Caldwell and Douglas, CPA, are completing the audit of Carmel Corporation for the year ended December 31, 19X4. While performing a review of subsequent events, they note the following situations.

1. Because of political developments in the Middle East, the possibility of expropriation of one of the company's foreign facilities exists. The book value of this facility is \(\$ 2.4\) million.

2. Carmel manufactures a car wax. In June 19X4, Carmel changed suppliers for one of the ingredients in the car wax. Shortly thereafter, customers began complaining that the wax caused the finish on their cars to become cloudy. In January 19X5 the company recalled the products manufactured with this ingredient and changed back to the original supplier. Carmel's lawyers believe it is probable that the company will lose the \(\$ 2\) million class action suit that was filed by a group representing the consumers who used Carmel's car wax. However, the lawyers believe the suit will be settled for \(\$ 326,000\), the estimated cost to correct the problem for the cars affected.

3. Carmel initiated a lawsuit against the supplier of the defective car wax ingredient. Carmel's lawyers believe it is highly probable that the company will win the suit and recover the \(\$ 375,000\) lost as a result of the customer's lawsuit and other expenses associated with recalling the product.

4. Carmel also manufactures portable facsimile machines that sell for \(\$ 245\) each. The machines are covered by an eighteen-month warranty that includes parts and labor. Warranty cost for machines sold during the year but paid in January is \(\$ 102,800\).

Required:

a. Describe the audit procedures for subsequent events that are likely to have detected each of the above situations.

b. Describe how the financial statements will be affected by each of the above situations. Refer to SFAS No. 5, Accounting for Contingencies, for the accounting implications.