Question

Samuel whales Ltd has purchased a property in Wellington New Zealand on 20 July 2020 for NZD 3,200,000 and intended to use it as a showroom. The company borrowed NZD 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 ToL 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 :

a. Impact on financial statements:

Event1: Disclosure of NZD 2,000,000 as a loan.

Event2: NZD 70,000 along with penalty interest will increase the expense.

Event3: Legal charges of $3,000,000 will increase the liability.

B. Audit procedures:

Event 1: Disclosure of loans and borrowings.

Event 2: Complete check for the changes in the schemes

Event 3: Confirmation from management for legal cases.

Explanation :

a. The potential impact on the financial statements is as follows:

B. The audit procedures that might verify potential impact on the financial statements are as follows: