Question

The audit team completed the field work on 22 July 2020. The audit report was signed on 5 August by Charles Kirby. The financial statements were signed by the BoD on the same day, which was subsequently released to shareholders on 12 August 2020. During the review of subsequent events, you noted the following material events:

1) Cook’s Furniture Ltd has purchased a property in Adelaide Australia on 20 July 2020 for AUD 3,200,000 and intended to use it as a showroom. The company borrowed AUD 2,000,000 to finance the purchase. The company plans to take the opportunity of the current low interest rate to expand its property acquisitions

. 2) The company applied for Wages Subsidy scheme on 4 April and was granted 70,000. On 7 August, the BoD received a letter from the government requesting the company to pay back the Wages Subsidy with interests citing the reason that the company did not qualify.

3) The company was experiencing delays in its supply chain from overseas suppliers from March to May 2020, which resulted longer lead times in filling customer orders. On 31 July, a customer filed a lawsuit against the company suing for damages of $300, 000. Because of the delay, this customer could not open business on time and suffered income loss. REQUIRED:

For each of the above subsequent event:

a) Explain the potential impact on the 2020 financial statements.

b) Discuss audit procedures that may verify the potential impact on the 2020 financial statements.

Answer 1

Answer :

Audit Impact on Subsequent Events

Sl. No.	Subsequent Event	Transaction Type	Financial Impact	Audit Procedure for Verification
1	Cook’s Furniture Ltd has purchased a property in Adelaide Australia on 20 July 2020 for AUD 3,200,000 and intended to use it as a showroom. The company borrowed AUD 2,000,000 to finance the purchase. The company plans to take the opportunity of the current low-interest-rate to expand its property acquisitions.	Acquisition / Loans & Borrowings	Disclosure of Loans & Borrowings of 2 Mn AUD	Details of all existing loans from the management as well as Banks. Disclosure of all material transactions including loans & borrowings taken
2	The company applied for the Wages Subsidy scheme on 4 April and was granted 70,000. On 7 August, the BoD received a letter from the government requesting the company to pay back the Wages Subsidy with interests citing the reason that the company did not qualify.	Compliance	70,000 USD + Penal Interest	Perform a complete check of all compliance requirements and verification of evidences supporting the change in schemes applied by the company
3	The company was experiencing delays in its supply chain from overseas suppliers from March to May 2020, which resulted in longer lead times in filling customer orders. On 31 July, a customer filed a lawsuit against the company suing for damages of $300, 000. Because of the delay, this customer could not open a business on time and suffer income loss.	Legal Charges	Legal Charges to file lawsuit for damages claimed 300,000 $	Confirmations from the management for all legal cases and potential exposure. Disclosure of all material transactions including legal charges and damages claimed by external parties with a contingency for potential exposure

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