Final answer:
An auditor is required to take further action on the audited financial statements if a development occurs affecting the entity's ability to continue as a going concern. Other listed scenarios like post-report fraud initiation, lawsuit resolution, or discovery of prior related party transactions do not automatically trigger this obligation.
Step-by-step explanation:
After the issuance of an auditor's report, the auditor generally has no further obligations regarding the audited financial statements unless certain conditions arise. One such condition that obligates the auditor to take action is if a development occurs that may affect the entity's ability to continue as a going concern.
A going concern is an assumption that the entity will continue its operations for the foreseeable future and does not intend to liquidate its assets or cease operations. In such cases, the auditor may need to perform additional procedures to determine the appropriate action, which could include revising the auditor's report or notifying those charged with governance in the entity.
Among the options provided, the situation where a material fraud is initiated by an employee after the report is issued does not impose a duty on the auditor regarding previously issued financial statements, as the fraud occurred subsequent to the audit period. Similarly, the resolution of a lawsuit considered remotely risky in the company's favor or the discovery of significant non-arms-length, related party transactions that happened before year-end does not, by themselves, necessitate the auditor to perform further inquiries on the already issued report.