a) i) Reporting Implication

Event 1:

• The release of dye occurred after the end of the reporting period, so this is indicative of conditions existing after the end of the reporting period – the event could not be foreseen at the end of the reporting period.
• No adjustment to the financial statements appears to be necessary. However, the investigation by the Environmental Protection Agency (EPA) could result in a legal claim against the company for illegal pollution, so as a material event, it will need disclosure in the financial statements. (2 marks)

Event 2:

• The problem with the inventory of mattresses provides additional evidence of conditions existing at the end of the reporting period as the inventory was in existence, and the faulty springs were included in the inventory at this time.
• The value of the inventory is overstated and should be reduced to the lower of cost and net realisable value in accordance with IAS 2 Inventories. An adjustment for this decrease in value must be made in the financial statements. The mattresses should therefore be valued at GH¢100,000, being the net realisable value. (2 marks)

a) ii) Auditors’ Responsibility and Audit Procedures

Event 1:

• Since the event takes place before the signing of the audit report, the auditors have a duty to identify material events affecting the financial statements.
• The event is after the reporting period but represents new conditions arising and therefore will qualify to be a non-adjusting event. If the impact on the financial statements is material, the auditor should ensure adequate disclosure. If disclosure is not made and the auditor considers it necessary, the audit opinion should be modified on the grounds that the financial statements did not disclose all the information required. This will be for lack of disclosure (not provision) even though the amount cannot yet be determined.
• Alternatively, if the auditor considers that the release of dye and subsequent fine will affect Aseda Manufacturer Ltd’s ability to continue as a going concern, the auditor should draw the members’ attention to this in the material uncertainty relating to going concern paragraph of the audit report.

Audit Procedures:

• Obtain any documentation on the event, such as board minutes, copies of environmental legislation, and possibly interim reports from the Environmental Agency to determine the extent of the damage.
• Inquire of the directors whether they will disclose the event in the financial statements.
• If the directors plan to make disclosure of the event, ensure that disclosure appears appropriate.
• If the directors do not plan to make any disclosure, consider whether disclosure is necessary and inform the directors accordingly. (6 marks)

Event 2:

• The auditor has an active duty to design and perform audit procedures to obtain sufficient and appropriate evidence of all events up to the date of the auditor’s report. The auditor should ensure that management have accounted for or disclosed subsequent events properly. If not, the implication on the audit report should be considered.

Audit Procedures:

• Obtain documentation from the insurers confirming their estimate of the value of the mattresses and that no further insurance claim can be made for the loss in value.
• Contact solicitors/administrators of the spring supplier to confirm that no refund can be expected for the defective springs.
• Obtain the amended financial statements and ensure that the directors have included GH¢100,000 as at the end of the reporting period and that the year-end value of inventory has been decreased to GH¢100,000 on the statement of financial position.
• Review inventory lists to ensure that the defective springs were not used in any other mattresses and that further adjustments are not required to any other inventory.
• Obtain an additional management representation point confirming the accuracy of the amounts written off and confirming that no other items of inventory are affected.
• Finally, assess the effect on the audit opinion after the decision of the directors regarding the inventory value is known. A qualified opinion may be required where appropriate adjustments are not made to the financial statements. (6 marks)