Question

24-27 The field work for the June 30, 2019, audit of Tracy Brewing Company was finished August 19, 2019, and the completed financial statements, accompanied by the signed audit reports, were mailed September 6, 2019. In each of the highly material independent events (a. through h.), state the appropriate action (1 through 4) for the situation and justify your response. The alternative actions are as follows:

1. Adjust the June 30, 2019, financial statements.

2. Disclose the information in a footnote in the June 30, 2019, financial statements.

3. Request the client to recall the June 30, 2019, statements for revision.

4. No action required.

The events are as follows:

a. On December 14, 2019, the auditor discovered that a debtor of Tracy Brewing went bankrupt on July 15, 2019, due to declining financial health. The sale generating the receivable had taken place January 15, 2019.

b. On December 14, 2019, the auditor discovered that a debtor of Tracy Brewing went bankrupt on October 2, 2019. The sale had taken place April 15, 2019, but the amount appeared collectible at June 30, 2019, and August 19, 2019.

c. On August 15, 2019, the auditor discovered that a debtor of Tracy Brewing went bankrupt on August 1, 2019. The most recent sale had taken place April 2, 2018, and no cash receipts had been received since that date.

d. On July 20, 2019, Tracy Brewing settled a lawsuit out of court that had originated in 2016 and is currently listed as a contingent liability.

e. On September 14, 2019, Tracy Brewing lost a court case that had originated in 2018 for an amount equal to the lawsuit. The June 30, 2019, footnotes state that in the opinion of legal counsel, there will be a favorable settlement

. f. On July 20, 2019, a lawsuit was filed against Tracy Brewing for a patent infringement action that allegedly took place in early 2019. In the opinion of legal counsel, there is a danger of a significant loss to the client.

g. On May 31, 2019, the auditor discovered an uninsured lawsuit against Tracy Brewing that had originated on February 28, 2019.

h. On August 6, 2019, the auditor discovered that a debtor of Tracy Brewing went bankrupt on July 30, 2019. The cause of the bankruptcy was an unexpected loss of a major lawsuit on July 15, 2019, resulting from a product deficiency suit by a different customer.

Answer 1

Requirement a

Amount should have been recognized to be uncollectible at the end of fact-finding, but it was revealed after the issuance of the statements. The F/S’s should have been known to be misstated on 19.8.2019. F/S’s will need to be evoked and reaffirmed.

Requirement b

Since amount seemed collectible after information-gathering, there is nothing that requires to be done since it was revealed after the report issuance date.

Requirement c

the uncollectible amount was determined before the end of information-gathering, so restate the F/S’s

Requirement d

The settlement should be replicated in the 30.6.2019 F/S’s as this is a classic type 1 subsequent event -- the conclusion or purpose of situations which were already on going at the B/S date.

Requirement e

The F/S’s were alleged to be impartially indicated on 30.6.2019 and 19.8.2019

Requirement f

The reason of the lawsuit arose before the B/S date and the lawsuit should be incorporated in the 30.6.2019 footnotes. Note: if the loss is both probable and can be rationally assessed, then answer 1 is correct to adjust the F/S’s for the amount of the expected loss.

Requirement g

The amount is unidentified to the auditor. disclose in the footnotes since the lawsuit was originated in the current year, but the amount of the loss is unknown.

Requirement h

The reason of the bankruptcy took place after the B/S date 30.6.2019. Therefore the B/S was justly itemized at that date. Footnote disclosure is necessary because the subsequent event is material.