Question

Assume that you are the financial statement auditor in the following independent cases, and you are completing your audit in February 20X2.
1. During January 20X2, the company’s management decided to sell rental real estate properties that accounted for approximately 40% of its total revenues in 20X1.
2. The company’s main factory was closed for six weeks in January and February of 20X2 because of ice storm damage. The factory resumed full operations in late February.
3. One of the company’s factories was destroyed by a fire in January. The plant was old and will not be replaced, as production can be taken up by excess capacity in other plants.
4. In late February, the company’s board of directors agreed to settle an outstanding claim by paying $15 million to former employees. The employees suffered health problems related to asbestos exposure during the years of their employment. A contingent liability was disclosed but not accrued as of December 31, 20X1, because of the uncertainty surrounding the outcome of the lawsuit.
5. For the past four years, the company has made 90% of its revenues and profits from sales of specialty cable to computer manufacturers. Early in 20X2, it has become apparent that there is massive overcapacity in this industry, and demand for the product has fallen to almost zero. It is not expected to recover for several years, and may never recover if alternate technologies developed in the meantime make the product unnecessary.

Required:
a. For each of these subsequent events, indicate if you would require the auditee company to adjust its December 20X 1 year-end financial statement, disclose the event in the 20X1 financial statements, and/or provide pro forma financial information in the 20X1 financial statements. Give reasons to support your responses, and state any assumptions you make.
b. Explain how you would document your findings and conclusions in the audit files.



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  • CreatedJanuary 09, 2015
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