Question

A lawsuit was settled after the audited financial statements had been issued. The issued statements contain a disclosure, in the footnote, of the lawsuit as a contingent liability and the lawyer's opinion that the outcome was expected to be favorable to the company. The settlement turned out to be a big loss for the company. What should the auditor do now? Explain your reasoning.

Answer 1

As the financial statements have been issued this will not be regarded as a “subsequent event”.

After the financial statement has been issued then the auditor does not have any kind of obligation to perform any audit procedures with regards to the financial statements. However in this case the event is quite significant as the settlement has turned out to be a big loss for the company. If this fact was known to the auditor at the date of the auditor’s report then the auditor would have certainly amended his report. So in this case the auditor will:

· Discuss the matter with the management

· Determine if the financial statements need amendment

· Inquire how the management intends to address the matter in the financial statements

In case management of the company amends the financial statements to account for the loss due to the settlement of the lawsuit then the auditor will have to:

· Carry out audit procedures that are required as well as necessary in the circumstances on the amendment

· Review and examine the steps that have been taken by the management to ensure that all recipients of the previously issued financial statements have been informed of this development

· Extend the audit procedure and provide a new auditor’s report on the amended financial statements