During your completion of the 2022 audit of TT, the following material items of information have come to your attention or been discovered in your completion procedures, and you need to resolve them.

 

(a) TT is the subject of a breach of copyright lawsuit from a large international graphic design company, who claim that the packaging design of their most popular variety of tea has been copied from one of its designs. TT prides itself on its original beautifully designed packaging and plans to contest the lawsuit, which was filed in November 2022, although they are very uncertain of the outcome.

 

(b) The large competitor that expressed interest in investing in TT during 2022 has formally communicated their offer to take a majority ownership interest on 15 January 2023.

 

(c) As a result of your audit of TT's inventory, you believe that there is a significant amount of stock obsolescence that has not been provided for. Camilla and Sarah, in your discussions with them, have stated they will not increase the provision, because they are hoping for the best possible price from the new investor company.

 

(d) One of TT's largest customers, a specialty grocery store that is supplied with TT products, filed for bankruptcy in January 2022. You learn that TT is ranked very low in the list of creditors and unlikely to receive outstanding debt.

 

(e) TT prides itself on its Fair-Trade certification, and Camilla has valuable relationships with growers around the world. However, one of the major overseas growers has recently received bad publicity for using child labour in their plantations.

 

(f) As this is the first year of BO's audit of TT, you are unable to verify TT's opening balances from your firm's working papers.

 

(g) During 2022, TT implemented full compliance with IFRS. This has been disclosed in their accounting policy note.

 

Required:

For each of the items listed above, identify (i) the appropriate additional accounting treatment (if applicable) and/or effect on the audit report (if applicable) and (ii) explain your reasoning why. 

 

You can set out your answer in a table as follows. If a cell is not applicable, put "N/A".

Item

Accounting treatment

Effect on audit report

Explanation