Final answer:
When an audit client's major customer suffers a significant event post year-end, the auditor should first determine if it requires the financial statements to be adjusted or if disclosure in the notes to the financial statements is sufficient. The best initial step is advising management to make relevant disclosures or adjustments. If not resolved, the auditor may need to mention the event in their report or withhold it.
Step-by-step explanation:
If an audit client's major customer suffers a significant event such as a fire after year-end but before the audit is completed, the auditor's response depends heavily on the circumstances and the potential impact on the financial statements. According to auditing standards, when an event occurs after the balance sheet date (known as a subsequent event) that could have a significant direct effect on the financial statements, the auditor should first consider the nature of the event, and the extent to which information about it is available and can be obtained.
Here, the client believes the event could significantly affect the financial statements. In such instances, if the event provides additional information about conditions that existed at the balance sheet date, the financial statements should be adjusted to reflect this information.
If the event provides information about conditions that arose after the balance sheet date, the financial statements should not be adjusted, but disclosure of the event in the notes to the financial statements may be necessary to prevent the financial statements from being misleading. This helps users of the financial statements to make informed decisions.
Ultimately, if management fails to make the required adjustments or disclosures, the auditor must take action, which can include disclosing the event in the auditor's report or withholding the auditor's report until the issue is resolved. However, this is generally a later step, after discussions with management have occurred and not immediately upon learning of the event. Therefore, the best initial course of action is to advise management to disclose the event in the notes to the financial statements or to adjust the financial statements if the event relates to conditions that existed at the balance sheet date.