Question 2. Acme Ltdbusiness and audit risk

Acme Ltd is a company in the chemical industry, situated near the Werribee River. Its year end is 30th June 2022 and you were engaged as the auditor on that date. The profit before taxation shown in the draft accounts to 30th June is $25,500,000. The following matters have come to your attention:

a. On 30th December 2021, the company allowed a chemical by-product to flow into the Werribee River which caused noxious fumes to float over the city centre. The company is being sued by the local council for the cost of cleaning the river and sundry other claims. The company directors believe it has a good defence. The amount involved is not yet known.

b. A debtor owing $200,000 at 30th June 2022 was declared bankrupt on 1 August 2022. The trustee in bankruptcy has informed Acme Ltd that he does not expect a payment of more than 5cents in the $1 to be made to unsecured creditors.

c. There has been a downturn in sales prices in July 2022, with the result that a portion of the inventory on hand at 30th June 2022 will be sold at below cost. Management have advised that there is an excess of cost over net realisable value amounts in total to $100,000.

d. On 16th July 2022 the companys premises situated close to the Werribee River were flooded as the result of a freak storm. The company estimates that uninsured losses of $700,000 will arise ($400,000 stock loss and $300,000 damage to freehold property). Required With reference to relevant audit standards, identify the business risk and outline any resulting potential audit risks that may require further investigation.