The auditor is auditing financial statements for the year ended December 31, 201

Question

The auditor is auditing financial statements for the year ended December 31, 2015, and is competing the audit in early March 2016. 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.

On February 12, 2016, 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, 2015. An estimated loss of $30,000 was accrued in the 2015 financial statements. The settlement was for $50,000.

Same facts as in Part 1, except the accident occurred January 1, 2016, and no loss was accrued.

The client is a bank A major commercial loan customer filed for bankruptcy on February 26, 2016. The bankruptcy was caused by an adverse court decision on February 15, 2016, involving a product liability lawsuit initiated in 2014 arising from products sold in 2014.

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, 2016, and the cost was substantially different than was estimated.

On February 2, 2016, the board of directors took the following actions:

(a) Approved officers' salaries for 2016.

(b) Approved the sale of a significant bond issue.

(c) Approved a new union contract containing increased wages and fringe benefits for most of the employees. The employees had been on strike since January 2, 2016.

A major customer was killed in a boating accident on January 25, 2016. The customer had pledged his bot as collateral against a loan that he took out in 2015. The boat, which was destroyed in the accident, was not insured. The allowance for doubtful accounts is not adequate to cover the anticipated loss.

Explanation / Answer

On February 12, 2016, the client agreed to an out-of-court settlement of a property damage suitresulting from an accident caused by one of its delivery trucks. The accident occurred onNovember 20, 2015. An estimated loss of $30,000 was accrued in the 2015 financial statements. The settlement was for $50,000.

The amount should be adjusted and disclosed in the financial statements. In the present case, the accident occured during the audit period. The provision is to be adjusted for the difference in the estimated loss(provision) of $30,000 and actual settlement of $50,000. Therefore the provision should be adjusted for $ 20,000.

Same facts as in Part 1, except the accident occurred January 1, 2016, and no loss was accrued.

Since the event happened after audit period, i.e., January 1, 2016. The amount will be disclosed only in the financial statements.

The client is a bank A major commercial loan customer filed for bankruptcy on February 26, 2016. The bankruptcy was caused by an adverse court decision on February 15, 2016, involving a product liability lawsuit initiated in 2014 arising from products sold in 2014.

Any additional amount required over and in excess of the present provision is adjusted only in the financial statements. In this case, the aditor needs to verify the amount of recovery and provision already made for the loss incurred by the client.

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, 2016, and the cost was substantially different than was estimated.

Again as stated above the amount is only adjusted in the financial statements. The cost of inventory and the account payable amount is to be adjusted, based on the actual invoice amount received.

On February 2, 2016, the board of directors took the following actions:

(a) Approved officers' salaries for 2016.

(b) Approved the sale of a significant bond issue.

(c) Approved a new union contract containing increased wages and fringe benefits for most of the employees. The employees had been on strike since January 2, 2016.

(a) Approved officer's salaries for 2016, (b) Approved the sale of a significant bond issue, and (approved a new union contract containing increased wages and fringe benefits for most of the employees. The employees had been on strike since january 2,2016)..............Neither of the items are to be adjusted not it could be disclosed in the financial statements. But the auditor needs to verify if there are any retrospective effects in 2015, and adjust if it is required, accordingly. However the items in (b) and (c) could be disclosed in subsequent events.

A major customer was killed in a boating accident on January 25, 2016. The customer had pledged his bot as collateral against a loan that he took out in 2015. The boat, which was destroyed in the accident, was not insured. The allowance for doubtful accounts is not adequate to cover the anticipated loss.

The amount is adjusted in the financial statements only.

The auditor is required to verify the amount of allowance of doubtful accounts and the provision needs to be made for the additional amount as and when required.

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