AA chap 19 : Overall Review of the Financial Statements

All material subsequent events require the numbers in the financial statements to be adjusted

• True

• False

A non adjusting event is a subsequent event for which NO amendments to the current year financial statements are required

• True

• False

Up to which date should the auditor perform subsequent events?

• The date the subsequent events review is performed

• The date of approval of the financial statements

• The date audit report is signed

• The date the financial statements are issued

ISA 580 Written Representations require auditors to obtain written representations to support other evidence.

For which of the following matters would a written representation NOT be suitable as audit evidence?

• That all deficiencies in internal control known to management have been communicated to the auditor

• That subsequent events requiring adjustment or disclosure in the financial statements have been dealt with appropriately

• That the payroll charge for three months of the year when the accounting records were unavailable is correctly stated

• That management has fulfilled their responsibility for the preparation and presentation of the financial statements

Auditors are required to undertake an overall review of the financial statements as the final step before they form their audit opinion. As part of this process they undertake a number of procedures.

Which of the following procedures would an auditor NOT undertake as part of the overall review of the financial statements?

• Reviewing the financial statements to ensure they are consistent with the auditor’s knowledge of the business and the results of their audit work

• Performing analytical procedures on the financial statements to form an overall conclusion on the financial statements

• Undertaking a review of subsequent events to identify whether any adjustment or disclosure is required in the financial statements

• Reviewing the financial statements to ensure compliance with accounting standards and local legislation disclosure

Answer explanation

Procedures A, B and D would be undertaken as part of the overall review of the financial statements. However, procedure C is undertaken when reviewing subsequent events occurring between the date of the financial statements and the date of the auditor’s report

Which of the following audit procedures would identify subsequent events occurring up to

the date of the auditor's report?

(1) Enquire of management whether there have been any unusual accounting

adjustments

(2) Enquire of management whether there have been any issues of shares/debentures,

or changes in business structure

(3) Review management procedures for identifying subsequent events to ensure that

such events are identified

(4) Obtain written representation that all subsequent events requiring adjustment or

disclosure have been adjusted or disclosed

• 1& 2

• 1&3

• 1,3,4

• 1,2,3,4

Humphries Co has three warehouses; following extensive rain on 20 June, rain and river water flooded the warehouse located in Bass. All of the inventory in the warehouse was damaged and has been disposed of. The insurance company has been contacted.

No amendments or disclosures have

been made in the financial statements.

Which TWO of the following statements correctly describe the likely impact that the

flooding of the warehouse will have on Humphries Co's financial statements for the year

ended 30 April 20X5?

• Inventory should be written down, because the flood damage is an adjusting even

• Inventory should not be written down, because the damage is not an adjusting

  event.

• If a material amount of inventory is uninsured, it may be necessary to disclose the

  event and an estimate of the financial losses

• If insurance proceeds are more likely than not to be received, a contingent asset

  should be recognised.

It is now 13 July 20X5. The auditor's report has been signed. The financial statements are

due to be issued on 25 July 20X5.

Which of the following statements correctly describes the auditor's responsibility in relation

to subsequent events occurring between now and 25 July?

• The auditor must design procedures to obtain sufficient appropriate audit evidence

  that all events up to that date that may require adjustment or disclosure have been

  identified.

• The auditor must perform procedures on matters examined during the audit, which

  may be susceptible to change after the year end.

• If the auditor becomes aware of a fact that, had it been known to the auditor at the

  date of the auditor's report, may have caused the auditor to amend the auditor's

  report, the auditor shall discuss the need for any adjustments with management.

• The auditor has no obligation to perform procedures, or make enquiries regarding

  the financial statements. Any subsequent events should be noted and considered in

  the next period's audit.

Which TWO of the following audit procedures should be performed in order to form a conclusion on the amendment required to Humphries Co's 20X5 financial statements in respect of the $0.3 million owed by the customer experiencing financial difficulties?

• Reviewing the post year end period for payments received from the customer in

  respect of the year-end debt

• Reviewing correspondence with the customer to assess the likelihood of Humphries

  Co recovering the $0.3 million

• Writing to the customer to request confirmation of the amount owed to Humphries

  Co at the year end

• Ask management to produce a revised cash flow forecast covering at least 12 months

  after the year end

Which of the following are potential indicators that Strawberry is not a going concern?

(1) The breach of the loan covenants

(2) The departure of the sales director without any replacement

(3) The fall in the inventory holding period

(4) The negative cash flow figures

• 1,2,3

• 2,3,4

• 1,3,4

• 1,2,4