Required
(a) Explain your responsibilities with respect to the cafeteria fire.
(b) How will this event be handled in the financial report and the audit report?
(a) The cafeteria fire took place ‘last week’. As today’s date is 13 July, the date of the fire must have been post 30 June, making it a subsequent event. The auditor is required by ASA 560.6 (Subsequent Events) to perform audit procedures to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial report (30 June) and the date of the auditor’s report (in three weeks’ time) that require adjustment of, or disclosure in, the financial report have been obtained. Therefore, the auditor has a duty to plan and execute procedures designed to detect a subsequent event such as a fire on the premises. The auditor must then determine whether the event is appropriately reflected in the financial report in accordance with the standard. Also, as per ASA 560.9, the auditor shall request management and those charged with governance to provide written representations (in accordance with ASA580) that the fire which occurred subsequent to the date of financial report and for which it requires disclosure have been disclosed in the financial report as at 30 June.
(b) The fire would be disclosed by way of Note to the Financial Report. The accounts would not be adjusted because the event is a Type 2 Event (those which provides evidence of conditions that arose after the date of the financial report. If the event is properly disclosed, the auditor would issue an unqualified audit report. The auditor would consider whether an emphasis of matter paragraph would be included in the audit report to draw the reader’s attention to the relevant Note in the Financial Report.
An unqualified report with emphasis of matter paragraph would be appropriate if the fire was considered to be a major catastrophe that has, or would have, a significant effect on the entity’s financial position (and it had been properly disclosed). The fire damage is not covered by insurance, but it is unlikely to cause such damage that the event has a significant effect on the entity’s financial position on its own. However, in combination with other events, such as those casting doubt on the entity’s ability to continue as a going concern, it could have such an effect.