1. Fraud
Clearly the fraud committed by the payables ledger clerk has been ongoing
during, and beyond the financial year. Fraud, error and other irregularities that
occur prior to the year-end date – but which are only discovered after the yearend
– are adjusting items, and therefore the financial statements would require
amendment to take account of the fraudulent activity up to the year-end.
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2. Legal proceedings
At the year-end, the company had made disclosure of a contingent liability.
However, subsequent to the year-end (29 October 2010), the court found the
company liable for breach of contract. The legal proceedings were issued on
20 September 2010 (some 10 days before the year-end). This is, therefore,
evidence of conditions that existed at the year-end. IAS 10 requires the result
of a court case after the reporting date to be taken into consideration to
determine whether a provision should be recognised in accordance with IAS
37, Provisions, Contingent Liabilities and Contingent Assets at the year-end. In
this case, the financial statements will require adjusting because:
? the conditions existed at the year-end
? the recognition criteria for a provision in accordance with IAS 37 have
been met.
3. Loss of customer
A customer ceasing to trade so soon after the reporting period indicates nonrecoverability
of a receivable at the reporting date and therefore represents an
adjusting event under IAS 10, Events After the Reporting Period. Assets should
not be carried in the statement of financial position at any more than their
recoverable amount and, therefore, an allowance for receivables should be
made.
Auditor’s responsibilities
So far we have considered the financial reporting aspects relating to events
after the reporting period. The second part of this article will now consider the
auditor’s responsibility in relation to ensuring all events occurring between the
reporting date and the (expected) date of the auditor’s report have been
adequately taken into consideration, and sufficient appropriate audit evidence
has been gathered to achieve the objective. It is important that where students
have studied Paper F3, Financial Accounting, knowledge of accounting
standards such as IAS 10 is not set aside or forgotten when it comes to papers
such as Paper F8, Audit and Assurance. There is a very close relationship
between accounting standards and auditing standards.
ISA 560, Subsequent Events outlines the auditor’s responsibility in relation to
subsequent events. For the purposes of ISA 560, subsequent events are those
events that occur between the reporting date and the date of approval of the
financial statements and the signing of the auditor’s report.
The overall objective of ISA 560 is to ensure the auditor performs audit
procedures that are designed to obtain sufficient appropriate audit evidence to
give reasonable assurance that all events up to the (expected) date of the
auditor’s report have been identified, properly accounted for/r disclosed in the
financial statements.
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ISA 560 also covers events that are discovered by the auditor after the date of
the auditor’s report but before the financial statements are issued.
Audit procedures
In Example 1 above, we identified that fraud and the legal proceedings were
adjusting events that gave rise to an adjustment within the financial statements
as at 30 September 2010. We also identified that the loss of the customer was
also an adjusting event, but as the value of the receivable was considered
immaterial, no adjustment was made to the financial statements. Let us
expand on the requirement in Example 1 as follows:
Required:
(b) Describe the audit procedures that should be performed to obtain
sufficient appropriate evidence that the subsequent events have been
appropriately treated in the financial statements.
Answer:
Candidates who are faced with scenarios such as those in Example 1 should
think about the information needed that would prompt an accountant or
finance director to go back to the year-end and retrospectively amend the
financial statements. You could interpret the question as asking ‘what
information would I need in real-life to justify a provision or disclosure within
the financial statements before making such provision or disclosure?’ Where
candidates have studied Paper F3 and have knowledge of IAS 10, thinking
about the provisions contained in this IAS 10 will often lead you into thinking
about the audit evidence you would need to satisfy yourself that the
requirements in IAS 10 have been met, as well as offering ideas as to how you
would go about obtaining this evidence for the audit file.
Fraud
Fraud risk factors are covered in ISA 240, The Auditor’s Responsibilities Relating
to Fraud in an Audit of Financial Statements. The fact that fraud has occurred at
Gabriella Enterprises Co will increase the risk of material misstatement due to
fraud.
The audit procedures to be performed to ensure the fraud has been correctly
accounted for in the financial statements may include:
? Recalculation of the amounts involved.
? Discussions with management as to how such a fraud occurred and why
it took six months’ to discover the fraud (controls should prevent, detect
and correct material misstatements on a timely basis).
? Establishing how the bookkeeper discovered the fraud and what controls
(if any) contain weaknesses to allow the employee to commit the fraud.
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Note that employee fraud usually involves the manipulation of controls,
whereas management fraud often involves the overriding of controls.
? Performing substantive procedures on journal entries (particularly those
close to, or at, the year-end).
? Confirming directly with suppliers the account activity for the period
under audit.
? Reviewing the purchase invoices and being on alert for any ‘doctored’ or
‘copy’ invoices and making enquiries as to their authenticity.
? A review of human resources files for evidence of disciplinary
proceedings taken against the employee. This will also confirm
compliance with laws and regulations, particularly in relation to
employment legislation and the withholding of monies.
? Testing of other controls to identify other weaknesses that may indicate
employee or management fraud.
? Obtaining written representations from management concerning the
fraud.
? Test checking after-date cash for evidence of reimbursements by the
employee, such as the withheld wages/salaries by the entity.
? Discussions with the entity’s legal advisers as to the possibility of
reimbursement of the balance of the misappropriated funds.
