Adjusting and Non-Adjusting Events, Audit of Zippy Limited and Cheyne Limited - Assignment Example

Question Adjusting and Non-adjusting events Adjusting events are those events that take place after the reporting period and provide more information on events that were present at the end of the financial reporting period. On the other hand, Non-adjusting events are those events that occur after the end of a reporting period and indicate events that took place at the end of this period. Event x happened after the reporting date and was not in existence before the reporting period. It could not have been foreseen this means that it’s a non-adjusting event. However, it calls for disclosure to the users of the financial statements so that they can make decisions appropriately. Event y is an example of an adjusting event; it is because the event was present at the closing of the year, and further information has been provided after the report has been issued. The event had been for but the amount allocated is not enough to cater for the expenses to be incurred. Therefore, this calls for an adjustment in the provisions of the company (Arens, Randal, Mark and Jenkins,2005) In the presence of subsequent events, an auditor has the duty to carry out audit procedures on the financial statements. Due to the presence of adjusting and non-adjusting events there is a need for audit procedures that can investigate these events. In the above case, there are two events and the audit procedures are discussed below. Making of inquiries with the management is a crucial step. The auditor should be able to enquire from the management on the various issues that have faced the company in order to determine how material the damage from event x is. The auditor should make inquiries to the client’s legal counsel concerning the litigation against the company. It helps to identify when this matter became relevant to the company and the amount of fine to be expected. The auditor should also read the available minutes of the shareholders and directors committees to identify any impending issues that might occur in the future. Disclosure is also necessary for handling of the two issues. The auditor should determine which item needs disclosure due to its materiality or its influence in decision-making. Inquiry from the management is also necessary to clarify issues that might occur. There is need to have a letter of representation from the management (Whittington and Kurt, 2006) The fine is an event that came after the audit report has been issued to the shareholders. At this point, the auditor has no obligation to make any inquiry regarding any such financial statements. The auditor has to ask the management to make revisions on the financial statements. After the financial statements are those who had viewed the previous statements and read, the auditor’s report are informed of the changes. These changes will occur because the provision made for the fine was smaller than the fine that was charged to the company (Porter and David, 1996) The auditor has a duty to confidentiality of any information gained from the client. The auditor shall keep confidential any facts learned while carrying out the audit activities. The auditor may go against confidentiality rule because of the following. He has to release the information for matters of obligation or for the purpose of providing information to the public. The duty of confidentiality lasts even after the termination of employment relation or performance of the audit activity. It is hard to conclude that the auditor shall not report any financial crime to outside authorities. There should be a balanced interest between societal harm and confidentiality. The law has recognition of instances where confidentiality can be outweighed by societal damage. In the case of fraud such as that of Eurasia Bank PLC, the auditor has the duty to report material fraud to the proper authorities for purposes of public interest and shareholder interest. The notification of proper authorities will ensure that fraudulent activities are not (Adams and Richard, 2004). Question 2 Audit of zippy limited The use of analytical procedures Analytical procedures are used to increase auditor’s efficiency. They are made up of evaluations of financial statements and involve simple comparisons and even the use of complex models involving relationships and elements. The use of analytical procedures serves to increase the auditors understanding of the client and identify specific audit risk while considering unusual balances or relationships of financial statements data. Some of the stages of an audit that may call for the use of audit procedures include preliminary, substantive and final analytical procedures. Initial analytical procedures help the auditor to understand better the client business and assist with the planning of nature, extent and timing of the audit. Substantive analytical procedures are used to obtain evidence of the account balance or class of transactions assertions. Final analytical procedures provide an overall review of financial statements in the final audit stage. The procedures can make use of trend and ratio analysis and the use of regression models. Going concern refers to the ability of the company to function without the threat of liquidation in the foreseeable future. The foreseeable future is usually a period of 12 months after the audit. For a company to termed as a going concern, there is a need for the financial statement to have no material misstatements that gives the auditor reasonable doubt. The management must make an assessment of whether the company is a going concern or not in the preparation of the financial statements (Biggs, Theodore and Paul, 1988).The manager should make judgments on the various future outcomes of conditions or events. The management should consider the complexity and size of the entity and also the uncertainty associated with the outcome of an. The management should check the ability to pay dividends to shareholders, cashflow difficulties, adverse financial ratios, negative operating cash flows and even legal proceedings. In case of the above the management has the responsibility to make adequate going concern disclosures in the financial statements. Some of the indicators that zippy may not be a going concern include. The management will not be able to pay dividends. There is major debt repayment falling due which the entity is not able to meet. The cash flow statement is also negative while the calculation of the financial ratios will yield adverse ratios. There is also a major loss in the cash flows of zippy limited(Hirst, and Lisa, 1996).The audit procedures to be carried out include a review of the compliance with terms of the loan and debt agreements. The auditor should read the minutes of the various committees in the company. Analytical procedures such as calculation of ratios are used. The subsequent events are reviewed to recognize adjusting and non-adjusting events. A confirmation with the third parties is also essential for financial support. Litigation inquiry is to the legal counsel for any claims. The audit company Dameron & Company has the following responsibilities: they should consider the management use of going concern assumption in the preparation of financial statements. The auditor considers whether the management is taking any procedures to curb the going concern issue so that he does not report the company as a going concern. Any refusal by the directors to amend the financial statements would lead to the auditor issuing a qualified opinion. It means that there are issues of concern in the financial documents, and the company cannot be seen to perfume in the foreseeable future. The company will not be a going concern and would ultimately lead to its liquidation (Gortemaker, Hans, and Philip, 2005) Question 3 The audit of Cheyne limited In the audit of Cheyne limited, there are several classifications of current assets that need to be for auditing using substantive audit procedures. These assets include inventories, prepayments, and cash balances. In the audit of Inventory, the auditor should Account for a sequence of inventory tags and ensure physical existence on the goods in question. The auditor should compare client’s physical inventory to that of the master file testing for completeness, existence, and accuracy (Messier et al., 2008). The auditor should subsequently compare unit prices with vendor invoices, these are tests of accuracy. Lastly, the auditor has to trace additions to finished bicycles to the production records. The quality of inventory should be verified while a consideration for the use of the service of the expert is considered to value parts of a bicycle. The auditor is tasked with the duty of verifying the propriety of inventory inflow. In the audit of prepayments, the following substantive procedures are carried out. Prepayments are for existence by confirmation with the relevant parties who have been prepaid. Prepayments should also be for accuracy through checking of accounting records for correct valuation. The auditor should compare trial balance total to that in the general ledger and examine supporting documents (Rawindara et al, 2011). Cash and cash balances are audited as follows, through confirmation directly with the bank for such things as contingent liabilities, letters of credit and even authorized signatures. Vouchers are at petty cash counted. The auditor examines or prepares bank reconciliation statements to ensure that the client’s records match with those at the bank. IAS 37 expects the clients to give a reliable estimate of amounts that might owed for the legal claim. The management has the responsibility to make the most appropriate disclosures that will not mislead the stakeholders to the company. The director’s report gives additional information that is very necessary for the audit. The auditor should ascertain that the auditor’s report is consistent with the information in the financial documents. The auditor checks for any instances of material misstatements that might bring doubt to the financial records (ACCA, 2007) Reference list Arens, Alvin A., Randal J. Elder, Mark S. Beasley, and Gregory J. Jenkins. Auditing and assurance services: an integrated approach. Pearson/Prentice Hall, 2005. Whittington, Ray, and Kurt Pany. Principles of auditing and other assurance services. Boston, MA: McGraw-Hill/Irwin, 2006. Porter, Brenda, Jon Simon, and David Hatherly. Principles of external auditing. Vol. 2. J. Wiley, 1996. Adams, Carol A., and Richard Evans. "Accountability, completeness, credibility and the audit expectations gap." Journal of corporate citizenship 2004, no. 14 (2004): 97-115. Biggs, Stanley F., Theodore J. Mock, and Paul R. Watkins. "Auditors use of analytical review in audit program design." Accounting Review (1988): 148-161. Hirst, D., and Lisa Koonce. "Audit Analytical Procedures: A Field Investigation*." Contemporary Accounting Research 13, no. 2 (1996): 457-486. Gortemaker, Hans, and Philip Wallage. "Principles of auditing: an introduction to international standards on auditing." (2005). Zeff, Stephen A. "International accounting principles and auditing standards: Is it the beginning or is it the end?." European Accounting Review 2, no. 2 (1993): 403-410. Messier, William F., Steven M. Glover, and Douglas F. Prawitt. Auditing & assurance services: a systematic approach. New York, NY: McGraw-Hill Irwin, 2008. RAWINDARA KUMĀRA, & SHARMA, V. (2011). Auditing: principles and prctice. ACCA. Paper F8, Paper F8. Crowthorne, International Financial Pub. in association with Emile Woolf International.(2007). Read More