With reference to the appropriate auditing standard, discuss the different types of subsequent events

Question 1 - Discuss which substantive procedures should be executed so that the audit risk in relation to cost-of -sales is adequately addressed? In your response, identify and explain which financial report assertions are most relevant when substantively testing cost-of-sales.

Answer -

Tests of detail substantive procedure should be executed so that the audit risk pertaining to cost-of-sales can be adequately addressed. As part of tests of detail certain accounts pertaining to costs should be picked up by the auditor and checked in detail. Once the cost of sales regarding these accounts have been verified, the ratio of cost of sales to the total sales, estimated from these accounts, can be applied to total sales to get a realistic estimate ofcost of sales.

Financial reporting assertion that is most relevant when substantively testing cost of sales is Accuracy. Accuracy means that cost of sales given in the financial statements is accurate. Another assertion that is relevant is Completeness. Completeness means that all the cost of sales has been recognized and recorded. Cut-off assertion is also relevant. Cut-off assertion means that costs of sales have been recorded in the period in which they accrued. Occurrence assertion is also relevant. Occurrence means that cost of sales were actually incurred.

Question 2 - With reference to the appropriate auditing standard (ASA), discuss the different types of subsequent events. Assess the types of material subsequent events to determine what effect, if any, they may have on the financial report.

Answer -

ASA 560 is the relevant accounting standard pertaining to subsequent events. There are two types of subsequent events: Adjusting events and Non-adjusting events. Adjusting events are events that materialized after the end of financial year, but conditions regarding their occurrence or materialization existed before the end of financial year. In case of materialization or occurrence of an adjusting event, financial statements of the company for the year will have to be re-adjusted to account for the financial impact of the occurrence of the adjusting event.

Non-adjusting events are events that occurred after the end of the financial year and conditions regarding their materialization did Not exist before the end of the financial year. In the case of materialization of non-adjusting events No adjustments need to be made to the financial accounts or financial statements of the company. A footnote should be added in the financial report to inform about the occurrence of this event.

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Discuss different types of subsequent events

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