balane sheet date or are entirely subsequent event. Accounting depends on judgement whether these are additional evidence. In the given case, the Company is in discussion stage and no agreement has been entered into. Accounting for acquisition is required from the day when control is obtained & in the given case, the Company is still in discussion stage & hence, it is not an adjusting event.

Further, whether acquisition is material & significant determines disclosure. If the size of the acquisition is large then the Company is required to disclose the subsequent event.

(c) A writ was lodged in the Supreme Court in the week after year-end claiming damages for illness allegedly caused by chemicals used at a subsidiary company’s manufacturing plant in the 1990s. This is the tenth such writ lodged, and the client has denied responsibility in all cases because it was unreasonable to believe at that time that these chemicals had adverse health effects. The claimant has new scientific evidence that counters this defence-

Standard provides that subsequent event are those which occur subsequent to balance sheet date and may provide additional evidence of event existing on the balane sheet date or are entirely subsequent event. Accounting depends on judgement whether these are additional evidence. In the given case, the case has been filed for an event which occured prior to Balance Sheet date and filing of litigation subsequently provides additional evidence. Further, based on facts of the case, the claimaint possess new scientific evidence & it is probable that the Company may have to pay damages. If the damages can be ascertained then the Company is required to account for the liability as an adjusting event. If, the damages cannot be ascertained then the Company shall make a contingent liability disclosure disclosing the fact that damages cannot be reliably ascertained.

(d) he review of subsequent cash receipts has revealed that several of the trade receivables that were considered doubtful have now been paid. However, the audit procedures have shown that a large debtor that was considered safe at 30 June was unexpectedly declared bankrupt on 20 July-

Estimates are used by the Company in preparation of financial statements and if subsequently the estimates & actual differ significantly, the accounting shall be done as error in estimate. However, if the actual event occurs prior to approval of financial statement, then Companies shall re-assess the basis of estimates. Standard provides that subsequent event are those which occur subsequent to balance sheet date and may provide additional evidence of event existing on the balane sheet date or are entirely subsequent event. Accounting depends on judgement whether these are additional evidence. In the given case, estimates for provisioning of debtors has differed significantly, considering that cash was subsequently collected & hence, the Company shall make an adjustment.

For the filing of insolvency by debtor subsequent to balance sheet date provides additional evidence that the customer was already bankrupt on Balance Sheet date & filing confirms or provides addtional evidence of existence of the bankruptcy of customer. Keeping with the requirement of the standard, the Company shall make an adjustment for loss of debtor balance.