University of the West Indies, Mona

Department of Management Studies

ACCT 3043 – Auditing I

TUTORIAL QUESTIONS 8

1. Distinguish a provision, a liability and a contingent liability AND provide an example of

each. (6 marks)

2. The following unrelated events occurred after the balance sheet date but before the
audit report was prepared:
i. The granting of a retroactive pay increase
ii. Declaration of a stock dividend
iii. Sale of fixed asset at a substantial profit
iv. Determination by the Tax Authorities of additional income tax due for a prior year

Required:

a. Explain how each of the items might have come to the auditors’ attention. (4
marks)
b. Discuss the auditor’s responsibility to recognize each of these in connection with
the audit report. (4 marks)

3. The field work for the June 30, 2019 audit of Macy Brewing Company was finished
August 19, 2019 and the completed financial statements accompanied by the signed
audit report, were mailed September 6, 2019. In each of the highly material independent
events (a – g), state the appropriate action (i – iv) for the situation and justify your
response. The alternative actions are as follows: (7 marks)
i. Adjust the June 30, 2019 financial statements.
ii. Disclose the information in a disclosure note in the June 30, 2019 financial
statements
iii. Request the client to recall the June 30, 2019 financial statement for revision
iv. No action is required

The events are as follows:

a. On December 14, 2019 the auditor discovered that a debtor of Macy Brewing
Company went bankrupt on July 15, 2019 due to declining financial health. The
sale which resulted in the receivable had taken place January 15, 2019.

b. On December 14, 2019 the auditor discovered that a debtor of Macy Brewing
Company went bankrupt on October 2, 2019. The sale had taken place April 15,
2018, but the amount appeared collectible at June 30, 2019 and August 19,
2019.

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 University of the West Indies, Mona
Department of Management Studies
ACCT 3043 – Auditing I

TUTORIAL QUESTIONS 8
c. On August 15, 2019, the auditor discovered that a debtor of Macy Brewing
Company went bankrupt on August 1, 2019. The most recent sale had taken
place April 2, 2018, and no cash receipts had been received since that date.

d. On August 6, 2019, the auditor discovered that a debtor of Macy Brewing

Company went bankrupt on July 30, 2019. The cause of the bankruptcy was an
unexpected loss of a major lawsuit on July 15, 2019, resulting from a product
deficiency suit by a different customer.

e. On August 6, 2019, the auditor discovered that a debtor of Macy Brewing

Company went bankrupt on July 30, 2019 for a sale that took place July 3, 2019.
The cause of the bankruptcy was a major uninsured fire on July 20, 2019.

f. On July 20, 2019. Macy Brewing settled a lawsuit out of court that had originated
in 2010 and is currently listed as a contingent liability in the financials.

g. On September 14, 2019, Macy Brewing lost a court case that had originated in
2018 for an amount equal to the lawsuit. The June 30, 2019, disclosure note
stated that in the opinion of legal counsel there will be a favourable settlement.

4. Describe the action that an auditor should take if an attorney refuses to provide
information that is within the attorney’s jurisdiction and may directly affect the fair
presentation of the financial statements.

5. What major considerations should the auditor take into account in determining how
extensive the review of subsequent events should be?

6. Describe matters that the auditor must communicate to audit committees of public
companies.

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