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

Audit procedure	Reason	Treatment required
a.Review of purchase cut-offs	The goods were shipped before the balance date. The title was also passed before the balance date. Hence, purchases are related to current year	Financial report needs to be adjusted.
b.Solicitor’s letter or Review of Payment details	In the given case, the event gives rise to accident i.e. liability before the balance sheet. Since it occurs before the final date, it relates to the current financial year.	Financial report needs to be adjusted.
c.Review of minutes, inquiries of the client or solicitors letter	In the given case, the agreement to purchase is after the balance sheet date. This however has significant effect on the upcoming year and will impact the stakeholders’ decisions on the company.	Event shall be disclosed in the notes to financial report.
d. Inquiries of client, client correspondence or visit to client	The event of flood occurs after the balance sheet date. Since, the inventory was not insured, this will have significant impact in the coming year and will effect stakeholders decisions.	Event shall be disclosed in the notes to financial report.

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