Final answer:
The auditor should advise the client to disclose the material, uninsured loss in the notes to the financial statements. An adjustment to the financial statements is not made for events occurring after the balance sheet date unless they provide information about conditions existing at that date. The auditor may also add an emphasis-of-matter paragraph to the audit report.
Step-by-step explanation:
If after the balance sheet date, but before the issuance of the audit report, a client suffers an uninsured loss of inventory due to a fire and the amount is material, the auditor should advise the client to disclose the event in the notes to the financial statements. This is in accordance with the accounting principle concerning subsequent events (also known as events after the reporting period) which dictates that such significant non-adjusting events should be disclosed to inform the users of the financial statements about the situation and its financial implications. Adjustment of the financial statements is not appropriate because the event occurred after the balance sheet date. However, if the event provides additional information about conditions that existed at the balance sheet date, then adjustments to the financial statements might be necessary.
While the auditor may suggest adding explanatory language in their report, this advice complements the need for disclosure in the notes rather than replaces it. The auditor might include an emphasis-of-matter paragraph in the audit report regarding the event, which does not modify the opinion but draws attention to the note disclosure. Delaying the issuance of financial statements is generally not advised unless the loss is so significant that the entity's ability to continue as a going concern is brought into question.