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I have a question regarding ISA 560 and IAS 10
I know, litigation against the entity started ‘after’ the reporting date, in respect of events that occurred ‘After’ the end of reporting period is a non-adjusting event and only disclosure is required.
But what would be the treatment,
if litigation against the entity ‘after’ the reporting date, in respect of events that occurred ‘After’ the end of reporting period and court decides the case against the entity and a payment has to be made for the settlement (amount is material to the financial statement)
or
If a substantial penalty is imposed by Government (eg: environmental agency) in respect of an incident that occurred after the reporting date and the amount of penalty is material.Regards
HarisIn this case the decision of the court will be discussed with the mgt due to the materiality of the fine. The auditor wil request for the FS to be adjusted to the tune of the fine and if mgt disagrees,, the auditor will issue an adverse opinion subject to the disagreement.
i think such occurance of claim require disclosure in recent F.S only . and next year F.S should contain provision or expense for this claim…….
@kayfabuacca: Although I am still confused about the treatment of this particular situation…
But I think if the amount of settlement payment/penalty requires an adjustment and management refuses to do so, then a ‘Modified’ opinion will be issued. An ‘Adverse’ opinion will only be issued if misstatement is both Material and Pervasive (e.g: Entity can continue as a going concern)If the law case were in respect of an event that occurred after the end of the reporting date and, say, the court awarded $1m against the company, there would be no adjustment (ie no provision) in the FS. Everything to do with the event is in another accounting period – like paying next year’s wages.
If material to the proper appreciation of the FS, it would be disclosed by way of note and perhaps also highlighted with an emphasis of matter paragraph in the audit report. That is not a modified opinion.
@gromit: Thank you very much for your assistance. 🙂
I had the same treatment in mind, but I got confused after solving BPP Revision Kit ‘question no 96- ZeeDiem’.– Specifically part (b) of this question
In this question, the Entity is under investigation for Chemical leaked into a local rive that occurred ‘after the reporting date’ and this investigation requires only disclosure as it is non-adjusting event (Part a of the question).In part b,it is stated that after the report has been ‘signed by the auditor’, the Environmental Agency has imposed a fine of $900,000 (this amount is material).
According to the answer given in BPP kit, although auditors has no obligation to perform audit procedures regarding the financial statements after their report has been singed. The auditor must consider whether accounts need amendment. In this case as the amount of the fine imposed is material, the accounts should be amended. If management amends the accounts, the auditors must issue a amended report.
If management does not amend the FS, the auditor will need to take actions to prevent reliance on the auditor’s report.(This part (b) got me confused and I am still confused)
The leak occurred after the reporting date, so the leak would be disclosed, the report is signed then there is a fine of $900,000. The adjustment being talked about here is whether or not to disclose that the fine is $900,000 (previously they could not have said that) ie whether the disclosure chould be amended. The ACCA model answer is:
The notification of a fine has taken place after the audit report has been signed.
Audit procedures will include:– Discuss the matter with the directors to determine their course of action.
– Where the directors decide to amend the disclosure in the financial statements, audit the amendment and then re-draft and re-date the audit report as appropriate.
– Where the directors decide not to amend the disclosure in the financial statements, the auditor can consider other methods of contacting the members. For example, the auditor can speak in the upcoming general meeting to inform the members of the event.
– Other options such as resignation seem inappropriate due to the proximity of the annual general meeting (AGM).
Resignation would allow the auditor to ask the directors to convene an extraordinary general meeting, but this could not
take place before the AGM so the auditor should speak at the AGM instead.
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