Question
The auditor is auditing financial statements for the year ended December 31, 2016, and is completing the audit in early March 2017. The following situations
The auditor is auditing financial statements for the year ended December 31, 2016, and is completing the audit in early March 2017. The following situations have come to the auditor's attention. Indicate and explain whether the financial statements should be adjusted only, adjusted and disclosed, disclosed only, or neither adjusted nor disclosed. (1) On February 12, 2017, the client agreed to an out-of-court settlement of a property damage suit resulting from an accident caused by one of its delivery trucks. The accident occurred on November 20, 2016. An estimated loss of $30,000 was accrued in the 2016 financial statements. The settlement was for $50,000. (2) Same facts as in part 1, except the accident occurred January 1, 2017, and no loss was accrued. (3) The client is a bank. A major commercial loan customer filed for bankruptcy on February 26, 2017. The bankruptcy was caused by an adverse court decision on February 14, 2017, involving a product liability lawsuit initiated in 2015 arising from products sold in 2015. (4) The client purchased raw materials that were received just before year end. The purchase was recorded based on its estimated value. The invoice was not received until January 31, 2017, and the cost was substantially different than was estimated. (5) On February 2, 2017, the board of directors took the following actions: (a) Approved officers' salaries for 2017. (b) Approved the sale of a significant bond issue. (6) A major customer was killed in a boating accident on January 21, 2017. The customer had pledged his boat as collateral against a loan that he took out in 2016. The boat, which was destroyed in the accident, was not insured. The allowance for doubtful accounts is not adequate to cover the anticipated loss.
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