Question

Your client, Hurdles Ltd, operates a rare earth processing plant in Malaysia. Once the processing is completed in Malaysia, the rare earth is shipped to China for use by the medical and automotive producers. Due to the spread of the COVID-19 virus, the Malaysian government introduced the Movement Control Order (MCO) on 11 January 2020. As a consequence, all processing of rare earth stopped in Malaysia.  On 27 December 2019, a major contract worth $6 million was agreed with a customer from China with the signing of the contract on 18 March 2020.

Your client’s accounting year end was 31 December 2019.

         Required

Discuss the auditor’s responsibilities for subsequent events of the contract for the year ended 31 December 2019.

Answer 1

ISA 560 “Subsequent Events” deals with the auditor’s responsibilities relating to subsequent events in an audit of financial statements.

-As per ISA 560 the term, Subsequent Events may be defined as the events occurring between the dates of balance sheet and audit report and the facts that become known to the auditor after the date of the auditor’s report.

--The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements have been identified.

-The auditor’s procedures on subsequent events shall include the following:

(a) Obtaining an understanding of the procedures through which management has identified subsequent events.

(b) Inquiring of management and, TCWG as to occurrence of subsequent events which might affect the financial statements.

(c) Reading minutes of management & TCWG meetings that have been held after the date of the financial statements.

(d) Reading the entity’s latest subsequent interim financial statements, if any.

• When, as a result of the procedures performed as required the auditor identifies events that require adjustment of, or disclosure in, the financial statements, the auditor shall determine whether each such event is appropriately reflected in those financial statements.

As per IAS 10-

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. Adjusting events require accounting treatment & Disclosure in the FS.

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

-In the present case the contract for $6million which is a material contract has been agreed on 27th December 2019, which is before the reporting date 31 st december 2019. The contract has been signed on 18 th March 2020. Such contract is an adjusting event as the evidence of the condition of the contract exists on the reporting date.

-Hence it should be properly disclosed in the Financial statement and also in the Board of directors report.

-The auditor should follow the requirement of ISA 560 to ensure that such contract has been properly disclosed in the Financial statement.