Question

Consider each of the following independent and material situations. In each case: • the balance date is 30 June 2020. • the fieldwork was completed on 25 August 2020. • the financial report and audit report were signed on 28 August 2020. • the financial report and audit report were mailed to the members on 1 September 2020. (i) Your client, Central Mining, owns a mineral exploration licence in Central Australia. At 30 June 2020 this licence was valued by an independent expert at $50,000,000. This valuation is reflected in the financial report. On 8 September 2020 Central Mining received notice that a claim was being lodged under the Native Titles Act for land which included that subject to the exploration licence. If the claim is successful the exploration licence will be worthless. (ii) Your client, Bird Pty Limited, derives approximately 10% of revenues from selling aviary supplies to city-based bird breeders. A draft copy of a government report, leaked to the press and reported in the media on 11 September, recommends that strict limits be placed on the number of birds that are allowed to be kept in suburban areas. Bird Pty Limited estimates that if the recommendations are enacted, about 70% of its customers will have to cut their flocks by 50% or more. This would affect not only future sales but also their ability to pay existing debts. No further information, other than the draft report, is available as at 15 September. (iii) Your client, Gem Pty Limited, made an out of court settlement on 1 August 2020 of $300,000. The settlement related to a litigation case dating back 4 years. A provision of $150,000 was recorded in the 30 June 2020 financial report. Ans; Since the settlement was done before the closing the Financial Statements so balance of $150000 (300000-150000) should be provided in the current year Financials. (iv) On 14 September 20X7, you discover that a debtor of your client, Galaxy Ltd, was placed in provisional liquidation on 8 September. The debtor owed $600,000 as at 30 June 2020; at this date the amount had been considered collectable by the company. (v) A flood occurred in the warehouse of your client SuperSpring Ltd on 21 September 2020. Inventory valued at $2m was destroyed. The directors believe only half of this value will be recovered from the insurers. Required: For each of the above events (i) to (v), state the appropriate action that the auditor would need to carry out in order to find out about the above and what the company would need to do for each of the above

Answer 1

Answers:

(i) Client to disclose the information in the notes to the 30 June 2020 financial report.

Since the claim has been filed but not yet enacted, no adjustment is needed. But it would greatly affect the financial statements in the future once the claim has been enacted upon so a disclosure has to be made to inform the stakeholders. Therefore, the auditor needs to disclose the information in the notes on financial reports as on 30 June 2020.

Your client, Outback Mining, owns a mineral exploration licence in Central Australia. At 30 June 2020 this licence was valued by an independent expert at $50,000,000. This valuation is reflected in the financial report. On 8 December 2020 Outback Mining received notice that a claim has been lodged under the Native Titles Act for land which included that subject to the exploration licence. If the claim is successful the exploration licence will be worthless.

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(ii) No action is required.

(ii) no action is required because there is no probable and determinable effects yet. They are only based on forecast and expectations. Therefore, for this event no action is required by the auditor.

Your client, Bird Pty Limited, derives approximately 10% of revenues from selling aviary supplies to city-based bird breeders. A draft copy of a government report, leaked to the press and reported in the media on 11 September, recommends that strict limits be placed on the number of birds that are allowed to be kept in suburban areas. Bird Pty Limited estimates that if the recommendations are enacted, about 70% of its customers will have to cut their flocks by 50% or more. This would affect not only future sales but also their ability to pay existing debts. No further information, other than the draft report, is available as at 15 September.

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(iii) Client to adjust the 30 June 2020 financial report.

The out of court settlement was already known and paid before the issuance of the financial statements so an adjustment has to be made to reflect it. Therefore, for this event the auditor is required to adjust the financial report as on 30 June 2020.

Your client, Gem Pty Limited, made an out of court settlement on 1 August 2020 of $300,000. The settlement related to a litigation case dating back 4 years. A provision of $150,000 was recorded in the 30 June 2020 financial report. Ans; Since the settlement was done before the closing the Financial Statements so balance of $150000 (300000-150000) should be provided in the current year Financials.

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(iv) ​No action is required.

The situation happened after the financials was signed and issued. Therefore, for this event no action is required by the auditor.

On 14 September 20X7, you discover that a debtor of your client, Galaxy Ltd, was placed in provisional liquidation on 8 September. The debtor owed $600,000 as at 30 June 2020; at this date the amount had been considered collectable by the company.

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(v) ​Client to adjust the 30 June 2020 financial report.

The flood happended on September 21 2020 which is prior the signing and fieldwork of the audit, adjustments must be made to reflect the effect of the flood in the inventory. For this event the auditor is required to adjust the financial report as on 30 June 2020.

A flood occurred in the warehouse of your client SuperSpring Ltd on 21 September 2020. Inventory valued at $2m was destroyed. The directors believe only half of this value will be recovered from the insurers.