TUTORIAL EXERCISE

DPA5043- AUDIT AND ASSURANCE

TOPIC 5- AUDIT REVIEW

Name : _________________________________________________
__
Reg. No. : _________________________________________________
__
Date : _______________________________
Class : _______________________________

STRUCTURE. Write your answer in the space provided or on a separate sheet of paper.

QUESTION 1 (CLO2/ C4/ PLO1)

The review of subsequent events and final audit completion are the final steps of which is the
responsibilities of the auditor before issuing the audit opinion. The auditor should not decide the
appropriate audit report to issue until the audit finalisation process is complete. Therefore, it is
critical that the review of subsequent events and final audit completion are execute properly as
the consequences of issuing inappropriate audit report can be severe.

You are required to:

a) Determine the possible actions for the audit work of Serena Corporation which ended on 17
March 2020. The material situations took place after the company’s financial period ended
31 December 2019. Both the financial statements and auditor’s report were issued on 29
March 2020.

Below are the suggestions of appropriate action:

A. Adjust the 31 December 2019 financial statements.

B. Disclose the information in a footnote in the 31 December 2019 financial statements.
C. No action is required.

The situations are as follows:

 SITUATION ACTION
i. On February 17, 2020, Samad Corporation sold some machinery for CNo action is
its book value. required.
ii. On February 20, 2020, a flood destroyed the entire uninsured BDisclose the
inventory in one of Samad's warehouses. information
in a footnote
in the 31
December
2019
financial
statements
iii. On March 1, 2020, one of Samad Corporation's major customers A. Adjust the
declared bankruptcy. The customer's financial condition in 2019 31
was deteriorating and they owed Samad Corporation a large sum of December
money as of the balance sheet date. 2019
financial
statements
iv. On March 10, 2020, the company settled a lawsuit at an amount AAdjust the
significantly higher than the amount recorded as a liability on the 31 December
books as of the balance sheet date. 2019
financial
statements
v. On January 5, 2020, there was a significant decline in the market BDisclose the
value of the securities held for resale from their value as of the information
balance sheet date. in a footnote
in the 31
December
2019
financial
statements
(10 marks)

b) Classify the two primary types of subsequent events that require consideration by
management and evaluation by the auditor and correlate it with two examples of each type.
(8 marks)
Type 1: Events that occur after the balance sheet date which provide additional
information to management that helps them determine the fair presentation of
account balances as of the balance sheet date. These events have a direct effect on
the financial statements and require adjustment.
  Examples include
 declaration of bankruptcy by a customer with an outstanding accounts
receivable balance due to deteriorating financial condition;
 settlement of litigation at an amount different from the amount recorded on
the books; and

 the disposal of equipment not being used in operations at a price below the
current book value.
• Type 2: Events that have no direct effect on the financial statements but for which
disclosure is required. Subsequent events of this type are events that provide
evidence about conditions which did not exist at the date of the balance sheet being
reported on but arose after the balance sheet date and may be significant enough to
require disclosure.
Examples include
 a decline in the market value of securities held for temporary investment or resale;
 issuance of bonds or equity securities;
 a decline in the market value of inventory as a consequence of government action barring
further sale of a product;
 the uninsured loss of inventories as a result of fire; and a merger or an acquisition.

c) Determine the three reasons why an experienced member of the audit firm must thoroughly
review audit documentation at the completion of the audit.
(6 marks)
1. To evaluate the performance of inexperienced personnel
2. To make sure that the audit meets the CPA firm's standard of performance
3. To counteract the bias that often enters into the auditor's judgment

d) Determine the four principal purposes of the required communication with the audit
committee regarding certain additional information obtained during the audit.
(8 marks)
• To communicate auditor responsibilities in the audit of financial statements.
• To provide an overview of the scope and timing of the audit.
• To provide those charged with governance with significant findings arising during the audit.
• To obtain from those charged with governance information relevant to the audit

e) Determine the possible actions for the audit work of Melati Corporation which ended 17
March 2020. The material situations took place after the company’s financial period ended
31 December 2019. Both the financial statements and auditor’s report were issued and
mailed to company shareholders on 29 March 2020.
Below are the suggestions of appropriate action:

A. Adjust the December 31, 2019 financial statements.

B. Disclose the information in a footnote in the December 31, 2019 financial statements.
C. Request the client revise and reissue the December 31, 2019 financial statements. The
revision should involve an adjustment to the December 31, 2019 financial statements.
D. Request the client revise and reissue the December 31, 2019 financial statements. The
revision should involve the addition of a footnote, but no adjustment, to the December 31,
2019 financial statements.
E. No action is required.

The situations are as follows:

 SITUATION ACTION
i. On February 19, 2020, Melati settled a lawsuit out of court that had . A.
originated in 2015 and is currently listed as a contingent liability.
Adjust the
v. On March 30, 2020, Melati settled a lawsuit out of court thatDecember had E.No
originated in 2013 and is currently listed as a contingent liability. 31, 2019action is
financialrequired
statements.
ii. On February 2, 2020, you discovered an uninsured lawsuit against B.
Melati that had originated on August 30, 2017.
Disclose the
information
in a footnote
in the
December
31, 2019
financial
statements.
iii. On January 16, 2020 a lawsuit was filed against Melati for a patent B.
infringement action that allegedly took place in early 2017. In the
opinion of Melati's attorneys, there is a reasonable (but not Disclose the
probable) danger of a significant loss to Melati. information
in a footnote
in the
December
31, 2019
financial
statements.
iv. On April 7, 2020, you discovered that a debtor of Melati went D.Request
bankrupt on January 22, 2020, due to a major uninsured fire that the client
occurred on January 2, 2020. revise and
reissue the
December
31, 2019
financial
statements.
The revision
should
involve the
addition of a
footnote, but
no
adjustment,
to the
December
31, 2019
financial
statements
 (10 marks)

(Total: 42 marks)