Question

The fieldwork for the December 31, 2016 audit of Schmidt Corporation ended on March 17, 2017. The financial statements and auditor's report were mailed March 29, 2017. In each of the situations below, indicate the appropriate action (a, b, c, d, e, f). The possible actions are as follows

a. Request the client to adjust the December 31, 2016 financial statements.

b. Disclose the information in a footnote in the December 31, 2016 financial statements.

c. Request the client recall, revise (with adjustment or footnote disclosure) and reissue the December 31, 2016 financial statements.

d. Request the client to adjust the December 31, 2016 financial statement. Change the audit report date and extend subsequent event testing to the new date.

e. Request the client to recall, revise and reissue the December 31, 2016 financial statement. Change the audit report to a dual dating report.

f. No action is required. The situations are as follows :

________ 1. On April 10, 2017, you discovered that a debtor of Schmidt Corporation went bankrupt on March 18, due to persistent financial health deterioration in recent years.

________ 2. On January 15, 2017, Welder Supply Co., a major customer of Schmidt Corporation declared bankruptcy due to a sudden drop in the market demand of Welder Supply’s products. You didn’t find out about the bankruptcy until March 25, 2017.

________ 3. On March 15, 2017, you noticed that securities held for temporary investment by Schmidt Corporation experienced a significant decrease in market value the day before. ________ 4. On March 20, 2017, another security held for temporary investment by Schmidt Corporation also experienced a significant decrease in market value. You learned of the change in market value the same day.

________ 5. On December 30, 2016, a flood destroyed half of the uninsured inventory in Schmidt's warehouses. You discovered the event on January 10.

Answer 1

Case 1:Answer (c)

In the given case, you have discovered that the debtor went bankrupt after the date of Financial statement i.e., December 31,2016, howver conditions with respect to the evnt existed as at the date of closure of financial statements (due to persistent financial heath detoriation in recent years).Hence, the finacial statements ended 31december 2016 would require adjustments to reflect the subsequent events that took place.

Case 2 : Answer (d)

In the given case , major customer went bankrupt before the issue of audit report but after the date of FS. As the customer went bankrupt due to unforeseen circumstances which do not indicate any conditions/circumstances that existed on the balance sheet date (date of FS), these do not qualify as adjusting events.

However the loss incurred to the company is so material that the fact would impact the economic users decision and it is certain that majority of the amount will not be recovered and hence this event will need adjustment to the financial statements.

Case 3 and case 4: Answer (f) No action required.

Fall in the market value of temporary investments do not represent any conditions existed as on the date of balance sheet, hence no adjustment is required.

Case 5: Answer (b)

A flood in the warehouse does not represent conditions existed on the date of financial statement, hence is not to be recognised in the financial statement. However a subsequent event footnote disclosure should be made so that the investors know that the event has occurred.