Case Study 1 Sub Sequo Ltd. is a food wholesaler operating throughout the Caribbean and its year end was 30 September 2021. The final audit is nearly complete and it is proposed that the financial statements and audit report will be signed on 13 December. Revenue for the year is $78 million and profit before taxation is $7.5 million. The following events have occurred subsequent to the year end. Receivable A customer of Sub Sequo Ltd has been experiencing cash flow problems and its yearend balance is $0.25 million. The company has just become aware that its customer is experiencing significant going concern difficulties. Sub Sequo believe that as the company has been trading for many years, they will receive some, if not full, payment from the customer; hence they have not adjusted the receivable balance. Lawsuit A key supplier of Sub Sequo is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by them is $1.2 million. This has been disclosed as a contingent liability in the notes to the financial statements; however correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Sub Sequo of $0.7 million. It is likely that the company will agree to this. Warehouse Sub Sequo has three warehouses; following extensive rain on 20 November significant rain and river water flooded the warehouse located in Grenada. All of the inventory was damaged and has been disposed. The insurance company has already been contacted. No amendments or disclosures have been made in the financial statements. Required: For each of the three events above: a) Discuss whether the financial statements require amendment; b) Describe audit procedures that should be performed in order to form a conclusion on the amendment; c) Explain the impact on the audit report should the issue remain unresolved.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Case Study 1
Sub Sequo Ltd. is a food wholesaler operating throughout the Caribbean and its year
end was 30 September 2021. The final audit is nearly complete and it is proposed that
the financial statements and audit report will be signed on 13 December. Revenue for
the year is $78 million and profit before
have occurred subsequent to the year end.
Receivable
A customer of Sub Sequo Ltd has been experiencing
experiencing significant going concern difficulties. Sub Sequo believe that as the
company has been trading for many years, they will receive some, if not full, payment
from the customer; hence they have not adjusted the receivable balance.
Lawsuit
A key supplier of Sub Sequo is suing them for breach of contract. The lawsuit was filed
prior to the year end, and the sum claimed by them is $1.2 million. This has been
disclosed as a
correspondence has just arrived from the supplier indicating that they are willing to
settle the case for a payment by Sub Sequo of $0.7 million. It is likely that the company
will agree to this.
Warehouse
Sub Sequo has three warehouses; following extensive rain on 20 November significant
rain and river water flooded the warehouse located in Grenada. All of the inventory was
damaged and has been disposed. The insurance company has already been contacted.
No amendments or disclosures have been made in the financial statements.
Required:
For each of the three events above:
a) Discuss whether the financial statements require amendment;
b) Describe
conclusion on the amendment;
c) Explain the impact on the audit report should the issue remain unresolved.
Step by step
Solved in 2 steps
