(c) In November 2006 Seymour announced the recall and discontinuation of a range of petcar

Question

(c) In November 2006 Seymour announced the recall and discontinuation of a range of petcare products. The

product recall was prompted by the high level of customer returns due to claims of poor quality. For the year to

30 September 2006, the product range represented $8·9 million of consolidated revenue (2005 – $9·6 million)

and $1·3 million loss before tax (2005 – $0·4 million profit before tax). The results of the ‘petcare’ operations

are disclosed separately on the face of the income statement. (6 marks)

Required:

For each of the above issues:

(i) comment on the matters that you should consider; and

(ii) state the audit evidence that you should expect to find,

in undertaking your review of the audit working papers and financial statements of Seymour Co for the year ended

30 September 2006.

NOTE: The mark allocation is shown against each of the three issues.

Answer 1

正确答案：

 

■ The discontinuation of the product line after the balance sheet date provides additional evidence that, as at the
balance sheet date, it was of poor quality. Therefore, as at the balance sheet date:
– an allowance (‘provision’) may be required for credit notes for returns of products after the year end that were
sold before the year end;
– goods returned to inventory should be written down to net realisable value (may be nil);
– any plant and equipment used exclusively in the production of the petcare range of products should be tested
for impairment;
– any material contingent liabilities arising from legal claims should be disclosed.
(ii) Audit evidence
■ A copy of Seymour’s announcement (external ‘press release’ and any internal memorandum).
■ Credit notes raised/refunds paid after the year end for faulty products returned.
■ Condition of products returned as inspected during physical attendance of inventory count.
■ Correspondence from customers claiming reimbursement/compensation for poor quality.
■ Direct confirmation from legal adviser (solicitor) regarding any claims for customers including estimates of possible
payouts.