ExpertMedium1 markMultiple Choice
CPA · Question 52 · Area III: Performing Procedures
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 year-end but before the report release date would require adjustment to the financial statements?
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 year-end but before the report release date would require adjustment to the financial statements?
Answer options:
A.
Loss of plant due to fire.
B.
Sale of a bond issue.
C.
Settlement of a lawsuit for an amount different from the amount recorded at year-end.
D.
Acquisition of a subsidiary.
How to approach this question
Subsequent Events: Type 1 (Existed at BS date) -> Adjust. Type 2 (New condition) -> Disclose.
Full Answer
C.Settlement of a lawsuit for an amount different from the amount recorded at year-end.✓ Correct
Settlement of a lawsuit for an amount different from the amount recorded at year-end.
Settlement of litigation confirms the amount of the liability that existed at the balance sheet date. This is a recognized subsequent event requiring adjustment.
Common mistakes
Confusing Type 1 and Type 2 events.
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