The company’s year-end was 30 September 2018.
On 3 December 2018, the audit of ABC Co is nearly complete and the financial statements and the audit report are due to be signed next week.
Additional information on two material events has just been presented to the auditor.
Event 1 – 10 October 2018
The springs in a new type of mattress have been found to be defective making the mattress unsafe for use. There have been no sales of this mattress; it was due to be marketed in the next few weeks. The company’s insurers estimate that inventory to the value of $750,000 has been affected. The insurers also estimate that the mattresses are now only worth $225,000. No claim can be made against the supplier of springs as this company is in liquidation with no prospect of any amounts being paid to third parties. The insurers will not pay ABC Co for the fall in value of the inventory as the company was underinsured. All of this inventory was in the finished goods store at the end of the year and no movements of inventory have been recorded post year-end.
Event 2 – 5 November 2018
Production at the DEF factory was halted for one day when a truck carrying dye used in colouring the fabric on mattresses reversed into a metal pylon, puncturing the vehicle allowing dye to spread across the factory premises and into a local river. The Environmental Agency is currently considering whether the release of dye was in breach of environmental legislation. The company’s insurers have not yet commented on the event.
a) Explain the responsibility of the auditor as at 3 December in relation to subsequent events.
b) For each of the two events in the information provided above:
i. Explain whether the event is an adjusting or non-adjusting event, and how it should be treated in relation to the financial report
ii. Identify and explain one audit procedure that the auditor should complete in relation to the event prior to signing the audit report
Assume that the date is now 20 December 2018, the financial statements and the audit report have just been signed, and the annual general meeting is to take place on 10 January 2019. The Environmental Agency has issued a report stating that ABC Cois in breach of environmental legislation and a fine of $900,000 will now be levied on the company. The amount is material to the financial statements.
c) In relation to this new event:
i. Explain the responsibility of the auditor
ii. The management of the client believe that this new information should be disclosed via a note to the financial statements. Do you agree with this action? Explain why or why not.
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