The financial year of Sherlon Ltd ended on 30 June 2015. Your auditor’s report w
ID: 2424966 • Letter: T
Question
The financial year of Sherlon Ltd ended on 30 June 2015. Your auditor’s report was signed on
25 August and the financial statements were issued on 10 September. Listed below are events
that occurred or were discovered after the end of the financial year. Assume that each has a
“material” effect on the financial statements.
1. 1 August — A lawsuit was filed against Sherlon for damages that allegedly
occurred before 30 June. In the opinion of Sherlon’s lawyers, there is a danger of
a significant loss.
2. 15 August — You discovered that Karlo, a debtor of Sherlon went bankrupt on
10 August. The most recent sale had taken place on 25 May and no transactions
had occurred since that date.
3. 1 September — You discovered that a legal action commenced against Sherlon in
relation to a faulty product sold in May 2015.
4. 15 September — A fire burnt down one of Sherlon’s warehouses, resulting in a
loss of 30% of the inventory that was on hand at that date.
5. 30 September — You discovered that Kingberly, a debtor of Sherlon, went
bankrupt on 15 July. Sales to Kingberly were all made before the end of the year
.
6. 30 September — You discovered that Allen, a debtor of Sherlon, went bankrupt
on 25 September. The sale had taken place before the end of the year, but the
amount had appeared collectable at the date on which the auditor’s report was
signed.
Required:
(a) Indicate your responsibilities for each of the above events.
(b) Indicate the type of disclosure (if any) you would recommend in relation to each of the
six events
Explanation / Answer
Answer
Answer (a) & (b)
Events after reporting period are those events favourable and unfavourable that occur between the end of the reporting period and the date when the financial statements are approved by the board of directors in case of a company.
Events are reporting period can be of two type
1. Adjusting events: Events that provide evidence of conditions that existed at the end of the reporting period
2. Non adjusting events : Events that are indicative of conditions that arose after the reporting period
It also requires that entity should not prepare its financial statements on a going concern basis if events after the reporting period indicates that the going concern assumption is not appropriate.
1. 1 August — A lawsuit was filed against Sherlon for damages that allegedly
occurred before 30 June. In the opinion of Sherlon’s lawyers, there is a danger of
a significant loss.
Answer: Here evidence of conditions existed at the end of the reporting period (30 June). So It is Adjusting event. Company should make provision of estimated significant loss in financial statements.
2. 15 August — You discovered that Karlo, a debtor of Sherlon went bankrupt on
10 August. The most recent sale had taken place on 25 May and no transactions
had occurred since that date.
Answer: Karlo, a debtor of Sherlon went bankrupt on 10 August. Here indicative of conditions arose after the reporting period (30 June). It is non-adjusting event. Company should disclose amount of possible bad debt because of bankruptcy of Karlo in notes to account.
3. 1 September — You discovered that a legal action commenced against Sherlon in
relation to a faulty product sold in May 2015.
Answer: Faulty product was sold in May 2015. Here evidence of conditions existed at the end of the reporting period (June 30) but your auditor’s report was signed on 25 August. You discovered that a legal action commenced against Sherlon in relation to a faulty product as on 1 September (i.e. after date of approval of Financial statements by the board of directors) .So this event will be recognised in next reporting year.
4. 15 September — A fire burnt down one of Sherlon’s warehouses, resulting in a
loss of 30% of the inventory that was on hand at that date.
Answer: Your auditor’s report was signed on 25 August. A fire burnt down one of Sherlon’s warehouses, resulting in a loss of 30% of the inventory that was on hand as on 15 September (i.e. after date of approval of financial statements by the board of directors). So this event will be recognised in next reporting year.
5. 30 September — You discovered that Kingberly, a debtor of Sherlon, went
bankrupt on 15 July. Sales to Kingberly were all made before the end of the year
Answer: Your auditor’s report was signed on 25 August. You discovered that Kingberly, a debtor of Sherlon, went bankrupt as on 30 September (i.e. after date of approval of financial statements by the board of directors). So this event will be recognised in next reporting year.
6. 30 September — You discovered that Allen, a debtor of Sherlon, went bankrupt
on 25 September. The sale had taken place before the end of the year, but the
amount had appeared collectable at the date on which the auditor’s report was
signed.
Answer: Your auditor’s report was signed on 25 August. You discovered that Allen, a debtor of Sherlon, went bankrupt as on 30 September (i.e. after date of approval of financial statements by the board of directors). So this event will be recognised in next reporting year.
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