Reference no: EM132565260
Question - You are an audit manager at Samuel Associates. You are finalising the audit of Cameron Brothers (CB), a large listed retailer. The draft financial statements of CB currently show a profit before tax of $7.5 million and revenue of $60 million for the financial year ended 30 June 2019. You have been informed that one of the segments of CB was discontinued during the June quarter of the 2019 financial year. As a result of the closure, 5 employees left the company in June 2019.
When carrying out subsequent events audit procedures, you reviewed the August 2019 Board meeting minutes which identified a legal claim for unfair dismissal of the CB employees related to the closure of the segment. You discussed this matter with the CB Human Resource Manager who advised that CB received a notice of a legal claim on 30 July 2019.
The legal representation letter obtained from CB lawyers confirmed the possible success of the employee claims, valued at $800,000. You have determined that $800,000 is material to CB.
Required -
a) Why do auditors review subsequent events before issuing the current year financial statements?
b) What is the correct treatment for the legal claim of $800,000 (adjust the financial reports or disclose in the notes or no action) in the financial report for the year ending 30 June 2019? Justify your answer
c) If CB management refuses to treat the legal claim in part (b) in accordance with your advice, what audit opinion would you provide? Explain your answer.
d) While further reviewing subsequent events, you found that closing down of the segment adversely affected the business activities of the other segments of CB.
(i) Explain "going concern assumption".
(ii) Identify three (3) substantive audit procedures you would undertake to review the validity of CB's going concern assumption.