ExpertACCA · Question 11 · Review and reporting
CASE 3: AQUAGRID UTILITIES PLC
AquaGrid Utilities PLC is a listed public water utility company. The audit for the year ended 31 March 2026 is nearing completion. In April 2026, a major water main burst, causing significant flooding and resulting in a pending lawsuit against AquaGrid. Furthermore, the company is struggling to meet its debt covenants due to a regulatory cap on water tariffs. The audit partner is reviewing the draft financial statements and considering the implications for the auditor's report.
How should the burst water main and resulting lawsuit in April 2026 be treated in the financial statements for the year ended 31 March 2026?
CASE 3: AQUAGRID UTILITIES PLC
AquaGrid Utilities PLC is a listed public water utility company. The audit for the year ended 31 March 2026 is nearing completion. In April 2026, a major water main burst, causing significant flooding and resulting in a pending lawsuit against AquaGrid. Furthermore, the company is struggling to meet its debt covenants due to a regulatory cap on water tariffs. The audit partner is reviewing the draft financial statements and considering the implications for the auditor's report.
How should the burst water main and resulting lawsuit in April 2026 be treated in the financial statements for the year ended 31 March 2026?
Answer options:
As an adjusting event, requiring a provision for the lawsuit to be recognized in the 31 March 2026 financial statements.
As a non-adjusting event, requiring disclosure of the nature of the event and an estimate of its financial effect in the notes.
It should be ignored completely as it occurred after the year-end date.
As a contingent liability requiring both a provision and a disclosure note.
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