Learning Objectives

Required:
Identify the other matters that Dingle’s representation letter should specifically confirm.

20. 
    Related Parties. D’orsay Dore, SA is being audited by Clement & Grandcourt, Expert Comptables. During the course of the audit Clement & Grandcourt discover D’orsay Dore sold inventory to Parisienne de Fedora for 90-day terms, three times the typical payment period required, and the payments went directly to the president of D’orsay Dore, not to the accounting department which was the usual practice. Industriel Cuir supplies over 40 percent of the raw materials D’orsay purchases whereas no other supplier provides more than 5 percent of raw materials. D’orsay management says that they do so much business with Industriel Cuir because they provide D’orsay management assistance at no charge.
    

D’orsay’s business is greatest in the last month before the fiscal year end when they book 30 percent of their sales, some years in the last week before closing. D’orsay Dore has provided Clement & Grandcourt with a management representation letter that states that there are no related party transactions.

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Required:
QUESTIONS, EXERCISES AND CASES

1. 
   Should Clement & Grandcourt take D’orsay Dore’s word when they say there are no related parties? Why?
   
2. 
   List the circumstances at D’orsay Dore that may indicate the existence of unidentified related parties.
   
3. 
   What audit procedures should Clement & Grandcourt perform to investigate the possibility of related parties?
   

3. 
   Review for Subsequent Events
   

23. 
    Subsequent Facts and Events. The following unrelated events occurred after the balance sheet date but before the audit report was prepared:
    

1. 
   The granting of a retrospective pay increase to selected employees.
   
2. 
   Receipt of a letter from the tax authorities stating that additional income tax is due for a prior year.
   
3. 
   Filing of an antitrust suit by the federal government.
   
4. 
   Declaration of a stock dividend.
   
5. 
   Sale of a fixed asset at a substantial profit.
   

Required:

1. 
   Define “review for subsequent events” and “subsequent events”
   
2. 
   Identify what procedure to identify events the auditor might have used to bring each of these items to the auditor’s attention. (Hint: See Illustration 11.8.)
   
3. 
   Discuss the auditor’s responsibility to recognize each of these in connection with the audit report.
   

[Adapted and reprinted with permission of AICPA. Copyright © 2000 & 1985 by American Institute of Certified Public Accountants.]

23. 
    Subsequent Facts and Events. In connection with their audit of the financial statements of Swan Mfg. Corporation of Ayutthay, Thailand for the year ended December 31, 20X4, Virameteekul, Kanchana & Banharn, Chartered Accountants (CA) review of subsequent events disclosed the following items:
    

1 January 3, 20X5: The government approved a plan for the construction of an express highway. The plan will result in the expropriation of a portion of the land owned by Swan Mfg. Corporation. Construction will begin in late 20X5. No estimate of the condemnation award is available.
2 January 4, 20X5: The funds for Baht 1,000,000 loan to the corporation made by the company president, Somsak Na Lan, on July 15, 20X4, were obtained by him from a loan on his personal life insurance policy. The loan was recorded in the account “loan from officers.” Mr. Somsak’s source of the funds was not disclosed in the company records. The corporation pays the premiums on the life insurance policy, and Mrs. Somsak, wife of the president, is the beneficiary.
3 January 7, 20X5: The mineral content of a shipment of ore, en route on December 31, 20X4, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to raw material inventory and a credit to accounts payable in the amount of Baht 824,000. The final liability to the vendor is based on the actual mineral content of the shipment.
4 January 31, 20X5: As a result of reduced sales, production was curtailed in mid- January and some workers were laid off. On February 5, 20X5, all the remaining workers went on strike. To date the strike is unsettled.

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CHAPTER 11 COMPLETING THE AUDIT