Reference no: EM131216118

The auditor is auditing financial statements for the year ended December 31, 2015, and is completing the audit early March 2016. The following situations have come to the auditor’s attention. Indicate and explain whether the financial statements should be adjusted only, adjusted and disclosed, disclosed, disclosed only, or neither adjusted nor disclosed.

1. On February 12, 2016, the client agreed to and out-of-court settlement of a property damage suit resulting from an accident caused by one of its delivery trucks. The accident occurred on November 20, 2015. An estimated loss of $30,000 was accrued in the 2015 financial statements. The settlement was for $50,000.

2. Same facts as in Part 1, except the accident occurred January 1, 2016, and no loss was accrued.

3. The client is a bank, a major commercial loan customer filed for bankruptcy on February 26, 2016. The bankruptcy was caused by an adverse court decision on February 15, 2016, involving a product liability lawsuit initiated in 2014 arising from product sold in 2014.

4. The client purchased raw materials that were received just before year-end. The purchase was recorded based on its estimated value. The invoice was not received until January 31, 2016, and the cost was substantially different than was estimated.

5. On February 2, 2016, the board of directors took the following actions:

a) Approved officers’ salaries for 2016.

b) Approved the sale of a significant bond issue.

c) Approved a new union contract containing increased wages and fringe benefits for most of the employees. The employees had been on strike since January 2, 2016.

6. A major customer was killed in a boating accident on January 25, 2016. The customer had pledged his boat as collateral against a loan that he took out in 2015. The boat, which was destroyed in the accident, was not insured. The allowance for doubtful accounts is not adequate to cover the anticipated loss.

This question is referring to Auditing,