Everclean Water Limited processes and packages portable water for local consumption. The factory is situated in a valley in a first-class residential area of the city. A major road used by most residents runs in front of the factory. Often this road is flooded with spill-over of water from the factory thus hindering vehicular and pedestrian movement. Management of the company on such occasions uses the services of a contractor to pump out the water from the road. This situation contravenes the provisions of the Factories, Offices and Shops Act 1970, Act 328.Everclean Water Limited has engaged Nadab and Associates as the auditors. In their preliminary tour of the factory the senior partners became aware of the flooding situation in the area. Back in the office the senior partners consulted ISA 250 “Consideration of laws and regulations in an audit of financial statements” for guidance on the auditor’s responsibility to consider laws and regulations in an audit of financial statements before carrying out the audit assignment.
Required:
i) State examples of the possible type of information that might have come to the auditors’ attention that might indicate non-compliance with the Factories, Offices and Shops Act. (5 marks)
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- Physical observation of the flooding by the Senior Partners on their visit to the factory.
- Tip-off from residents of the area, likely.
- Investigation by a regulatory organisation or government department such as the Environmental Protection Agency (EPA).
- Payment of fines or penalties, if any.
- Adverse media comments, likely.
ii) Evaluate the possible effect on the financial statements for non-compliance with the law according to ISA 250. (5 marks)
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The auditors should consider the following, when evaluating the possible effect on the financial statements for non-compliance with the law:
- Going Concern applicability
- The potential financial consequences, such as fines, damages, penalties, litigation, threat of expropriation of assets and enforced discontinuation of operations.
- Whether the potential financial consequences require disclosure like enforced discontinuation of operations.
- Whether the potential financial consequences are so serious as to call into question the fair presentation given by the financial statements, or otherwise make the financial statements misleading.
- Provisions to be made in the accounts and contingencies.