Auditing: A Business Risk Approach - Essay Example

?Auditing Table of Contents Subsequent Events 3 Solutions 4 Reference 8 Bibliography 9 Subsequent Events According to the Auditing Standard under section 560, when external auditors conduct auditing in a firm, they usually refer to the historical financial evidences that connect to the present financial statement. In this process, it may happen that the transactions might have occurred after balance sheet date but before the issuance of the financial statement. This affects the financial statements and therefore adjustments are made and properly mentioned in the statements. These occurrences are known as subsequent events.1 There are two types of subsequent events which an external auditor must evaluate: Firstly, the auditors must consider those evidences which involved conditions with respect to those that existed at the date of the balance sheet and it would affect the financial statements. All the information that is achieved prior to the issuance of the financial statements should be taken into consideration. The second types of event are those events that did not existed even at the time of balance sheet. Some of these types of events are such that disclosing this information would save the financial statements form being misleading. The effects of the subsequent events can be seen in the assets such as receivables and inventories or in the estimation of liabilities because these kinds of events represent the functionalities which exist over a long period of time.2 After the balance sheet date is over, there is a time period when the auditors are concerned about completing their different phase of audits. This time period is known as subsequent period and this period extends till the date of the auditor's report. This period may vary from time to time depending on the situations. In addition to the main duties, it is also the task of the external auditor to conduct other auditing procedures and require adjusting and disclosing the essential financial events and occurrences so as to present a completely transparent report, according to the stated accounting principles.3 Solutions Further Audit Evidences This study is on the Platinum Pokie Club in Western Australia. The evidences in the subsequent period are giving for the external audit firm to analyze their outcomes. Audit evidences are basically the information that auditors use for arriving at a conclusion. Auditors do not examine all the information given because generally many of the information are cumulative in nature that is they occur over a long period of time and may sometimes be analyzed after the date of balance sheet during the subsequent period. Audit evidences are more reliable when they are receiving from external sources that are unbiased. The evidences acquired directly by the auditor are more authentic that information received indirectly. Moreover, information available in a documented form is trusted more than verbally transmitted information.4 The financial controller of the club reported on 5th august, before the auditor’s report, that Mr. Tan, the general manager has made fraudulent expenses claims of $ 40000 over 5 years. The profit and loss account for the five years during which Mr. Tan was working in the club should be properly analyzed. All the evidences supporting all the expenditures should be received and then estimate the actual amount of fraud expenditures. Moreover, the account details of Mr. Tan can be collected with the help of police authorities to see his bank balances. In the second evidence we see Ms. Peters taking legal action against the company and claiming medication and damage charge from the club. For this kind of even, solicitor's advice can be taken, so as to see the likelihood of the customer winning the case and estimate the costs that they would be incurring. The financial controller informed on 18th of August about some serious fire that occurred during a football celebration. For this the insurance money has already been received. But the problem is that the bistro and bar would remain close and due to that fact 7 % revenue will decrease. Though these are calamities that might happen and the club should always maintain provision for such occurrences. But analysis can be done on making temporary provisions to start the services, so that the revenue remains unaffected. In the fourth evidence, the board takes decisions to sell land it was holding as long term investments. The balance sheet can be analyzed to check the existence of land as a property holding and its value in the balance sheet. The last evidence states that the club upgraded its air conditioning system. For this purpose they made an investment. The first installment of $ 100,000 was due on 1 September. But the work will be completed by 20th June. So the position of the fund allotted for this function needs to be checked because the event is getting completed on balance sheet date. Actions Generally those events or transactions are occurring till the date of balance sheet is considered. But there are some subsequent events, which are even considered after the date of balance sheet but before the final auditing dates. Otherwise they are considered for the next financial year. Appropriate notes are made for those occurrences but they are not adjusted in the financial accounts.5 The first even occurred on the 5th of August that is before the date of auditors report. So an adjustment in the financial statements is required. Though the Financial controller wishes to take 2 months time to investigate this issue of fraudulent expenses. But on account of the occurrence of this event, this evidence shall be considered. The second evidence is received on 17th August that is after the date of audit report, which is 15th August. Moreover, any transaction has not been taken place in this account. So there is no need for any adjustments in the financial statements. Next evidence is received on 18th August, of some fire breakout in the club for which insurance money was already recovered. So, it can be assumed that the whole proceedings and the event took place within the financial year. Thus it has already been adjusted in the financial books. Now, due to the damages in the bistro and bar areas, it would remain close for a month. This would decrease the revenue of the club by 7 %. This shall be noted but not adjusted in the financial statement because the date of audit reporting was 15th august and this event will be recorded in the next financial statement. The board decided to sell a land holding on 18th August, which was informed by the finance controller on 23rd August. This contract for the land will be signed on 25th August. This transaction will be noted down but no adjustment can be made in the financial statement. The air- conditioning system of the club is upgraded within 30th June and this was informed on 11th August. The first installment of the payment is due on 1st September. Necessary adjustments should be made in the books of accounts for such transaction.6 Reference 1 AICPA. “Subsequent Events.” (2004): 1-2. http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00560.pdf. 2 PCAOB. AU Section 560. (2004): 1-2. http://pcaobus.org/Standards/Auditing/Pages/AU560.aspx. 3 Larry E. Rittenburg, Karla Johnstone, and Audrey Gramling. Auditing: A Business risk Approach. Connecticut: Cengage Learning, 2011. 4 ICISA. “International standard on auditing 560 Subsequent events.” (2004): 2-3. http://www.icisa.cag.gov.in/Background%20Material/SUBSEQUENT%20EVENTS%20(560).pdf. 5 Nick A. Dauber, Anique Ahmed Qureshi, and Marc H. Levine. The Complete Guide to Auditing Standards, and Other Professional Standards for Accountants 2009. New York: John Wiley & Sons, 2009. 6 Smith. CPA 2012 AUD: How to Pass the CPA Exams after Studying for Two Weeks without Anxiety. USA: T. Smith, 2011. Bibliography Gupta, Kamal. Contemporary Auditing. New Delhi: Tata McGraw-Hill Education. 6th Ed. 2004. McCorry, Kieran. Microsoft Exchange 2003 Deployment and Migration. Florida: Digital Press, 2004. Read More