An auditor is performing a review of a nonissuer's financial statements. The auditor inquires about subsequent events. Which of the following events occurring after the balance sheet date but before the report date would MOST likely require adjustment to the financial statements?

Answer options:

Bankruptcy of a major customer who had a large outstanding receivable balance at year-end.

Issuance of a significant bond payable.

Loss of plant due to a fire.

A major business combination.

How to approach this question

Type 1 (Adjust) vs Type 2 (Disclose). Bankruptcy of a customer is the CLASSIC Type 1 example because they didn't go broke overnight; they were broke at year-end, we just know it for sure now.

Full Answer

A.Bankruptcy of a major customer who had a large outstanding receivable balance at year-end.✓ Correct

The bankruptcy of a customer with an outstanding balance usually indicates that the financial difficulty existed at the balance sheet date. This provides additional evidence about the valuation of the receivable at year-end, requiring adjustment (Type 1 event).

Common mistakes

Thinking bankruptcy is a 'new' event. It's the culmination of an old condition.

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