Subject: Auditing

Brad Gokool is reviewing the results of the subsequent events audit procedures, Brad is writing a report for his audit partner based on these results and will be attending a meeting tomorrow with the partner and representatives of the company to discuss them. The issue will be whether the financial statements should be amended or additional notes should be included for these subsequent events, Many of the items are not material and Brad will recommend that no action be taken with respect to these. However, there are several items that Brad believes are material and should be discussed at the meeting. These are: . The board is planning to issue shares in a private placement on August 15. The share issue is to fund the purchase of a 60-percent stake in another company. The negotiations are in the final stages and although the Contract is not yet signed, it will be signed by August 15. A statement of claim was lodged in court in the week after year end claiming damages for illness allegedly caused by chemicals used at a subsidiary company's manufacturing plant in the 1990s. This is the tenth such claim lodged and the client has denied responsibility in all cases because it was unreasonable to believe at that time that these chemicals had adverse health effects. The claimant has new scientific evidence that counters this defence. The review of subsequent cash receipts has revealed that several of the accounts receivable that were considered doubtful have now been paid. However, the audit procedures have shown that a large customer with a significant receivable balance considered safe on June 30 unexpectedly declared bankruptcy on July 20. The year end for the company is June 30 and the audit report is due to be signed on August 20. Which of the following accurately describes the events listed? Issuing shares on August 15th is a type 2 event Negotiations for the purchase of another company is a type 1 event Lawsuit filed after year-end is a type 1 event The financial statements should be adjusted to reflect receivables that were previously deemed to be doubtful Issuing of shares on August 15th should be disclosed in the notes to the financial statements The lawsuit shows evidence of conditions that arose after the date of the financial statements