An unqualified audit report normally states that the financial statements to which the report refers give a true and fair view of the state of the company's affairs at the Statement of Financial Position date and of its profits for the year ended on that date.

Bearing in mind the above statement the directors of Midland Builders Ltd have drawn up accounts for the year ended 30 April 2X11 which do not reflect certain events which have occurred since the year end. They justify their action on the grounds that the books and records correctly reflect what was known at the year end. The following are the events which are not reflected in the draft financial statements (in all cases the figures are material).

(i) At ameeting in May 2X11 the local planning authority rejected the company’s plans to develop one of its freehold sites. The site was included in the company’s assets at its cost of £500 000 but it is likely that the site will have to be sold and will realize no more than £350 000 because of its reduced development potential.

(ii) Following the completion of a long-term contract in June 2X11 it has been possible to calculate the final profit on the contract. It appears that the profit accrued at 30 April 2X11 was underestimated by £220 000. This arose from a material error at 30 April 2X10 in estimating the amount of work still to be completed.

(iii) A public company in which Midland Builders Ltd held shares as a long-term trade investment announced in June 2X11 that it was going into liquidation. The investment is shown in the Statement of Financial Position at its historical cost of £140 000 and a note of its stock market value at 30 April 2X11 of £146000 is included in the notes to the accounts. It now appears likely that the investment will prove worthless.

Required:

(a) Discuss generally the effect which facts and events relating to a period but becoming known or occurring after the end of an accounting period can have on the financial statements for the period in question. Comment on the directors’
view that the books and records reflect what was known at the year end and that no further adjustments are required.

(b) List FOUR detailed procedures which an auditor should adopt in order to detect post Statement of Financial Position events.

(c) In respect of each of the three events described above, list the detailed work which the auditor should undertake and comment on the acceptability of the company’s decision not to adjust its financial statements:
(i) refusal of planning permission;
(ii) completion of long-term contract;
(iii) liquidation of trade investment.