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Bullfinch.com is a website design company whose year end was 31 October 2014. The audit is almost complete and the financial statements are due to be signed shortly. Revenue for the year is $11·2 million and profit before tax is $3·8 million. A key customer, with a receivables balance at the year end of $283,000, has just notified Bullfinch.com that they are experiencing cash flow difficulties and so are unable to make any payments for the foreseeable future. The finance director has notified the auditor that he will write this balance off as an irrecoverable debt in the 2015 financial statements.
Required: (i) Explain whether or not the 2014 financial statements require amendment
The balance of $283,000 is material (nearly 7.4% of profit and 2.5% if revenue).
It was on the SOFP at year end but the new information tells us that this blance is probably worthless ie this is an event that tells us more about the situation at year end.
Therefore it is an adjustable event and the receivable shoudl be witten off as at 31/10/2014.
THANKS A LOT
WHAT IF THE AUDIT REPORT HAS BEEN ISSUED?
AND ARE THERE EVENTS WHICH BY NATURE INFLUENCE ADJUSTMENTS DESPITE THE DATES THEY OCCURRED?If the FS had been issued, the new information can show that the FS contained a meterial misstatement. The auditors shoud ty to persuade the directors to reissue corrected FS. If they don’t, the auditors can circulate information to shareholders (very rare).
I don’t understand your second point. An event either happens before or after the period end. If before year end, it is not a post BS event. If after year-end it is and is treated either as non-adjusting or adjusting.
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