Question

QUESTION 4:

You are the audit partner of Merit Chartered Accountants (“MCA”), working on the audit of Darwin Tourist Buses (“DTB”) for the 2017 financial year. DTB is a provider of luxury bus trips all around Australia, including both interstate capital city travel and conference and holiday packages. The net profit before tax of DTB for the 2017 financial year is $14.5M while net assets total $232M. You are due to sign the auditor’s opinion on 22 August 2017. DTB will issue the financial statements on 28 August 2017. On 16 August 2017, the following situations come to your attention:

Situation 1 Jolly Holidays, one of DTB’s largest wholesale travel agents that purchased travel packages in bulk from DTB, went into liquidation on 3 July 2017. A letter from the liquidator dated 31 July 2017 indicates that creditors are likely to receive $0.10 in the dollar. As at 30 June 2017, Jolly Holidays owed DTB $2,301,000.

Situation 2 On 15 August 2017, a bus travelling from Brisbane to Sydney crashed. It is alleged that the bus driver was distracted by a call on his mobile telephone. 5 passengers died and 17 were injured. The passengers had paid their fares during the 2017 financial year. (An account “Unearned Income” was credited in the prior year when monies were received). It is likely that a law suit will be brought against the company due to the driver’s negligence.

REQUIRED: Assume there are no issues other than those described in Situations 1 and 2, and that going concern is not an issue. Also, assume that in response to each material situation above, management could either adjust the amounts in the financial statements or take no action. Treating Situations 1 and 2 independently when answering this question:

(a) For Situation 1:

(i) Identify the appropriate treatment in the financial statements. Justify your answer. (2 marks)

(ii) Identify the appropriate auditor’s opinion if management adjusts the amounts in the financial statements. Justify your answer. (2 marks)

(iii) Identify the appropriate auditor’s opinion if management takes no action. Justify your answer. (2 marks)

(b) For Situation 2,:

(i) Identify the appropriate treatment in the financial statements. Justify your answer. (2 marks)

(ii) Identify the appropriate auditor’s opinion if management adjusts the amounts in the financial statements. Justify your answer. (2 marks)

(iii) Identify the appropriate auditor’s opinion if management takes no action. Justify your answer. (2 marks)

You may wish to present your answer in the form of the following table:

Situation	(i) Accounting treatment and justification.	(ii) Auditor’s opinion if management adjusts financial statements and justification	(iii) Auditor’s opinion if management takes no action and justification.
1
2

Answer 1

Ans. IAS 10 Deals with events occurring after the balance sheet date. IAS 10 Events After The Reporting Period contains requirements for when events after the end of the reporting period should be adjusted in the financial statements. Adjusting events are those providing evidence of conditions existing at the end of the reporting period in other words on the date of period end or at balance sheet date, whereas non-adjusting events are indicative of conditions arising after the reporting period (the latter being disclosed where material).

Event after the reporting period:

An event, which could be favourable or unfavourable, that occurs between the end of the reporting period and the date that the financial statements are authorised for issue.

- Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.

- Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the reporting period.

Accounting :-

• Adjust financial statements for adjusting events - events after the balance sheet date that provide further evidence of conditions that existed at the end of the reporting period, including events that indicate that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.
• Do not adjust for non-adjusting events - events or conditions that arose after the end of the reporting period.
• If an entity declares dividends after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period. That is a non-adjusting event.

Disclosure Requirements :-

Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions. The required disclosure is :-

(a) the nature of the event and

(b) an estimate of its financial effect or a statement that a reasonable estimate of the effect cannot be made.

A company should update disclosures that relate to conditions that existed at the end of the reporting period to reflect any new information that it receives after the reporting period about those conditions.

Companies must disclose the date when the financial statements were authorised for issue and who gave that authorisation. If the enterprise's owners or others have the power to amend the financial statements after issuance, the enterprise must disclose that fact.

Situation	(i) Accounting Treatment & Justification	(ii) Auditor's opinion if management adjusts financial statements & justification	(iii) Auditor's opinion if management takes no action & justification
1
i)	As per above given definition this is a non adjusting event because there is no evidence of this event at the time of period closing but since amount involved is material and this is a one of largest customer of organisation it will affect future earning prospects of company, hence management needs to disclose this event by notes to accounts. Amount of loss due to this event $ 20,70,900 ($ 23,01,000 * 90%) is material so disclosure is required.	This is not a adjusting event as per IAS so management can't adjust this event in financial statements is they do so as an auditor we will give a qualification remark ( management didn't complied with the requirements of relevant accounting standard while preparing the final accounts ) for the same in our audit report.	As discussed earlier management needs to disclose this event by Notes to accounts, if they don't do so, we as an auditor will provide a qualification remark in our audit report.
ii)	As per above given definition this is also a non adjusting event because there is no evidence of this event at the time of period closing but since here accident took place due to negligence of company's driver it is probable that company have to pay damages to the family of deceased customers, so company have to show the amount of damages (if estimation is possible) through notes to accounts but if estimation is not possible management can only show the relevant note under foot notes.	This is not a adjusting event as per IAS so management can't adjust this event in financial statements is they do so as an auditor we will give a qualification remark ( management didn't complied with the requirements of relevant accounting standard while preparing the final accounts ) for the same in our audit report.	As discussed earlier management needs to disclose this event by Notes to accounts, if they don't do so, we as an auditor will provide a qualification remark in our audit report.

An entity shall not prepare its financial statements on a going concern basis if management determines after the end of the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so. since here it is mentioned in question these two situations don't have any effect on going concern assumption of entity we didn't require any adjustment for the same.