Final answer:
The auditor should advise management to disclose the event in the notes to the financial statements as it is a subsequent event that could significantly affect the entity's financial statements.
Step-by-step explanation:
In the scenario where a major customer of an entity suffers a fire after the year-end but before the completion of audit fieldwork, and the entity believes the event may significantly affect the financial statements, the auditor should advise management to disclose the event in the notes to the financial statements. This is because the event occurs after the balance sheet date but may have a significant impact on the financial position or performance and is, therefore, a subsequent event that requires disclosure for users of the financial statements to make informed decisions.
Disclosing the subsequent event in the notes to the financial statements provides transparency and complies with accounting principles regarding subsequent events. If the event had occurred prior to the end year and had a material effect, an adjustment to the financial statements would have been necessary. However, because this incident occurred after the reporting period, it needs to be noted as it could influence the assessment of the entity's financial health.
Directing the disclosure in the audit report itself might not be necessary unless the auditor concludes that the management's disclosure is inadequate. In such cases, the auditor should describe the nature of the event and, if practicable, provide an estimate of its financial effect or state the reason such an estimate cannot be made. Withholding the auditor's report until the full effects are known is unnecessary and could unduly delay the issuance of the financial statements and audit report.