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Question 5d

You are the audit senior responsible for the audit of Have A Bite Co, a company that runs a chain of fast food restaurants. You are aware that a major risk of their sector is that poor food quality might result in damage claims by customers.

You had satisfied yourself at the interim audit that the company’s control risk as regards purchases of food and its preparation in the kitchen was low. However, during your final audit it comes to your attention that one month before the year-end, a customer has sued the company for personal injury caused by food poisoning, claiming an amount of $200,000 in compensation.

This amount is material to the stated profit of the company, but management believes that it has good defences against the claim.

Following your audit you have concluded that there is a possibility, but not a probability, that the claim will be successful. However, management have decided not to make a provision or disclosure in the financial statements in respect of this matter.

Required:

Describe how the matter should be reported in the financial statements and explain the effect on your audit report.