Area III: Procedures — CPA Practice Question 27

How to approach this question

Distinguish Type 1 (Recognized - existed at BS date) vs Type 2 (Non-recognized - arose after BS date).

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C.Settlement of a lawsuit in January Year 2 for an amount different from the liability recorded at December 31, Year 1, based on events that occurred in Year 1.✓ Correct

Settlement of a lawsuit in January Year 2 for an amount different from the liability recorded at December 31, Year 1, based on events that occurred in Year 1.

The settlement of a lawsuit confirms a condition that existed at the balance sheet date (the liability for the suit). This is a Type 1 (Recognized) subsequent event requiring adjustment to the financial statements. The other options describe events that arose entirely after year-end (Type 2), which require disclosure but not adjustment.

Common mistakes

Confusing the settlement date (Jan) with the condition date (Dec).

Which of the following subsequent events would require adjustment to the financial statements for the year ended December 31, Year 1?

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Practice the full CPA AUD Practice Exam 5

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