- 8 Marks
Title: AAA – May 2019 – L3 – Q1a – The audit approach, Audit evidence, Reportin
Analyze the impact of a significant explosion on financial statements, assess contingent liabilities, and determine appropriate audit evidence.
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)
Find Related Questions by Tags, levels, etc.
- Tags: Audit evidence, Contingent Liabilities, Explosion, Insurance Claims, Subsequent Events
- Level: Level 3
- Topic: Audit evidence, Reporting, The audit approach
- Series: MAY 2019