During January the audit team was gathering evidence concerning subsequent events and was informed that the client had settled a lawsuit that was $ 125,000 less than the year-end contingent liability related to the lawsuit. The audit team concluded this was a Type I event which required an AJE.

1.At what phase or step in the audit process would this AJE be prepared?

1A.If this adjustment is not booked, list all balance sheet and income statement accounts that will be misstated and indicate whether they will be understated or overstated.

EARTHWEAR CLOTHIERS Schedule of Proposed Adjusting Entries 12/3115 Assets Llobrities Equity Workpoper Ret N10 Revenues Expenses 75.000 140,000 215,000 312.500 F20 Proposed Adjusting Entry Payroll expense Bonuses Accrued liabilities To accrue payroll through 12/31 and recognize bonuses. Cost of sales Inventory To adjust ending inventory based on sample results Inventory Accounts payable To record inventory in transit at 12/31 Accounts receivable Sales To record sales cutoff errors at 12/31 Total (312,500) F20 227,450 227,450 R15 79.850 79.850 (5.200 442.450 79.850 527,500 MG000/ Song Concheon Based on the above the account balances torres Clothes were stated in accord EARTHWEAR CLOTHIERS Schedule of Proposed Adjusting Entries 12/3115 Assets Llobrities Equity Workpoper Ret N10 Revenues Expenses 75.000 140,000 215,000 312.500 F20 Proposed Adjusting Entry Payroll expense Bonuses Accrued liabilities To accrue payroll through 12/31 and recognize bonuses. Cost of sales Inventory To adjust ending inventory based on sample results Inventory Accounts payable To record inventory in transit at 12/31 Accounts receivable Sales To record sales cutoff errors at 12/31 Total (312,500) F20 227,450 227,450 R15 79.850 79.850 (5.200 442.450 79.850 527,500 MG000/ Song Concheon Based on the above the account balances torres Clothes were stated in accord