Week – 9

Answer:
Part – A:
Key Audit Matters:

Matters or events that are according to the professional judgement of the auditor are of most
significance and important in execution of the audit of the current year financial statements are
known as Key Audit Matters. These matters are extracted from the matter that are being
communicated to the those charged with governance.
A further description is required to be added by the auditor on each of the key audit matters in
his audit report by stating that:

 Why the given matter has been considered as highly important and of more significance
in the audit.

 How the auditor has addressed the matter during the performance of the audit.

 Needs to provide related disclosure references.

The Key Audit Matters paragraph or section is usually placed right after the basis for opinion
paragraph of the audit report and before the Management Responsibility Paragraph.

Part – B:
Issues
a) On August 15th, the
board is planning to
issue its shares in the
private placement.
Event/Accounting
Treatment
It’s a type 2 event, needs a
disclosure in the financial
statements of the company.
Explanation
Since, the issuance of share
and evidence for it arises after
the year end or date of the
financial statements because
the private offerings would
occur after the year end at
June 30th, therefore, this event
needs a disclosure in the
financial statements and
 would not affect the financial
statements before year end.
b) Issuing shares to Type 2 event, needs to give Since, the contract is not yet
finance the purchase disclosure in the financial signed and it will be signed
of 60% stake in statements. on 15th August; therefore, the
another company. issuance of share would have
no implications on the year-
end financial statement that
are being closed at June 30.
Hence, needs a disclosure in
the financial statements of the
company instead of adjusting.
c) A legal case has been This is a Type 1 event and Since, there is sufficient
lodged against the needs to be adjusted. evidence that is existed at the
company for damages. date of the financial
statements because the event
that gives rise to the law suit
occurred before the ear end
June 30.
d) Doubtful trade This is a Type 1 event and Here the auditor has to check
receivable has now needs to be adjusted. whether it is a bogus receipt.
been paid. Since it is in cash, there might
be chances of manipulation of
debtor’s balances by entering
bogus receipts in their
account. Moreover, one of the
large debtors and other debt
amounts that could have a
material impact on the
financial statements;
therefore, this event needs to
be adjusted and disclosed.