Scarborough Hydraulics Ltd contracts with governments to carry out a variety of infrastructure projects including water treatment and desalination plants and other drainage works. It also acts as a contractor to maintain a range of government infrastructure assets. The contracts that it has with its government customers have very strict turnaround times to ensure that, in the event of problems, water services to the public are quickly brought back on-line.

You have completed your audit of Scarborough Hydraulics and the following material events occurred:

1. Scarborough holds a stock of high value drainage components to allow them to be able to respond quickly to their customers’ needs. Due to the size and quantity of these items they were stored in a large outdoor space on the outskirts of Sydney. Shortly after the year end a significant amount of this stock was stolen. The security at this site was inadequate and no record of the theft is available.

2. Scarborough has a large manufacturing centre in Melbourne which provides prefabricated concrete for the company's infrastructure projects. The company policy is to include factories in the balance sheet at market value less accumulated depreciation. The Melbourne factory is included in the balance sheet based on a valuation carried out five years ago. The company has not engaged a valuer to revalue the property because the directors believe that market values have remained fairly level over the last five years, so the existing carrying value is not materially different from current value.

3. During the year Scarborough completed a contract to provide drains for a private construction company that was building 500 houses in a new suburb of Brisbane. Shortly before the year end a downpour of rain saw the drainage system fail causing damage to the houses being built.

The construction company is suing Scarborough for the costs of rectifying the damage.

Scarborough have not provided for any possible payout because they expect their losses to be covered by a claim against one of their sub-contractors that supplied the faulty part that caused the failure.

Required

Discuss each of the above issues, state what effect each would have on the audit opinion and give reasons.