Panda Co manufactures chemicals and has a factory and four offsite storage locations for finished goods.  Panda Co’s year end was 30 April 2013. The final audit is almost complete and the financial statements and audit report are due to be signed next week. Revenue for the year is $55 million and profit before taxation is $5•6 million.

The following two events have occurred subsequent to the year end. No amendments or disclosures have been made in the financial statements.

Event 1 – Defective chemicals

Panda Co undertakes extensive quality control checks prior to despatch of any chemicals. Testing on 3 May 2013 found that a batch of chemicals produced in April was defective.

The cost of this batch was $0•85 million. In its current condition it can be sold at a scrap value of $0•1 million. The costs of correcting the defect are too significant for Panda Co’s management to consider this an alternative option.

Event 2 – Explosion

An explosion occurred at the smallest of the four offsite storage locations on 20 May 2013. This resulted in some damage to inventory and property, plant and equipment. Panda Co’s management have investigated the cause of the explosion and believe that they are unlikely to be able to claim on their insurance.

Management of Panda Co has estimated that the value of damaged inventory and property, plant and equipment was $0•9 million and it now has no scrap value.

The directors do not wish to make any amendments or disclosures to the financial statements for the explosion (event 2).

Required:

Explain the impact on the audit report should this issue remain unresolved. (3 marks)