Part 2. Subsequent EventsFacts:You are performing an annual audit of a company with a December 31, 20X1 year-end. Your firm is planning to complete the audit on March 1, 20X2 and release the report on March 31, 20X2. On March 15, 20X2, two material subsequent events occur:A fire caused extensive damage to the company’s manufacturing plant in New Jersey.A large customer went bankrupt. At December 31, 20X1, the Company had a receivable of $2,500,000 from this customer; at December 31, 20X1 the Company had established an allowance for doubtful accounts of $700,000 for this customer. Required:Explain whether each subsequent event is a Type 1 or Type 2 Subsequent Event.What is the impact of each subsequent event on the company’s audited financial statements for the year ended December 31, 20X1? Be specific as to whether (a) there will be an adjustment which will cause the company’s balance sheet and / or income statement to change plus footnote disclosure, (b) there will only be footnote disclosure, or (c) there will be no impact to either the financial statements or the footnote disclosures.How should your Audit Firm date its audit report?

1. Subsequent event types: The fire caused damage to the company's manufacturing plant in New Jersey: It is a Type 2 subsequent event. As Type 2 incorporates those events that provide evidence concerned to the conditions which do not exist at the balance sheet reporting date but arose following that reporting date. A large customer went bankrupt: It is a Type 2 subsequent event. Type 2 incorporates those events that provide evidence concerned with the conditions which do not exist at the balance sheet reporting date but arose following that reporting date.The impact of the subsequent events on the audited financial statement of the company for the year ended December, 31 20x1: 1. A fire caused extensive damage to the company’s manufacturing plant in New Jersey: "There will be only a footnote disclosure". As per IAS 10, this event will be treated non-adjusting. Under this standard, any natural disaster like flood and fire that leads to a loss is classified as a non-adjusting event. These types of events do not provide evidence of the conditions that existed at the date of reporting. If the event impacts the organization’s going concern, then it will be treated as an adjusting event and as per the break-up values the organization has to prepare the financial statements. 2. A large customer went bankrupt: There will be only a footnote disclosure". As per the IAS 10, this event will also be treated as a non-adjusting event. Due to this, there will be no adjustments made in the financial statements.According to the PCAOB AS 3110, “Dating of the independent auditor’s report”. For dating the report, the auditor has two alternate methods, first is “dual dating” and other one “as of later date”.

Answered: Required: Explain whether each…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Part 2. Subsequent Events

Facts:

You are performing an annual audit of a company with a December 31, 20X1 year-end. Your firm is planning to complete the audit on March 1, 20X2 and release the report on March 31, 20X2. On March 15, 20X2, two material subsequent events occur:

A fire caused extensive damage to the company’s manufacturing plant in New Jersey.
A large customer went bankrupt. At December 31, 20X1, the Company had a receivable of $2,500,000 from this customer; at December 31, 20X1 the Company had established an allowance for doubtful accounts of $700,000 for this customer.

Required:

Explain whether each subsequent event is a Type 1 or Type 2 Subsequent Event.
What is the impact of each subsequent event on the company’s audited financial statements for the year ended December 31, 20X1? Be specific as to whether (a) there will be an adjustment which will cause the company’s balance sheet and / or income statement to change plus footnote disclosure, (b) there will only be footnote disclosure, or (c) there will be no impact to either the financial statements or the footnote disclosures.
How should your Audit Firm date its audit report?

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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