- 8 Marks
Question
Abuakwa Ltd (Abuakwa) is a multinational mining group that is involved in different operations. The draft financial statements for the year ended 31 March 2019 show the following:
| Financial Statement Extracts | 2019 (draft) | 2018 (audited) |
|---|---|---|
| Revenue | GH¢30.60 million | GH¢28.08 million |
| Profit before tax | GH¢3.12 million | GH¢3.00 million |
| Total net assets | GH¢29.76 million | GH¢27.24 million |
You are the manager responsible for the audit for the year ended 31 March 2019. You have just visited the client’s premises to review the audit team’s work to date. The audit senior has drafted the following “points for the attention of the manager”.
a) On 12 March 2019, an explosion occurred in one of Abuakwa’s premises, destroying about one quarter of the premises. Luckily, the explosion happened at night when the premises were empty, and there were no injuries to any persons. Structural engineers and surveyors are currently assessing the stability of the remainder of the premises, and it is, as yet, unclear whether they can be repaired or will need to be demolished and rebuilt in their entirety.
In the last few days, notifications have been received from the owners of four nearby businesses claiming that the structural integrity of their premises may have been compromised by the impact of the explosion.
They also advised that structural engineers are currently assessing their premises to ensure they are still safe. These business owners have formally notified Abuakwa that if their premises were adversely affected by the explosion, they will claim an “appropriate and justifiable” level of compensation from Abuakwa.
Abuakwa’s insurers have been informed but at this point are refusing to comment on the situation until, they say, all the facts are clear in relation to the explosion and its effects.
(8 marks)
Answer
Matters to be considered
- This event occurred before the period end and so must be fully reflected in the financial statements for the year ended 31 March 2019.
- The explosion will mean that the property and other assets that were affected are probably impaired in value, and this impairment will need to be quantified and reflected in the financial statements (IAS 36).
- It has also created a potential liability to the owners of the other businesses who claim to have been affected. This may need to be quantified and disclosed in the financial statements, although there is currently so much uncertainty in this regard that disclosure may not be required. (IAS 37)
- There is also the possibility of an off-setting contingent asset in the form of the potential for an insurance claim. It is unlikely, however, that this could be seen as virtually certain at this point and so it will not be accrued in the financial statements. It may, however, be noted depending on how satisfied the company is that it will be received.
(4 points for 4 marks)
Audit evidence to be documented
- Details of the explosion and such reports about it as may exist, e.g., to the Health and Safety Authority, Environmental Protection Agency, to the Insurers, etc.
- Preliminary reports from the surveyors and structural engineers.
- All correspondence with the insurance company, including the insurance policy and evidence that it has been paid up to date.
- The notification of claim from the other business owners and copies of any legal correspondence with them.
- Minutes of board meetings at which the explosion was discussed. In particular, the cause will need to be established to eliminate (or mitigate) the susceptibility of the company to a recurrence.
(4 points for 4 marks)
- Tags: Audit evidence, Contingent Liabilities, Explosion, Insurance Claims, Subsequent Events
- Level: Level 3
- Topic: Audit evidence, Reporting, The audit approach
- Series: MAY 2019
- Uploader: Dotse