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ACCT3103L10

What are subsequent events occurring between the balance sheet date and the date of the auditor’s report?
They are transactions and events which might affect the financial statements being audited eg. adjustment/disclosure
What are subsequent discovery of facts existing at the date of the auditor’s report?
Occurs when auditor becomes aware that some information included in the financial statements was materially misleading after the audited financial statements have been issued.

eg. subsequent discovery of the inclusion of fraudulent sales

Upon such a discovery auditor should request the client issue a revised set of FS containing a new audit report and explanation of reasons for the revisions.

A principal purpose of a letter of representation from management is to:
(1) serve as an introduction to company personnel and an authorisation to examine the
records
(2) discharge the auditor from legal liability for his or her examination
(3) confirm in writing management’s approval of limitations on the scope of the audit
(4) remind management of its primary responsibility for financial statements.
Remind management of its primary responsibility for financial statements
The date of the management representation letter should coincide with the:
(1) date of the auditor’s report
(2) balance sheet date
(3) date of the latest subsequent event referred to in the notes to the financial statements
(4) date of the engagement agreement.
Date of the auditor’s report
The audit step most likely to reveal the existence of contingent liabilities is:
(1) a review of vouchers paid during the month following the year-end
(2) accounts payable confirmations
(3) an inquiry directed to the client’s lawyers
(4) mortgage-note confirmation.
An inquiry directed to the client’s lawyers
Management’s refusal to furnish a written representation on a matter the auditor considers essential constitutes:
(1) prima facie evidence that the financial statements are not presented fairly
(2) a violation of the Corporations Act
(3) an uncertainty sufficient to preclude an unmodified opinion
(4) a scope limitation sufficient to preclude an unmodified opinion.
A scope limitation sufficient to preclude an unmodified opinion.
On 14 December 20X0 the auditor discovered that a debtor of Tracy Brewing had been placed in liquidation on 2 October 20X0. The sale had taken place on 15 April 20X0, but the
amount appeared collectible at 30 June 20X0 and 19 August 20X0.

Which option should be performed:

1 Adjust the 30 June 20X0 financial statements.
2 Disclose the information in a footnote in the 30 June 20X0 financial statements.
3 Request the client to recall the 30 June 20X0 statements for revision.
4 No action is required.

No action is required

The amount appeared collectible at the end of the fieldwork.

On 15 August 20X0 the auditor discovered that a debtor of Tracy Brewing had been placed in liquidation on 1 August 20X0. The most recent sale had taken place on 2 April
20X9 and no cash receipts had been received since that date.

Which option should be performed:

1 Adjust the 30 June 20X0 financial statements.
2 Disclose the information in a footnote in the 30 June 20X0 financial statements.
3 Request the client to recall the 30 June 20X0 statements for revision.
4 No action is required.

Occured in period 1 between the balance date and audit report date.

Adjust the 30 June 20×0 financial statements

c On 14 December 20X0 the auditor discovered that a debtor of Tracy Brewing had been placed in liquidation on 15 July 20X0, due to declining financial health. The sale had taken
place on 15 January 20X0.

Which option should be performed:

1 Adjust the 30 June 20X0 financial statements.
2 Disclose the information in a footnote in the 30 June 20X0 financial statements.
3 Request the client to recall the 30 June 20X0 statements for revision.
4 No action is required.

Period 3 – After financial report issued

Request the client to recall the 30 June 20×0 statements for revision.

On 6 August 20X0 the auditor discovered that a debtor of Tracy Brewing had been placed in liquidation on 30 July 20X0. The cause of the insolvency was an unexpected loss of a major legal action on 15 July 20X0, resulting from a product deficiency action by a different
customer.

Which option should be performed:

1 Adjust the 30 June 20X0 financial statements.
2 Disclose the information in a footnote in the 30 June 20X0 financial statements.
3 Request the client to recall the 30 June 20X0 statements for revision.
4 No action is required.

Period 1 – Between balance date and audit report date

Because it is an UNEXPECTED LOSS of legal action it is a disclosure.

Disclose the information in a footnote in the 30 June 20X0 financial statements

On 6 August 20X0 the auditor discovered that a debtor of Tracy Brewing had been placed in liquidation on 30 July 20X0 for a sale that took place on 3 July 20X0. The cause of the insolvency was a main uninsured fire on 20 July 20X0.

Which option should be performed:

1 Adjust the 30 June 20X0 financial statements.
2 Disclose the information in a footnote in the 30 June 20X0 financial statements.
3 Request the client to recall the 30 June 20X0 statements for revision.
4 No action is required.

Period 1 between the balance date and the audit report date.

Disclosure by client in the notes to financial statements

On 31 May 20X0 the auditor discovered an uninsured legal action against Tracy Brewing
that had originated on 28 February 20X0.

Which option should be performed:

1 Adjust the 30 June 20X0 financial statements.
2 Disclose the information in a footnote in the 30 June 20X0 financial statements.
3 Request the client to recall the 30 June 20X0 statements for revision.
4 No action is required.

Period 1 between the balance date and the audit report date

Adjust the 30 June 20X0 financial statements

On 20 July 20X0 Tracy Brewing settled a legal action out of court that had originated in 20X7 and is currently listed as a contingent liability.

Which option should be performed:

1 Adjust the 30 June 20X0 financial statements.
2 Disclose the information in a footnote in the 30 June 20X0 financial statements.
3 Request the client to recall the 30 June 20X0 statements for revision.
4 No action is required.

Period 1 between balance date and audit report date

Adjust the financial statements

On 14 September 20X0 Tracy Brewing lost a court case that had originated in 20X9 for an amount equal to the legal action. The 30 June 20X0 footnotes state that in the opinion of legal counsel there will be a favourable settlement

Which option should be performed:

1 Adjust the 30 June 20X0 financial statements.
2 Disclose the information in a footnote in the 30 June 20X0 financial statements.
3 Request the client to recall the 30 June 20X0 statements for revision.
4 No action is required.

Period 3 After reporting date

No action necessary

On 20 July 20X0 Tracy Brewing settled a legal action out of court that had originated in 20X7 and is currently listed as a contingent liability.

Which option should be performed:

1 Adjust the 30 June 20X0 financial statements.
2 Disclose the information in a footnote in the 30 June 20X0 financial statements.
3 Request the client to recall the 30 June 20X0 statements for revision.
4 No action is required.

Period 1 between balance date and audit reporting date

Adjustment to financial statements

On 20 July 20X0 a legal action was filed against Tracy Brewing for a patent infringement action that allegedly took place in early 20X0. Legal advice suggested there is a danger of a significant loss to the client
Which option should be performed:

1 Adjust the 30 June 20X0 financial statements.
2 Disclose the information in a footnote in the 30 June 20X0 financial statements.
3 Request the client to recall the 30 June 20X0 statements for revision.
4 No action is required.

Period 1 between balance date and audit reporting date

Disclose the information in a footnote in the 30 June 20X0 financial statements

What are Contingent Liabilities
A potential future obligation to and outside party for an UNKNOWN amount resulting form past activities.

Main assertions of concern are completeness and disclosure.

If a contingent liability is probable what action is required? If amount account be reliably estimated and if it can.
If amount cannot be reliably estimated then a disclosure is required

If amount can be reliably estimated then an adjustment to FS is required.

What is the primary source of obtaining information concerning litigations and liabilities?
A legal representation letter sent directly back to the auditor.

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