A significant customer of the firm suffers a large economic loss after year end, but prior to completion of field work. The audit client believes this event will have material effect on the financial statements. The auditor should:
A) adjust the financial statements for the year under audit.
B) add a paragraph to the audit report.
C) advise the client to disclose the event in the notes to the financial statements.
D) advise the client to delay issuing the financial statements until the economic loss can be determined.

Question

Quizplus · Accepted Answer

Advising the client to disclose the event in the notes to the financial statements is the best course of action. This is in line with the principle of disclosure, where material information should be disclosed in the financial statements to ensure they are not misleading. Adjusting the financial statements or delaying the issuance of the financial statements are not necessary, as this event only occurred after year end and the financial statements are still accurate as of that date. Adding a paragraph to the audit report may not be sufficient to convey the materiality of the event, and it is better to disclose it in the notes to the financial statements.

A Significant Customer of the Firm Suffers a Large Economic