Which of the following events occurring after the balance sheet date but before the auditor's report date would require ADJUSTMENT to the financial statements?

Answer options:

Loss of plant and equipment due to a fire.

Sale of a bond issue.

Settlement of a lawsuit for an amount different from the amount recorded at year-end, where the cause of the litigation existed at year-end.

A major business combination.

How to approach this question

Distinguish Type 1 (Adjust) vs Type 2 (Disclose). Type 1: Condition existed at Balance Sheet date. Type 2: Condition arose after.

Full Answer

C.Settlement of a lawsuit for an amount different from the amount recorded at year-end, where the cause of the litigation existed at year-end.✓ Correct

Settlement of a lawsuit for an amount different from the amount recorded at year-end, where the cause of the litigation existed at year-end.

Subsequent events that provide additional evidence about conditions that existed at the date of the financial statements (Type 1) require adjustment. A lawsuit settlement confirms the liability that existed at year-end.

Common mistakes

Confusing Type 1 and Type 2 events.

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