CA J is working as internal auditor in JKL Limited, a non-listed company. The responsibilities of internal auditor include reviewing financial…

CA Intermediate · Auditing and Ethics · MTP · May 2024
CA J is working as internal auditor in JKL Limited, a non-listed company. The responsibilities of internal auditor include reviewing financial information and performing detailed tests on transactions and balances. He is also responsible for compliance with laws, regulations and external requirements. During the year 2022-23, services of an employee of company were terminated. The said employee had filed a suit against the company in respect of certain compensation dues amounting to 10 lakhs which were not paid to him. Based upon advice of legal counsel, the company had made a provision of 10lacs in financial statements for year 2022-23. However, somewhere in June 2023, there is an out of court settlement between company and employee for 6 lakhs. The statutory audit of company is under progress and audit report has not yet been finalized. How internal auditor should have proceeded in situation?

Suggested Answer and Working Notes:

Subsequent events are events occurring between the date of financial statements and the date of the auditor's report and facts that become known to the auditor after the date of the auditor's report. In the given case, the company had already made provision of 10lakhs in financial statements for year 2022-23. However, there is an out of court settlement between the company and employee for 6lakhs. It is an example of event which provides evidence of conditions that existed at the date of financial statements i.e. 31st March, 2023. It provides evidence on adjustment in provision amount already made in financial statements. Therefore, internal auditor should ask management to revise provision downwards to 6 lakhs so that financial statements are in accordance with applicable accounting standards.

Topics: Completion and Review

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