Canterlot Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2020 year, Canterlot gained a new client, Cloudsdale Medical Group (CMG), which owns 100 per cent of the following entities:

• Everfree Forest Hospital, a private hospital group

• Calendula Care Pty Ltd, a private nursing home

• Tempo Cancer Treatment Limited (TCTL), a private oncology clinic that specialises in the treatment of cancer.

Year-end for all CMG entities is 30 June.

You are the audit partner reviewing the audit work papers for CMG for the year ended 30 June 2020. Today is 13 July 2020 and the audit report is due to be signed in three weeks’ time.

During your review you note that the fixed-term borrowings of CMG totalling $75 million are approaching maturity and CMG does not seem to have renegotiated any terms of refinancing. You are aware, from your experience with other clients, that banks are reluctant to extend financing on the same terms in the current market. The financing of CMG was historically managed by the group’s treasurer who left the group six months ago and has not been replaced.

CMG’s financial controller, who has been with the group for nine months, has advised you that he has been busy renegotiating with some of CMG’s key suppliers who recently requested cash on delivery for all orders rather than extending the normal credit terms.

You are also aware that a fire that occurred in the hospital cafeteria last week was not adequately covered by insurance. Fortunately, no one was seriously injured in the fire, but the cafeteria was so badly damaged it had to be closed.

While discussing this matter with CMG’s law firm, they reveal that the hospital is unlikely to have adequate professional indemnity insurance to meet the current demands of several malpractice cases that have been brought against the hospital in the last 12 months.

(a) Explain your responsibilities with respect to the cafeteria fire.

(b) How will this event be handled in the financial report and the audit report?