Question 5 Completing the Audit 15 Marks Your firm is the external auditor to Aroha Fashion (AF). AF's balance date is of 31 December 2019. The audit of AF is nearly complete on 3rd March 2020 and the financial statements and the audit report are due to be signed within a week. However, the following additional information on two material events has just been presented to the auditor. No entries in respect to them have been made in the accounting records. The dollar amounts involved are material to the financial statements of AF Event 01- Default AF has guaranteed the payment of interest on the 10-year interest loans of Newart, an associated company. Outstanding loans of Newart Company amount to $150,000 with interest payable at 5% per annum, due 31 June and 31 December of each year. The loans were taken out by Newart Company on 1 January 2018, and all interest payments have been met by that company except the payment due on 31 December 2019. Newart states that it will pay the defaulted interest to the lenders on 25 January 2020. Event 02-Legal action On 15 December 2019, Dalton Company Ltd filed a case against AF for breach of contract. At the time of the audit, Lawyers informally stated that the outcome of the legal action is not going well'. Required: NZ As per liability" IAS 37 define "contingent (2 marks) 2. Referring to NZ IAS 37 Provisions, contingent liabilities, and contingent assets, . Explain if the two events are a liability, provision, or contingent liability? (04 marks) Event 01: Event 02: b. State how the above events should be recorded in financial statements. (1 marks) 3. Describe the audit procedures you will carry out to determine how the company will account for default interest of Newart. (4 marks) 4. Describe the audit procedures you will carry out to determine how the company will account for the legal actions facing AF. (4 marks) 11