Consider each of the following independent and material situations. In each case: the balance…

Consider each of the following independent and material situations. In each case:

  • the balance date is 31 October 2020.
  • the fieldwork was completed on 5 December 2020.
  • the financial report and audit report were signed on 12 December 2020.
  • the financial report and audit report were mailed to the members on 20 December 2020.
  1. Your client, Outback Mining, owns a mineral exploration licence in Central Australia. At 31 October this licence was valued by an independent expert at $50,000,000. This valuation is reflected in the financial report. On 8 December Outback 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.
  2. 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 November, 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 12 December.

  1. Your client, Gem Pty Limited, made an out of court settlement on 1 December 2020 of $300,000. The settlement related to a litigation case dating back 4 years. A provision of $150,000 was recorded in the 31 October 2020 financial report.
  2. On 14 December 2020, you discover that a debtor of your client, Galaxy Ltd, was placed in provisional liquidation on 8 December. The debtor owed $600,000 as at 31 October; a specific provision of $300,000 of this amount was made at this date. On very preliminary information, the likely payout to unsecured creditors is zero.
  3. A flood occurred in the warehouse of your client SuperSpring Ltd on 2 November 2020. Inventory valued at $2m was destroyed. The directors believe only half of this value will be recovered from the insurers.

Required:

(a) Identify the periods during which the auditor is responsible for identifying subsequent events and indicate the extent of the auditor’s responsibility. (10 marks)

(b) For each of the above events (i) to (v), state the appropriate action (i) to (iv) that the auditor would require in order to issue an unqualified opinion for the situation and justify your response. The alternative actions are as follows (15 marks):

(i) Client to adjust the 31 October 2020 financial report.

(ii) Client to disclose the information in the notes to the 31 October 2020 financial report.

(iii) Client to recall the 31 October 2020 financial report for revision.

(iv) No action is required

Answer required in around 500 words.

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