Question

You are the auditor of South Face, a public company. South Face ("the Company") manufactures and distributes ski and snowboard equipment worldwide through a network of independent distributors. You are conducting the audit for the year ended December 31, 2019. The following unrelated events occur and/or come to your attention after the balance sheet date but before the date of your opinion on the financial statements (February 28, 2020):

South Face’s largest customer, Ratagonia, filed bankruptcy (due to deteriorating financial condition) in January 2020. South Face has a material accounts receivable balance due from Ratagonia as of December 31, 2019.
The Company was so caught up in its own success that it forgot to accrue for bonuses earned by senior management during 2019 but payable in February 2020. The aggregate bonus amount was $920,000.
There was an avalanche in Park City, Utah resulting in serious damage to the Company’s main manufacturing plant on February 14, 2020. Even after insurance reimbursements, the Company expects to have material losses as a result of the avalanche. (Note: you do not need to discuss the adequacy of their insurance policy).
An elderly long-time user of South Face equipment was paralyzed in a skiing accident on December 28, 2019. Her family files a lawsuit against the Company on February 21, 2020 alleging that her accident was related to an issue with her ski bindings. Ms. P Street, the Company’s attorney, believes that a significant settlement is probable but the actual amount cannot yet be estimated. The financial statements for the year ended December 31, 2019 do not include an accrual for the pending settlement.
South Face declared a cash dividend of $2.00/common share outstanding on December 27, 2019. The dividend is payable on February 3, 2020 to the common shareholders of record on the declaration date. No entries have been made in the accounting records in relation to this declaration. There were 425,210 common shares outstanding on December 27, 2019.
The price of the Company stock increased from $35 per share on December 31, 2019 to $60 per share on March 1, 2020. It’s a volatile market!
II. For each of the above six items, state the appropriate action for the situation:

A. Adjust the December 31, 2019 financial statements

B. Disclose the information in a footnote to the December 31, 2019 financial statements but

do not adjust the 2019 financial statements

C. No action is required

Answer 1

Answer:1. A adjust the December 31 2019 financial statement. This item was available as at year end and may affect going concern.

2. A. adjust the December 31 2019 financial statement, since the bonus was earned in 2019.

3.B. this will only be disclose as it's not related to 2019

4.B. since it's only probably and not certain

5A . since the declaration is for 2019 financial year

6 C this is just a market information.

Step-by-step explanation: