The field work for the December 31, 2012 audit of Alfa Corporation ended on March 17, 2013. The financial statements and auditor's report were issued and mailed to stockholders on March 29, 2013. In each of the material situations below, select the appropriate action.
-On February 19, 2013, Alfa settled a lawsuit out of court that had originated in 2002 and is currently listed as a contingent liability.

Question

Quizplus · Accepted Answer

BThe settlement of a lawsuit that was previously recognized as a contingent liability affects the financial position of Alfa Corporation and thus should be reflected in the financial statements for the period ended December 31, 2012. This can be done through an adjustment to the financial statements (A) to account for the settlement amount, and also by disclosing the details of the settlement in a footnote (B) to provide full disclosure and context about the contingent liability and its resolution.

The Field Work for the December 31, 2012 Audit of Alfa