Bart, Felix & Jeter (BFJ) LLP completed the audit of Silver Sonic Ltd for the financial year ending 30 June 2021 on 15^th August 2021. The auditor's report was signed on 22^nd August and given to Silver Sonic's board of directors and management. Subsequently the company issued the signed audited reports on 30^th August 2021.

Based on risk assessment, BFJ set the materiality level at $100,000 which is 10% of net profit before tax.

 

The following issues were brought to the attention of BFJ after the financial year end.

1 August - A lawsuit was filed against Silver Sonic for damages that allegedly occurred before 30 June 2021. The plaintiff is suing Silver Sonic for $1 million. In the opinion of Silver Sonic's lawyers, there is a strong possibility that the plaintiff may win the lawsuit.

 

16 August - The auditor discovered that Three Hams, a debtor of Silver Sonic, went bankrupt on 15 August. The most recent sale to Three Hams had taken place on 15 June and no transactions had occurred since that date. The balance of Three Hams account is 8% of the Silver Sonics' net profits before tax.

 

25^th August - the auditor discovered that legal action commenced against Silver Sonic in relation to faulty products sold in June 2021.

 

5^th October - a fire burnt down one of Silver Sonic's warehouse, resulting in a loss of 30% of the inventory that was on hand at that date.

 

REQUIRED:

a.       Identify which of the subsequent events are adjusting events and which are non-adjusting events, explaining clearly your reason for your assessment for each event                                

 b.      For each of the subsequent events identified, discuss what effect each would have on the financial statements, and what effect each would have on the audit opinion if management refuses to make changes to the financial statement. Give reasons for your assessment. In your discussion, include the type of opinion that is likely to be issued for each.                                                             

c.       Explain the auditor's responsibility in relation to the subsequent event that occurred after the auditor's report was signed but before the audited financial statements were released.

Answer rating: 100% (QA)

a Subsequent Events 1 August 1 Lawsuit filed against Silver Sonic for damages This is a nonadjusting event because it occurred after the financial yearend and does not provide additional information a... View the full answer