Reference no: EM132613759

Question - Zane Inc.'s financial statements are to be approved by the Board of Directors on March 3, 2017, and the audit report will be issued on March 5, 2017.

The following subsequent events were noted during the completion phase of your audit of Zane.

1. On February 22, 2017, Zane's major customer ceased trading on the TSX due to financial difficulties. The customer owed Zane Inc. $1,000,000 as at December 31, 2016, which was not provided for as part of the allowance for doubtful accounts as the account was not overdue at that time. The customer's difficulties were unexpected and were due to one of its manufactured products having major defects. The public became aware of the situation on January 31, 2017, when the news reported several customers had been severely injured because of the defect.

2. On February 23, 2017, the Controller discovered a material fraud. The account payables clerk had been diverting funds into a fictitious supplier's bank account. The fraud had been occurring for at least the past six months. The employee was immediately dismissed, legal proceedings against the employee have been initiated, and the employee's final wages have been withheld as part reimbursement back to the company.

3. On November 15, 2016, a customer initiated legal proceedings against the company in relation to a breach of contract. On January 29, 2017, the company's legal advisers informed the directors that there was only a remote possibility that the company would be found liable; therefore, no provision was made in the financial statements. On February 28, 2017, the court found the company liable on a technicality and is now required to pay damages amounting to a material amount. The company plans to appeal the decision.

Required - Identify if these subsequent events would require adjustment or disclosure to the financial statements by management. If the company should not adjust or disclose, indicate that you expect the company to do neither. Explain your reasoning.