Question

our client's largest customer suffered a significant loss due to a fire occurring ifter the balance sheet date but before the audit report date. Your client believes this event could significantly affect the client's future financial performance because the customer's purchases account for over 80% of the client's annual sales. How should you address this subsequent event? a. Advise management to record an adjusting entry to write off all A/R from the customer as uncollectible as of the balance sheet date. b. Issue a disclaimer of opinion on the client's financial statements due to the scope limitation. c. Ignore any potential implications of the event because the auditor has no responsibility regarding subsequent events. d. Advise management to disclose the fire and its potential impact on future financial performance and the collectability of the customer's A/R in the F/S footnotes.

Answer 1

The correct action is to advise management to disclose the subsequent event—the customer's fire— and its potential impact on future financial performance and the collectability of A/R in the financial statements' footnotes.

Step-by-step explanation:

The student's question pertains to the treatment of a subsequent event in auditing, specifically one that occurred after the balance sheet date but before the audit report date. According to auditing standards, auditors have a responsibility to evaluate subsequent events that could have a material effect on the financial statements. In this case, where the client's largest customer suffered a significant loss due to a fire and the customer accounts for a significant portion of the client's sales, this event could affect the client's future financial performance and the collectability of the customer's accounts receivable (A/R).

The correct course of action is to advise management to disclose the fire and its potential impact on future financial performance and the collectability of the customer's A/R in the financial statements (F/S) footnotes (option d). This disclosure would inform users of the financial statements about the event and its potential effects. It is not appropriate to write off all A/R as uncollectible at the balance sheet date, disclaim an opinion, or ignore the event. The necessary disclosure in the footnotes would ensure that the financial statements present a true and fair view of the company's financial position and performance after considering the subsequent event.

Answer 2

The appropriate response to the subsequent event where the client's largest customer suffered a loss because of a fire is to disclose the event and its potential impact in the financial statements' footnotes.

Step-by-step explanation:

The subsequent event described, a fire affecting a significant customer after the balance sheet date, should indeed be addressed. The correct action is to disclose the event in the financial statements (F/S) footnotes. This disclosure should detail the nature of the event and its potential impact on future financial performance and the collectability of the customer's accounts receivable (A/R). It's not appropriate to write off the A/R as of the balance sheet date, issue a disclaimer of opinion, or ignore the subsequent event entirely.