The following questions concern subsequent events. Read the background

information

related to the company and the description of each event, and answer the related

questions.

BACKGROUND INFORMATION

Silo Inc. manufactures industrial chemicals. It has a chemical plant in Sarnia, Ontario, and

four offsite storage locations for finished goods. Silo$$s year$-$end was October $31,2020.$ It is now

November $25$: The audit has been completed, and the auditors plan to have the closing meeting

with the audit committee for approval of the financial statements next week.

Planning materiality is $$280000$ and performance materiality is $$170000.$ Net income

before taxes is $$5600000.$ The total of uncorrected misstatements is $$50000$ overstatement

of net income.

The following two events have occurred subsequent to the year$-$end. At this point, no

adjustments or additional disclosures have been made in the financial statements with regard

to the two events.

Subsequent Event $1$

Silo undertakes extensive quality control checks prior to delivering its chemicals. Based

upon testing performed on November $3,2020,$ quality control concluded that a batch

of chemicals produced in October was defective. The cost of this batch was $$350000.$

Management

does not have any other options except to sell the chemicals for scrap $($at a

value of $$100000).$

a$.$ Before concluding on the appropriate financial statement treatment, provide two audit

procedures that the auditor could perform to assess the impact of the event.

$612$ CHAPTER $17$ I COMPLETING THE AUDIT

b$.$ Choose the best response. Assuming that the auditor has performed additional audit

procedures to corroborate the details of the event, the auditor should

$(1)$ advise client management to adjust the financial statements for the $$300000$ writedown

of inventory and disclose the details of the event.

$(2)$ advise client management to include a note explaining the details of the event with

no adjustment to the financial statements.

$(3)$ post the adjustment to the summary of identified misstatements, with no further

action required.

$(4)$ revise planning materiality.

Subsequent Event $2$

An explosion occurred at the smallest of the four offsite storage locations on November $20,$

$2020.$ This resulted in some damage to inventory and property, plant, and equipment. Based

upon its internal investigation, Silo management determined the cause was lack of safety training.

As a result, it does not think that insurance will cover the losses or repair costs. Management

has decided to close the storage facility and move the chemicals to another facility. The

estimated value of damaged inventory and property, plant, and equipment was $$900000,$ with

no scrap value.

c$.$ Before concluding on the appropriate financial statement treatment, provide two audit

procedures that the auditor could perform to assess the impact of the event.

d$.$ Choose the best response. Assuming that the auditor has performed additional audit

procedures to corroborate the details of the event, the auditor should

$(1)$ advise client management to adjust the financial statements, write off the $$900000$

value of the assets, and disclose the details of the event.

$(2)$ advise client management to include a note explaining the details of the event

and describing the value of the assets affected, with no adjustment to the financial

statements.

$(3)$ post the adjustment to the summary of identified misstatements, with no further

action required.

$(4)$ revise planning materiality.