ACCA AA Syllabus E. Review And Reporting - Adjusting Events - Past Papers ^{3 / 4}

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.

Required:

For each of the two events above:

(i) Explain whether the financial statements require amendment; and

(ii) Describe audit procedures that should be performed in order to form a conclusion on any required amendment.

Note: The total marks will be split equally between each event. (12 marks)

Humphries Co operates a chain of food wholesalers across the country and its year end was 30 September 2011. The final audit is nearly complete and it is proposed that the financial statements and audit report will be signed on 13 December. Revenue for the year is $78 million and profit before taxation is $7•5 million. The following events have occurred subsequent to the year end.

Receivable

A customer of Humphries Co has been experiencing cash flow problems and its year-end balance is $0•3 million. The company has just become aware that its customer is experiencing significant going concern difficulties. Humphries believe that as the company has been trading for many years, they will receive some, if not full, payment from the customer; hence they have not adjusted the receivable balance.

Lawsuit

A key supplier of Humphries Co is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by them is $1 million. This has been disclosed as a contingent liability in the notes to the financial statements; however correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Humphries Co of $0•6 million. It is likely that the company will agree to this.

Warehouse

Humphries Co has three warehouses; following extensive rain on 20 November significant rain and river water flooded the warehouse located in Bass. All of the inventory was damaged and has been disposed of. The insurance company has already been contacted. No amendments or disclosures have been made in the financial statements.

Required:

For each of the three events above:

(i) discuss whether the financial statements require amendment;

(ii) describe audit procedures that should be performed in order to form a conclusion on the amendment;

(iii) explain the impact on the audit report should the issue remain unresolved. (15 marks)

EastVale Co manufactures a range of dairy products (for example, milk, yoghurt and cheese) in one factory. Products are stored in a nearby warehouse (which is rented by EastVale) before being sold to 350 supermarkets located within 200 kilometres of EastVale’s factory. The products are perishable with an average shelf life of eight days. EastVale’s financial statements year-end is 31 July.

It is four months since the year-end at your audit client of EastVale and the annual audit of EastVale is almost complete, but the auditor’s report has not been signed.

The following events have just come to your attention. Both events occurred in late November.

(a) A fire in the warehouse rented by the company has destroyed 60% of the inventory held for resale.

(b) A batch of cheese produced by EastVale was found to contain some chemical impurities. Over 300 consumers have complained about food poisoning after eating the cheese. 115 supermarkets have stopped purchasing EastVale’s products and another 85 are considering whether to stop purchasing from EastVale. Lawyers acting on behalf of the consumers are now presenting a substantial claim for damages against EastVale.

Required:

In respect of EACH of the events at EastVale Co mentioned above:

State, with reasons, whether or not the financial statements for the year-end require amendment (6 Marks)