Question

Your client is Hobartcorp Ltd, a diversified business operating throughout Australia. Year-end was 30 June 2016, the auditor’s report was signed on 31 July 2016 and the financial statements were mailed to shareholders on 14 August 2016.

During your subsequent events review, you noted the following independent and material items:

1. Hobartcorp has been involved in a legal dispute with a competitor for a number of years. The dispute relates to alleged breaches of copyright by Hobartcorp. On 27 July, you discovered that Hobartcorp had settled the legal action out of court on terms more favourable than expected.

2. As for (1) above, except that the legal action was settled on 5 August.

3. On 10 July, one of Hobartcorp’s major product lines developed a fault that rendered the product unusable. Hobartcorp became aware of the fault on 30 July. Although the fault posed no safety risks to consumers, Hobartcorp decided to launch a full product recall on the following day.

4. On 30 July 2016, the Bureau of Meteorology issued a cyclone warning for parts of Far North Queensland. Hobartcorp has a large sugar cane plantation in this area. On 2 August, the cyclone hit, wiping out about 90% of the crop.

5. In early June, one of Hobartcorp’s largest debtors informed Hobartcorp that it was experiencing serious financial difficulties. On 5 July, Hobartcorp was informed that the debtor had gone into receivership. Preliminary reports suggest Hobartcorp will recover only 10 cents in the dollar of the outstanding debt

REQUIRED: (a) Outline the key additional procedures you should have performed in relation to each of the above events.

(b) What actions should you have recommended to management in relation to each of the above events?

Answer 1

An event after reporting period is an adjusting event, if it provides evidence of condition existing at the end of the reporting period. period between 30 june to 31 july is an event occuring after reporting period. In case no 1 the dispute was setteled on 27th july provides the evidence of the liability existing at the end of reporting period. therefore the event will be considered as adjusting event and accordingly will be adjusted in financial statement.

In point no 2 settlement of legal action will not be relevant as the financial statement is adjusted in point no 1 itself.

In point no 3 and 4 both the events are non adjusting events occuring after the reporting period, if the events are material and influence the financial decision stakeholders or effect the goingconcern of the company then the same should be disclosed in the directors report.

In case no 5 it was discovered that only 10 % of debtor will be recovered , this confirms that the expected credit loss at the of the reporting period on entity needs to adjust the loss allownace in order to disclose the net carrying amount of debtors.