• 10 Marks

AAA – Nov 2020 – L3 – Q3a – Audit Evidence | Evaluation and Review

Discuss whether financial statements require amendment for specific events and describe related audit procedures and audit report implications.

a) For each of the three events below:
i) Discuss whether the financial statements require amendment. (3 marks)
ii) Describe audit procedures that should be performed in order to form a conclusion on the amendment. (4 marks)
iii) Explain the impact on the audit report should the issues remain unresolved. (3 marks)

  • Warehouse Flood:
    • Amendment: The flood event occurred after the year-end, making it a non-adjusting event under IAS 10. The financial statements should not be adjusted, but if the impact is material, a disclosure note should be made.
    • Audit Procedures:
      • Discuss the event with management.
      • Review the insurance claim and correspondence with insurers.
      • Obtain a written representation confirming that the company’s going concern status is not impacted.
      • Review other warehouses’ inventory levels for reasonableness.
    • Audit Report Impact: If management refuses to disclose the event and it is material, a qualified opinion would be required with an ‘except for’ paragraph regarding the lack of disclosure.
  • Lawsuit Settlement:
    • Amendment: The lawsuit settlement amount agreed after year-end provides evidence of the condition that existed at the balance sheet date, so the financial statements should be adjusted to reflect a provision of GHS 0.9 million instead of a contingent liability.
    • Audit Procedures:
      • Contact the company’s legal counsel for confirmation of the settlement likelihood and amount.
      • Review the correspondence from the supplier confirming the settlement amount.
      • Discuss the provision with management and obtain written representation.
    • Audit Report Impact: If management refuses to adjust the provision, a qualified opinion would be required due to non-compliance with IAS 37.
  • Receivable with Going Concern Issues:
    • Amendment: The event provides evidence about conditions existing at the balance sheet date, indicating that the receivable may not be collectible. An allowance for doubtful debts should be considered, but as the amount is immaterial, no adjustment may be necessary.
    • Audit Procedures:
      • Review correspondence with the customer regarding their financial difficulties.
      • Discuss with management why no allowance has been made.
      • Check post-year-end payments from the customer.
    • Audit Report Impact: As the receivable is immaterial, the lack of adjustment does not warrant a modification to the audit opinion.
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