Below is question and the answer and the explanation.
My question is: I would think that” Loss on an uncollectible trade receivable recorded in Year 1 from a customer that declared bankruptcy in Year 2″ would just require disclosure in the notes since the event of bankruptcy happened after the balance sheet date. It would not require adjustments
Any thoughts? thx
Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, Year 1?
A.
Uninsured loss of inventories purchased in Year 1 as a result of a flood in Year 2
B.
Settlement of litigation in Year 2 over an event that occurred in Year 2
Correct C.
Loss on an uncollectible trade receivable recorded in Year 1 from a customer that declared bankruptcy in Year 2
D.
Proceeds from a capital stock issuance in Year 2 that was being approved by the board of directors in Year 1
You are correct, the answer is C.
For each event discovered subsequent to the end of the year under audit but before the audit report has been issued, the auditor would ask, “Does this event provide additional evidence with respect to conditions that existed at the balance sheet date?” Only one of the answer choices meets this criterion. The loss on an uncollectible trade receivable recorded in Year 1 from a customer bankruptcy declared in Year 2 would be indicative of conditions existing at the balance sheet date (the customer's financial condition would have been deteriorating at the end of Year 1) and would require an adjustment so that the financial statements are not misleading.
The other three answer choices provide evidence with respect to conditions that did not exist at the balance sheet date but arose subsequent to that date. Each of these events would require disclosure, but not adjustment, in the financial statements.
AUD 69, 92 7/15 Gleim and Ninja test bank
FAR sometime in 10/15 Gleim
BEC not taken
REG not taken
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