In conducting an audit, an auditor reviews a client's current financial statements for the proper reporting of loss contingencies. management has stated that they feel that all loss contingencies are remote and have not recorded any in the financial statements.

the auditor contacted the audit clients legal council inquiring about any current legal action against the audit clients. the legal council informs the auditor that they believe that the client will ultimately lose a $5 million lawsuit against them.

the audit client has already recorded legal fees totaling $1 million during the current year and estimates another $500,000 in legal costs will be incurred before the lawsuit is concluded. engagement mentality is $500,000 for this client.

which action should this auditor recommend to the audit client?

a. propose no financial statement adjustment because the amount is immaterial
b. propose no financial statement adjustment because disclosure is sufficient for generally accepted accounts ting principles (GAAP)
c. propose a financial adjustment that records a $5 million liability and related expense
d. propose a financial statement adjustment that records a $6.5 million liability and related expense

Answer rating: 100% (QA)

c Propose a financial statement adjustment that records a 5 million liability and re... View the full answer