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CA Intermediate · Auditing and Ethics · Completion and Review

After the balance sheet date of 31 March but before the auditor signs the report on 20 May, Sahyadri Foods Ltd's main warehouse in Pune is destroyed by fire on 5 May. The loss is material, the going concern assumption is unaffected, and the fire is not related to conditions existing at the balance sheet date. What should the auditor ensure under SA 560?

The auditor should ensure the fire is disclosed as a non-adjusting subsequent event, giving its nature and estimated financial effect, without adjusting the year-end figures. The loss reflects conditions arising after 31 March, so adjustment is inappropriate, though an Emphasis of Matter may be used for emphasis.

  1. AThe financial statements are adjusted to recognise the loss in the year ended 31 March
  2. BThe event is ignored because it occurred after the balance sheet date
  3. CThe auditor withdraws from the engagement as the event is material
  4. DThe event is appropriately disclosed in the financial statements as a non-adjusting event, and the auditor considers an Emphasis of Matter if relevantCorrect

Explanation

The fire arose after the balance sheet date and does not give evidence of conditions at that date, so it is a non-adjusting event. Adjustment would be wrong. Because it is material, disclosure of its nature and estimated financial effect is needed, and the auditor may draw attention through an Emphasis of Matter paragraph.

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