QUESTION 1 (28 marks)
You are an audit trainee busy with your third and final year of articles. Part of your
daily tasks is assisting your clients with any queries they might have on accounting for
items in their records and financial statements.
The following relates to queries you received from some of your clients.
Query 1
Machine Mania (Pty) Ltd is being sued by one of their customers who claim that a
machine purchased from Machine Mania (Pty) Ltd was faulty. The faulty machine
caused serious injuries to one of the customer’s employees and they therefore
instituted a claim of R1 000 000 against Machine Mania (Pty) Ltd on 30 November
2023. Machine Mania (Pty) Ltd has sought legal advice and is disputing the claim. The
outcome of the dispute is not yet known at year-end, 31 December 2023.
Machine Mania (Pty) Ltd is of the opinion that they will not be required to recognise a
liability in relation to the claim in their 31 December 2023 annual financial statements.
REQUIRED:
Please note that the following questions need to be answered with reference to the
Conceptual Framework for Financial Reporting ONLY.
1.1) With reference to Query 1, advise Machine Mania (Pty) Ltd whether they are
correct in not raising a liability for the claim instituted by the customer in their
annual financial statements for the financial year ended 31 December 2023.
(12 marks)
