Question
Michael C, a certified accountant, is examining the financial report of the Diego Corporation Ltd. For the period ended 31 December 2020. He plans to
Michael C, a certified accountant, is examining the financial report of the Diego Corporation Ltd. For the period ended 31 December 2020. He plans to complete the field-work and sign the auditors' report on 15 March 2021. Michael's audit work is primarily designed to obtain evidence that will provide a reasonable assurance that the Diego Corporation's 31 December 2020 financial report presents fairly the financial positions, results of operation and cash flows of that enterprise following applicable Accounting Standards. Michael is concerned, however, about events and transaction that occur after 31 December 2020, since he does not have the same degree of assurance for such events as for those occurred in the period ending 31 December 2020.
These events have come to his attention:
i. On 5 February 2021, Diego issued and sold to the general public 2 million in convertible bonds.
ii. On 15 January 2021, the company settled and paid a personal injury claim of a former employee as the result of an accident that occurred in March 2020. The company had not previously recorded a liability for the claim.
iii. On 25 January 2021, the company agreed to purchase for cash the outstanding share of Porter Electrical Co. Ltd. The acquisition is likely to double the sales volume of Deigo.
Required:
a) Explain what is commonly referred to in auditing as a subsequent event. Illustrate the TWO (2) types of subsequent events that require consideration by the management of Diego Corporation and evaluation of Michael. Support your answer with one example for each type (your example should not be similar to the three events above) (13 marks)
b) For each of the events or transactions above, indicate ONE audit procedure that should have brought the item to the attention of the auditor and the form of disclosure required in the financial report. Include the reasons for such disclosures. (12 marks)
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