Chapter 24, Problem 25DQP

The field work for the June 30, 2016, audit of Tracy Brewing

Company was finished August 19, 2016, and the completed financial statements, accompanied by the signed audit reports, were mailed September 6, 2016. In each of the highly material independent events (a. through h.), state the appropriate action (1 through 4) for the situation and justify your response. The alternative actions are as follows:

1. 1. Adjust the June 30, 2016, financial statements.
2. 2. Disclose the information in a footnote in the June 30, 2016, financial statements.
3. 3. Request the client to recall the June 30, 2016, statements for revision.
4. 4. No action is required.

The events are as follows:

1. a. On August 6, 2016, the auditor discovered that a debtor of Tracy Brewing went bankrupt on July 30, 2016. The cause of the bankruptcy was an unexpected loss of a major lawsuit on July 15, 2016, resulting from a product deficiency suit by a different customer.
2. b. On December 14, 2016, the auditor discovered that a debtor of Tracy Brewing went bankrupt on July 15, 2016, due to declining financial health. The sale generating the receivable had taken place January 15, 2016.
3. c. On December 14, 2016, the auditor discovered that a debtor of Tracy Brewing went bankrupt on October 2, 2016. The sale had taken place April 15, 2016, but the amount appeared collectible at June 30, 2016, and August 19, 2016.
4. d. On August 15, 2016, the auditor discovered that a debtor of Tracy Brewing went bankrupt on August 1, 2016. The most recent sale had taken place April 2, 2015, and no cash receipts had been received since that date.
5. e. On July 20, 2016, Tracy Brewing settled a lawsuit out of court that had originated in 2013 and is currently listed as a contingent liability.
6. f. On September 14, 2016, Tracy Brewing lost a court case that had originated in 2015 for an amount equal to the lawsuit. The June 30, 2016, footnotes state that in the opinion of legal counsel, there will be a favorable settlement.
7. g. On July 20, 2016, a lawsuit was filed against Tracy Brewing for a patent infringement action that allegedly took place in early 2016. In the opinion of legal counsel, there is a danger of a significant loss to the client.
8. h. On May 31, 2016, the auditor discovered an uninsured lawsuit against Tracy Brewing that had originated on February 28, 2016.