Final answer:
An adjusting entry allocates income and expenditure accurately to the accounting period where they occurred. A subsequent event provides additional evidence regarding the company's financial position after the balance sheet date but before the financial statements are issued. Accrual involves recording transactions when they occur, not when cash is exchanged.
Step-by-step explanation:
In the context of auditing financial statements such as those of Hollis Manufacturing Corporation, identifying and dealing with subsequent events is crucial for presenting accurate financial health of the company as of the fiscal year-end. An adjusting entry is a journal entry made in the accounting records at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred. The purpose is to adjust the accounts to accurately represent the financial position of the company.
A subsequent event occurs after the balance sheet date but before the financial statements are issued or available to be issued. There are two types of subsequent events: those that provide additional evidence about conditions that existed at the date of the balance sheet and those that are indicative of conditions that arose subsequent to the balance sheet date. The former may require an adjusting entry to the financial statements.
An accrual involves recording revenue and expenses that have been incurred but not yet received or paid. This process adheres to the accrual basis of accounting, which states that transactions should be recognized when they occur, not necessarily when cash changes hands.