You are a partner in the audit firm of Younge & Foolisch. The audit of Bouncy Co. Ltd., a manufacturer of beds and mattresses, is nearly complete, and the audit files have been sent to you as the engagement partner for a final review. The company’s year-end was 31 March 202X. Several points have been highlighted on the file for your attention:

Inventory: On 10 May 202X, the production manager reported that springs in a new type of mattress had been found to be defective making the mattress unsafe for use. There had been no sales of this mattress; it was due to be marketed in the next few weeks. The company estimates that inventory to the value of £750,000 has been affected but, at the moment, no adjustment has been made to the finished good inventory valuation. 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. They estimate that the mattresses are now only worth £225,000. No claim can be made against the supplier of springs as that company is in administration with no prospect of any amounts being paid to third parties. The loss is material to the financial statements. The financial director takes the view that this is ‘next year’s problem’.

Claim: On 7th April 202X, production at the factory was halted for one day when a delivery of bleach used in processing the fabric on mattresses accidentally leaked into a local watercourse and into the drainage system. It has not been possible to ascertain who was at fault. The Environment Agency is currently considering whether a prosecution is necessary. The company’s insurers have not yet commented on the event.

Ongoing event: Your last conversation with the financial director revealed that the company is in receipt of claims for unfair dismissal from a group of 30 employees who were made redundant when Bouncy closed its Northtown factory during the financial year. They claim that they were not offered alternative employment and that correct procedures were not followed as there was no consultation period. Bouncy takes the view that it complied with legal advice and all proper procedures were undertaken. At this stage, the claim has been notified to the company, but no legal action has yet commenced as the parties wish to negotiate first. Bouncy Co. has notified its insurers of the claim. The amount involved, should they win their case, is estimated at £350,000. No mention of this has been made in the financial statements, nor is there any mention on the audit file. The amount is material. There is no letter from the company’s legal advisors in respect of actual or potential legal actions and no note on the file. Reviewing the audit checklist indicates that the audit team has carried out this procedure and made the enquiry as they have signed off as having done so.

Required:
(a) For each of the events above explain the auditors’ responsibility and the audit procedures that should be carried out according to ISA(UK)560 Subsequent Events.
(b) Assume that the date is now 20 July 202X, the financial statements and the audit report have just been signed and the annual general meeting is to take place on 10 August 202X. The Environmental Agency has issued a report stating that Bouncy Co. is in breach of environmental legislation in view of the pollution caused by the bleach, and a fine of £900,000 will now be levied on the company. Explain the additional audit work the auditor should carry out in respect of this fine.