QUESTION FOUR

You are the Audit Manager responsible for the audit of Mega Chews Ltd, a company that runs a chain of fast food restaurants. You are aware that a major risk of this sector is that poor food quality might result in damages claimed by customers. You had satisfied yourself at the interim audit that the company's control risk as regards purchases of food and its preparation in the kitchen was low. However, during your final audit, it comes to your attention that one month before the year-end, a customer has sued the company for personal injury caused by food poisoning, claiming an amount of GH100,000 in compensation. This amount is material to the stated profit of the company, but management believes that it has good defenses against the claim.

Required:

(iv) In respect of the potential claim, state THREE items of evidence you should obtain and explain how they might enable you to form a conclusion on the likelihood of the claim being successful.

(B)

Following your audit, you have concluded that there is a possibility, but not a probability, that the claim will be successful. However, management has decided not to make a provision or disclosure in the financial statements regarding this matter.

Required: Describe how the matter should be reported in the financial statements and explain the effect on your audit report.