37. Rabbit Co manufactures chemicals and has a factory and four offsite storage locations for finished goods. Rabbit Co’s year end was 30 April 20X3. The final audit is almost complete and the financial statements and auditor’s report are due to be signed next week. Revenue for the year is $55 million and profit before taxation is $5.6 million.
The following two events have occurred subsequent to the year end. No amendments or disclosures have been made in the financial statements.
Event 1 – Defective chemicals
Rabbit Co undertakes extensive quality control checks prior to the dispatch of any chemicals. Testing on 3 May 20X3 found that a batch of chemicals produced in April was defective. The cost of this batch was $0.85 million. In its current condition it can be sold at a scrap value of $0.1 million. The costs of correcting the defect are too significant for Rabbit Co’s management to consider this an alternative option.
Event 2 – Explosion
An explosion occurred at the smallest of the four offsite storage locations on 20 May 20X3. This resulted in some damage to inventory and property, plant and equipment. Rabbit Co’s management have investigated the cause of the explosion and believe that they are unlikely to be able to claim on their insurance. Management of Rabbit Co has estimated that the value of damaged inventory and property, plant and equipment was $0.9 million and it now has no scrap value.
(a) For each of the two events above:
(i) Explain whether the financial statements require amendment; and
(ii) Describe audit procedures that should be performed in order to form a conclusion on any required amendment.
Note. The total marks will be split equally between each event.