Question

On February 25, a CPA issued an auditor' report expressing an unqualified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that, on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the ongoing deterioration of the financial condition of the entity's principal customer, which finally led to the customers bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA's next course of action most likely would be to?

1) notify the entity's creditors that the financial statements and the related auditor's report should no longer be relied upon.
2) notify each member of the entity's board of directors about management's refusal to adjust the financial statements.
3) issue revised financial statements and distribute them to each creditor known to be relying on the financial statements.
4) issue a revised auditor's report and distribute it to each creditor known to be relying on the financial statements.

Answer 1

The CPA should first notify the board of directors about management's refusal to adjust the financial statements. If the board does not act appropriately, the CPA should then inform parties relying on the financial statements that they should no longer be relied upon. So the correct answer is option 2.

Step-by-step explanation:

When a CPA discovers that there has been a material subsequent event after the issuance of an unqualified audit report, and management refuses to adjust the financial statements, the CPA should take appropriate action to ensure that the financial statements are not misleading.

The correct course of action in this scenario is closest to option 1. The CPA has an obligation to ensure that the financial statements and related audit report are not relied upon if they are materially misstated. Although the CPA cannot issue revised financial statements on behalf of the entity (options 3 and 4), they should notify the board of directors about the situation.

If the board does not take appropriate action to prevent reliance on the financial statements, the CPA should notify parties that are currently relying on the financial statements and the related auditor's report.