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CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

While auditing Greenfield Foods Ltd, the auditor finds that a major customer, Mehta Retail, which owes Rs 40 lakh, has filed for insolvency in April, after the year end but before the financial statements are approved. The balance was fully included in receivables at 31 March. How should the auditor view this?

The insolvency should be treated as an adjusting event because it confirms a condition that existed at the balance sheet date. The auditor should ensure a provision for the doubtful receivable is made in the current year's statements, as events up to the report date must be considered.

  1. AAs a non-adjusting event requiring only disclosure
  2. BAs an adjusting event, since it provides evidence of conditions existing at the balance sheet date, requiring provision for the doubtful debtCorrect
  3. CAs an event to be ignored because it occurred in the next financial year
  4. DAs a matter to be reported only in the next year's audit

Explanation

Insolvency of a debtor after the balance sheet date normally confirms the debtor's poor financial condition that existed at the reporting date, so it is an adjusting event. Evidence obtained between year end and the audit report date must be considered under SA 560. Treating it as non-adjusting or deferring it understates the provision.

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