You are a manager with Hodges Jones & Sylvia (the Firm) and a member of the...
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You are a manager with Hodges Jones & Sylvia (the Firm) and a member of the Firm's audit team for the audit of Delta Corporation (the Company). During your planning and risk assessment of the Company's audit for the year ended December 31, 2022, it has been brought to your attention that the Company is in the process of settling a lawsuit which was initiated against the Company during year ended December 31, 2022. In connection with this matter (for which the Company does not have any insurance coverage), the management of the Company, in consultation with its attorneys, has concluded that it would be appropriate to record a liability of $500,000. Based upon your review of the attorney's correspondence related to this matter and your discussions with the Company's internal attorney and the Company's Chief Financial Officer (the Company's CFO) you and the engagement team have concluded that management's estimate of this liability is reasonable under the circumstances. The Company has recorded the following journal entry related to this matter. The Firm's audit report will be dated March 15, 2023. Legal settlement expense Legal settlement liability To record estimated liability as of 12.31.22 related to litigation Debit 500,000 Credit 500,000 As a part of your required subsequent events procedures, the Company's CFO informs you that the aforementioned legal matter will be settled for $400,000. You have also received an updated attorney's letter (dated March 1, 2023) which confirms with certainty this amount. In this discussion, the Company's CFO also informs you that the Company's management has decided not to adjust the financial statements for this $100,000 differential based on its insignificance to the financial statements taken as a whole. There are no other misstatements and this misstatement, if waived, would not be expected to be material to the Company's results of operations for the year ending December 31, 2023. 1. Would it be appropriate to adjust the estimated liability for the litigation settlement from $500,000 to $400,000? 2. Based on a conclusion that the adjustment can be waived, please complete the following practice aid. Financial Statement Impact Assets Increase (Decrease) Liabilities Decrease (Increase) Net Income Decrease (Increase) Equity Decrease (Increase) You are a manager with Hodges Jones & Sylvia (the Firm) and a member of the Firm's audit team for the audit of Delta Corporation (the Company). During your planning and risk assessment of the Company's audit for the year ended December 31, 2022, it has been brought to your attention that the Company is in the process of settling a lawsuit which was initiated against the Company during year ended December 31, 2022. In connection with this matter (for which the Company does not have any insurance coverage), the management of the Company, in consultation with its attorneys, has concluded that it would be appropriate to record a liability of $500,000. Based upon your review of the attorney's correspondence related to this matter and your discussions with the Company's internal attorney and the Company's Chief Financial Officer (the Company's CFO) you and the engagement team have concluded that management's estimate of this liability is reasonable under the circumstances. The Company has recorded the following journal entry related to this matter. The Firm's audit report will be dated March 15, 2023. Legal settlement expense Legal settlement liability To record estimated liability as of 12.31.22 related to litigation Debit 500,000 Credit 500,000 As a part of your required subsequent events procedures, the Company's CFO informs you that the aforementioned legal matter will be settled for $400,000. You have also received an updated attorney's letter (dated March 1, 2023) which confirms with certainty this amount. In this discussion, the Company's CFO also informs you that the Company's management has decided not to adjust the financial statements for this $100,000 differential based on its insignificance to the financial statements taken as a whole. There are no other misstatements and this misstatement, if waived, would not be expected to be material to the Company's results of operations for the year ending December 31, 2023. 1. Would it be appropriate to adjust the estimated liability for the litigation settlement from $500,000 to $400,000? 2. Based on a conclusion that the adjustment can be waived, please complete the following practice aid. Financial Statement Impact Assets Increase (Decrease) Liabilities Decrease (Increase) Net Income Decrease (Increase) Equity Decrease (Increase)
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Related Book For
Auditing and Assurance services an integrated approach
ISBN: 978-0132575959
14th Edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley
Posted Date:
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