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.

issues	accounting treatment	justification

please provide correct answer

Answer 1

Case 1 - On 3 January, 20X8, Caufield Ltd received a shipment of raw materials from korea but the cut off date of inventory is anywhere with period end date i,e December 31 , 20X7. However the material ordered in October 20X7, and shipped FOB shipping point in November 20X7 .

But in FOB Purchase ,  In practice, purchases are recorded upon receipt, based on the date indicated on the receiving report. So for the time being you dont need to show any treatment on closing date.  

Case 2 - To pay the compensation that the insured employer is legally liable to pay his employees and their dependents due to the death or personal injury caused by accidents or diseases contracted due to the work and during the course of the employment.In this case , campensation likely to arise anytime after 20X0 . SO that is why to aviod any kind of surprised burden on companies health . Company should create provision for this. Also it is legal requirement of Korean Workman Compension Act (KCOMWEM)

Case 3-The acquisition is likely to double the sales volume of Caufield Ltd. Although it do not have any operational impact on company business. But in another way adverse effect on company financial postion.

• Sale will gets decresed
• Going concern may be in danger if loss incurred over a period of time
• Overburden of borrowing
• Management Clashes

The idiol way is Auditor should disclosed this thing as a material effect.

Case 4 =when an entity should adjust its financial statements for events after the reporting period; and the disclosures that an entity should give about the date when the financial statements were authorised for issue and about events after the reporting period.

Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. The two types of events are:

• those that provide evidence of conditions that existed at the end of the reporting period (adjusting events); and
• those that are indicative of conditions that arose after the reporting period (non-adjusting events).

But in this case , we can consider flood is condition that we already know before its happening. So we cannot adjust in period ending December 31