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After attempting scenario ‘b’ (part II) of this question. The solutions said that the event was non adjusting however when I was answering I said it was an adjusting event because inventory is compromised at the year end and therefore should be written down.
Please help me understand where I went wrong.
The scenario is:
EastVale Co manufactures a range of dairy products (for example, milk, yoghurt and cheese) in one factory.
Products are stored in a nearby warehouse (which is rented by EastVale) before being sold to 350 supermarkets located within 200 kilometres of EastVale’s factory. The products are perishable with an average shelf life of eight days. EastVale’s financial statements year-end is 31 July.
It is four months since the year-end at your audit client of EastVale and the annual audit of EastVale is almost complete, but the auditor’s report has not been signed.
The following events have just come to your attention. Both events occurred in late November.
(a) A fire in the warehouse rented by the company has destroyed 60% of the inventory held for resale.
(b) A batch of cheese produced by EastVale was found to contain some chemical impurities. Over 300 consumers have complained about food poisoning after eating the cheese. 115 supermarkets have stopped
purchasing EastVale’s products and another 85 are considering whether to stop purchasing from EastVale. Lawyers acting on behalf of the consumers are now presenting a substantial claim for damages against
EastVale.Required
In respect of each of the events at EastVale Co mentioned above:
(i) Describe the additional audit procedures you will carry out; (8 marks)
(ii) State, with reasons, whether or not the financial statements for the year-end require amendment; and
(6 marks)
(iii) Discuss whether or not the audit report should be modified. (6 marks)
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