Module: Audit and Assurance
Seminar 11 – Subsequent Events
The questions you get relating to Subsequent Events will test your knowledge on the
meaning of Contingency and Provisions, Favourable/Unfavourable and
Adjusting/Non-Adjusting events. You would need to have a good understanding of
the terminologies in this area.
Typically, when you get a question on subsequent events, it tends to tie to an audit
report question as well.
Question 2
You are involved in the audit of Better Homes Plc, a UK based company that builds
residential homes for sale to the public.
The income statement for the year ended 31 December 2016 shows a turnover of
£22million with a net profit of £8million.
You have read in the trade press that the company were being investigated by the
Health & Safety Inspectorate because the wiring in some of the new homes were
found to be defective and in some cases fires had started causing damage to the
properties and caused injury to the homeowners.
The article mentioned that a joint lawsuit was being instigated by the homeowners
concerned for compensation in respect of injury and damage to their properties. The
total value of the lawsuit, if successful, is estimated to be in the region of £7m - £10m
plus legal costs.
You have discussed the matter with management who stated that they were aware
of the lawsuit but there was no need to amend the accounts in any way because
they have been advised by their lawyers that the company had ‘no case to answer’.
In addition, they mentioned that they were suing the wire manufacturer for £4million
and were confident that they would succeed in this action.
Question A
Explain the difference between a contingency and a provision.
The difference between the two is that with one of them you know a lot about
and the other you are unsure about.
Seminar 11 – Subsequent Events
The questions you get relating to Subsequent Events will test your knowledge on the
meaning of Contingency and Provisions, Favourable/Unfavourable and
Adjusting/Non-Adjusting events. You would need to have a good understanding of
the terminologies in this area.
Typically, when you get a question on subsequent events, it tends to tie to an audit
report question as well.
Question 2
You are involved in the audit of Better Homes Plc, a UK based company that builds
residential homes for sale to the public.
The income statement for the year ended 31 December 2016 shows a turnover of
£22million with a net profit of £8million.
You have read in the trade press that the company were being investigated by the
Health & Safety Inspectorate because the wiring in some of the new homes were
found to be defective and in some cases fires had started causing damage to the
properties and caused injury to the homeowners.
The article mentioned that a joint lawsuit was being instigated by the homeowners
concerned for compensation in respect of injury and damage to their properties. The
total value of the lawsuit, if successful, is estimated to be in the region of £7m - £10m
plus legal costs.
You have discussed the matter with management who stated that they were aware
of the lawsuit but there was no need to amend the accounts in any way because
they have been advised by their lawyers that the company had ‘no case to answer’.
In addition, they mentioned that they were suing the wire manufacturer for £4million
and were confident that they would succeed in this action.
Question A
Explain the difference between a contingency and a provision.
The difference between the two is that with one of them you know a lot about
and the other you are unsure about.
