Question

In: Accounting

a. You are auditing a company as of 12/31/20X1. The client is involved in pending or...


a. You are auditing a company as of 12/31/20X1. The client is involved in pending or threatened litigation as of 12/31/20X1. When drafting the attorney letter to be sent to the Law Firm handling the litigation, one option is for the auditor and client personnel to write & include a description of pending or threatened litigation in the attorney letter. What is a more practical option?


b. You are performing an annual audit of a company with a December 31, 20X1 year-end. Your firm is planning to complete the audit on March 1, 20X2 and release the report shortly thereafter. On February 15, 20X2, two material subsequent events occur:
• There was a significant fire at one of the company’s manufacturing plants, and
• One of the company’s customers files for bankruptcy; your client had an accounts receivable of $300,000 from this customer at 12/31/20X1
What impact, if any, will these two subsequent events have on your client’s 12/31/20X1 audited
financial statements?


a. You are auditing a company as of 12/31/20X1. The client is involved in pending or threatened litigation as of 12/31/20X1. When drafting the attorney letter to be sent to the Law Firm handling the litigation, one option is for the auditor and client personnel to write & include a description of pending or threatened litigation in the attorney letter. What is a more practical option? (3 Points)

the question is like that


Solutions

Expert Solution

a) Th Auditors primary responsibility is to send a letter of audit enquiry to the law firm to obtain the confirmation on the details obtained by the management regarding the pending or threatening litigations. So, the the attorney letter includes

1) The name of the compamy, its subsidiaries and date of audit

2) A list of threatened and pending claims with respect to which lawyer has engaged

3) A list prepared by the management that describes and evaluates the unasserted claims

4) reuest to the lawyer to provde his opinion on all those matters furnished in the letter and also mention if there are any limitations on the opinion given

b) Subsequent Events: Subsequent events aer those events which are occurs after the balance sheet date but before the reporting date. Subsequent events are of 2 types. !) Events that are recognized 2) Events that are not recognized

Events that are Recognised: The events which have the probability of existing and are recognised before balance sheet date but occurred after the balance sheet date. So fter the occurence of the event but before the reporting date, adjustments should be made to the finanial statements for the events are to be recognised due to its materiality because non disclosure will effect the decision making of the users

Events that are not recognized: The events which we do not have any idea of their existence and hence we do not recognise. Such events occurs after the balance sheet date. Adjustments to the financial statements are not required but the dislosure should be made in the foot notes of the financial statements to let the users know that the event occured.

There was a significant fire at one of the company’s manufacturing plants,

This is a subsequent event that is not recognised because we do not have any idea of existence. So, we have to provide a disclosure to the financial statements to let the users know about the existence of fire as it had an impact on the decision making of the users So, no adjustments are made to the financial statements.

One of the company’s customers files for bankruptcy; your client had an accounts receivable of $300,000 from this customer at 12/31/20X1

The company doesnot know that the customer will file for bankrutcy and so didnot provide any provision for doubtful accounts ant the vent occured after balance sheet date and before reposting date which is a non recognised event. So, it is not required to do any adjustments to the financial tatements but have to provide adislosure in the footnotes of the financial statements as it has a impact on the decision making of investors..


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