The audit of Bouncy Co is nearly complete and the financial statements and the audit report are due to be signed next week. However, the following additional information has just been presented to the auditor. The company’s yearend was 30 September 2X17.
The springs in a new type of mattress have been found to be defective making the mattress unsafe for use. There have been no sales of this mattress; it was due to be marketed in the next few weeks. The company’s insurers estimate that inventory to the value of R1,750,000 has been affected. The insurers also estimate that the mattresses are now only worth R1,225,000. No claim can be made against the supplier of springs as this company is in liquidation with no prospect of any amounts being paid to third parties. The insurers will not pay Bouncy for the fall in value of the inventory as the company was underinsured. All of this inventory was in the finished goods store at the end of the year and no movements of inventory have been recorded post year-end.
What actions should the auditors take and what will be the effect on the accounts for the year ended 30 September 2X17?