Question

Jonas Worth is the engagement partner for the financial report audit of Caufield Ltd for the year ended 31 December, 20X7. The following material events or transactions have come to Wood's attention before he is scheduled to issue his report on 28 February, 20X8.

a) On 3 January, 20X8, Caufield Ltd received a shipment of raw materials from korea. The materials had been ordered in October 20X7, and shipped FOB shipping point in November 20X7 (2.5 marks). (50 -80 words)

b) On 15 January, 20X8, the company settled and paid a personal injury claim of a former employee as the result of an accident that occurred in March 20X0. The company had not previously recorded a liability for the claim (2.5 marks). (50 -80 words)

c) On 25 January, 20X8, the company agreed to purchase for cash the outstanding shares of La Trobe Electrical Ltd. The acquisition is likely to double the sales volume of Caufield Ltd (50 -80 words)

d) On 1 February, 20X8, a plant owned by Caufield Ltd was damaged by a flood, resulting in an uninsured loss of inventory (50 -80 words)

Required: For each of the above events or transactions, discuss audit procedures that should have brought the item to the auditor's attention, and indicate the treatment required in the financial report. Give reasons for your decision.

Client Accounting	Treatment	Justification

Answer 1

These items may have brought to the auditor's attention when testing for subsequent events. Subsequent events are defined as the events which occur between the date of reporting and the date of approval of the financial statements and the signing of the auditor's report. The procedure might include reading of the Company's minutes of the meeting, reading the interim financial statements, and comparing it to the audited FS and noting of significant changes or events that might have occurred. It could be adjusting or non-adjusting.

Adjusting Event: Adjusting events are the events that occur after the reporting period that provides more evidence of conditions that existed at the end of the period of reporting,

Non-adjusting event: Non-adjusting events are the events that occur after the period of reporting that indicates the condition that may arise after the end of the period of reporting.

a. The item is shipped in November but only received on January. These items are in-transit and must be part of the Dec 20x7 ending inventory, since ownership of the goods passes to the buyer upon shipment (FOB Shipping point).

b. Since the accident happened in the past, and additional evidence was provided resulting to claims settlement. Management needs to record expenses and liability.

c. The purchase of stocks requires disclosure only since non-disclosure may affect the ability of FS users to make proper evaluations and decisions.

d. The flood, a fortuitous event, also requires disclosure in the Company's notes to FS because it had caused destruction of the Company's property.