Question

Axel Heckman is the engagement partner for the financial report audit of Sturfolks Equipment Ltd for
the year ended 30 June 2018. The following material events or transactions have come to Axel’s
attention before he is scheduled to issue his report on 31 August 2018:


(a) On 14 July 2018, Sturfolks Equipment settled and paid a personal injury claim of a former
employee as a result of an accident that occurred in March 2017. The company has not
previously recorded a liability for the claim.


(b) On 17 July 2018, Sturfolks Equipment agreed to purchase for cash the outstanding shares of
Recreational Equipment Ltd. This acquisition is likely to double the sales volume of Sturfolks
Equipment.


(c) On 20 July 2018, the directors became aware of broken glass found in their pre-packaged
sandpits. This product had only been on sale for two weeks and had been purchased directly
from the manufacturer, NSWPIT Ltd, an unrelated company in Thailand, one week prior to
being introduced to the public.


(d) On 3 August 2018, a plant owned by Sturfolks Equipment was damaged in a flood, resulting in an uninsured loss of inventory.

For each of the above events or transactions, identify audit procedures that should have brought the
item to the auditor’s attention, and determine the treatment required in the financial report for the
year ended 30 June 2018.

Answer 1