- 15 Marks
Question
You have just concluded the audit of Roico Limited for the year ended 31 December, 2012. During the review of the working paper file, the partner in charge discovered that no information is available on activities after year-end. The partner instructed the team leader to carry out a review of the company’s activities after year-end. The team leader was not comfortable with the instruction and wants to know why it is necessary to examine accounting information relating to the next accounting period.
You are required to:
(a) Enumerate the audit procedures which would be carried out in order to identify any material subsequent events. (10 Marks)
(b) Discuss the purpose and importance of subsequent events review. (5 Marks)
(Total: 15 Marks)
Answer
(a) Audit Procedures for Identifying Material Subsequent Events:
- Evaluate Procedures by Management:
- Identify and evaluate management’s procedures to ensure all post-year-end events are identified and properly evaluated for their impact on financial statements.
- Review Relevant Accounting Records:
- Check for subsequent cash receipts related to account receivables.
- Examine uncleared items in the bank reconciliation and other accounts.
- Read Board and Management Meeting Minutes:
- Review minutes, correspondence, and memoranda to identify any significant subsequent events.
- Consider External Information:
- Analyze information from external sources, such as competitors, suppliers, or customers, for relevance to the company.
- Examine Management Accounts and Projections:
- Review budgets, cash flow projections, and other financial data to assess the company’s current trading position.
- Assess Known Risk Areas:
- Focus on risks and contingencies identified during prior audits or inherent to the company’s operations.
- Review Responses to Circularizations:
- Check responses from debtors, creditors, banks, and legal counsel for potential issues.
- Obtain Management Representations:
- Secure written confirmation from management about their evaluation of subsequent events.
- Perform Cut-Off Procedures:
- Ensure inventory and payables are reviewed for proper cut-off procedures.
- Comply with ISA 560:
- Follow ISA 560 by performing procedures to gather evidence on events that may require adjustments or disclosure in the financial statements
(b) Purpose and Importance of Subsequent Events Review:
- Responsibility Beyond Year-End:
- The auditor’s responsibility extends until the date the audit report is signed, necessitating an extension of audit work to cover the post-year-end period.
- True and Fair Representation:
- To ensure that subsequent events are accurately reflected in the financial statements, preserving their integrity and adherence to a true and fair view.
- Statutory or Regulatory Compliance:
- Certain subsequent events must be accounted for to comply with legal or regulatory requirements.
- Evaluation of Financial Impact:
- Assess the impact of favorable or unfavorable events on the company’s financial condition.
- Addressing Material Adjustments:
- Identify adjustments necessary for conditions existing at the end of the reporting period, such as obsolete inventory
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