TUTORIAL Chapter 18: Completing the audit
Review questions
1. Identify the audit procedures normally associated with subsequent events.
2. How would you define the two types of events that occur after the reporting period?
What are the potential accounting effects of each type?
3. What procedures should the auditor perform when a question arises regarding going
concern?
4. What are the objectives of the management representation letter?
5. Identify the items that should be included on all working papers.
6. What is contingent liabilities and how can auditor get information with regards to
contingent liabilities?
Professional application questions
Question one Subsequent events
You are an audit assistant allocated to perform the audit of Topporene Ltd for the year ended
30 June 2015. The managing director of Topporene is interested in the audit
responsibilities for identifying subsequent events. The audit partner would like you to
document these responsibilities in a memo to the managing director. The detailed
audit work is expected to be completed by 31 August 2015. It is planned that:
• the auditor’s report will be signed on 15 September 2015
• the financial statements will be sent to shareholders on 30 September 2015.
Required
(a) In your memo explain the auditor’s responsibilities for identifying subsequent events
in the following periods:
1st September 2015 to 15th September 2015
18th September 2015 to 30th September 2015
1st October 2015 onwards
Question two Subsequent events
Tanners Ltd is a wholesaler of packaging products and you are about to complete the
financial report audit for the year end 30 June 2015. Before you finalise your audit opinion
you are considering some significant events that have recently occurred in Tanners Ltd.
Factory fire
There was a fire at one of Tanners’ factories in late July 2015. Some machinery, raw
materials and finished products were damaged in the fire. The insurance company was
informed and an investigation showed that the factory supervisor was at fault by not
following safety procedures, as a result the insurance company have refused to accept the
claim.
Jonners Ltd
In August 2015, Tanners was informed by one of its long-standing customers, Jonners Ltd,
that it was having going concern problems and that paying the amount owed to Tanners was
going to be difficult. No amount has been received from Jonners since June. The directors of
Tanners believe that it is not necessary to adjust the receivable balance at 30 June 2015 as
Jonners has always paid them in the past.
Contaminated Land
On 15th June 2015 Tanners Ltd purchase a land valued at 2 Million dollars. However, on
August they discovered that the land was contaminated with toxic acid.
Required
Identify what type of events are they and for each of the issues above describe how they
Should be treated in the financial report.
Question three going concern indicators
Ulysses Polytropos Ltd is an Australian company which manufactures travel products
including suitcases, backpacks, wallets, hiking gear, clothing and other sundry travel related
items. The market for these products is characterised by fashion conscious customers,
innovation in design, high levels of competition and product costs pressure from cheaper but
high quality products from a variety of manufacturers around Asia. The market continues to
grow which creates new opportunities but also attracts new entrants into the market. Ulysses
Polytropos operates at the high quality, and high price, end of the market and has in recent
years seen a decline in demand for its products despite the overall buoyant market. This has
been attributed to demand for cheaper products as well as domestic customers buying online
from around the world. In order to address this decline, the company has tried to change its
research and development division but has struggled to attract employees with the vision to
take the company forward.
In order to reduce production costs the organisation invested in new manufacturing plant and
reorganised the factory layout to create more efficient processes. This required a significant
investment, only some of which was able to be financed by long-term bank loans. Ulysses
Polytropos has fully drawn down on its bank overdraft facility, the banks are unwilling to
provide further funds and in order to manage cash flows creditor payment days have
extended, leading to difficult relations with some key suppliers who will no longer do
business with the company.
The forecast for the coming 12 months shows the cash position worsening so additional funds
will be required to allow the company to continue meeting its obligations. The directors
believe that it will take another 18 to 24 months to turn the business around and move back
into profitability. The bank overdraft is being reviewed in two months’ time and the directors
are confident that additional funds will be made available to allow the company to continue
to trade for the next two years and then they will see the business become successful again.
Required
Identify and explain any indicators that there are doubts about Ulysses Polytropos Ltd’s
ability to continue as a going concern.