As audit senior you recently completed the audit of 2Ways Limited (a listed company) for the year ended 31 December 20Y4. The audit fieldwork was completed on 22 January 20Y5 and the audit partner is currently considering the audit opinion that is to accompany the financial report. The audit report is expected to be signed on 14 February 20Y5.

The following are material and independent events that relate to the clients 31 December 20Y4 year end:

1. On 25 January 20Y5, One2 Limited acquired a controlling interest in Go3 Limited. The company paid cash for its controlling interest and it is expected that the acquisition will double the sales volume of One2 Limited.

2. On 1 February 20Y5 a storage facility of the company was damaged by a flood which resulted in an uninsured loss of inventory totaling $4,875,000.

3. The court ruled in favour of 2Ways Limited on 25 January 20Y5 concerning tax deductions it claimed in its 20Y2 and 20Y3 tax returns. The company provided for the full amount of the potential disallowances in its 31 December 20Y4 statement of financial position. The tax authorities have indicated that they will not appeal the courts ruling.

4. On 18 January 20Y5 one of the biggest investor advisor companies in the country issued a pessimistic report regarding 2Ways Limiteds long-term prospects. The market price of the companys shares subsequently decreased by 35%.

REQUIRED:

a) Provide one (1) audit procedure that the auditor could have used to obtain evidence regarding each of the above event(s)/transaction(s). (8 marks)

b) Prior to signing the audit report the audit partner asks you to describe (with reasons) how each of the above transactions and/or events should be treated in the clients financial report. (12 Marks)