CPA · Question 32 · Area III: Performing Procedures
An auditor is performing an audit of a nonissuer's financial statements. The auditor identifies a subsequent event occurring after the balance sheet date but before the financial statements are issued: the settlement of a lawsuit for an amount significantly different from the year-end accrual. The cause of the lawsuit existed at the balance sheet date. How should this event be treated?
Answer options:
Adjust the financial statements to reflect the settlement amount.
Disclose the settlement in the notes but do not adjust the financial statements.
Recognize the difference as a gain or loss in the subsequent year.
Request management to rescind the settlement until after the audit report date.
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