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Tracy Brewing Company audit change: Adjust, disclose, revise

The field work for the June 30, 2009, audit of Tracy Brewing Company was finished August 19, 2009, and the completed financial statements, accompanied by the signed audit reports, were mailed September 6, 2009. In each of the highly material independent events (a through i), state the appropriate action (1 through 4) for the situation and justify your response. The alternative actions are as follows:

1. Adjust the June 30, 2009, financial statements.
2. Disclose the information in a footnote in the June 30, 2009, financial statements.
3. Request the client to recall the June 30, 2009, statements for revision.
4. No action is required.

The events are as follows:

a. On December 14, 2009, the auditor discovered that a debtor of Tracy Brewing went bankrupt on July 15, 2009, due to declining financial health. The sale had taken place January 15, 2009.
b. On December 14, 2009, the auditor discovered that a debtor of Tracy Brewing went bankrupt on October 2, 2009. The sale had taken place April 15, 2009, but the amount appeared collectible at June 30, 2009, and August 19, 2009.
c. On August 15, 2009, the auditor discovered that a debtor of Tracy Brewing went bankrupt on August 1, 2009. The most recent sale had taken place April 2, 2008, and no cash receips had been received since that date.
d.On August 6, 2009, the auditor discovered that a debtor of Tracy Brewing went bankrupt on July 30, 2009. The cause of the bankruptcy was an unexpected loss of a major lawsuit on July 15, 2009, resulting from a product deficiency suit by a different customer.
e. On August 6, 2009, the auditor discovered that a debtor of Tracy Brewing went bankrupt on July 30, 2009, for a sale that took place July 3, 2009. The cause of the bankruptcy was a major uninsured fired on July 20,2009.
f. On July 20, 2009, Tracy Brewing settled a lawsuit out of court that had originated in 2006 and is currently listed as a contingent liability.
g. On September 14, 2009, Tracy Brewing lost a court case that had originated in 2008 for an amount equal to the lawsuit. The June 30, 2009, footnotes states that in the opinion of legal counsel there will be a favorable settlement.
h. On July 20, 2009, a lawsuit was filed against Tracy Brewing for a patent infringement action that allegedly took place in place in early 2009. In the opinion of legal counsel, there is a danger of a significant loss to the client.
i. On May 31, 2009, the auditor discovered an uninsured lawsuit against Tracy Brewing that had originated on February 28, 2009.

Solution Preview

From FASB Statement 165:

4. Subsequent events are events or transactions that occur after the balance sheet date
but before financial statements are issued or are available to be issued. There are two
types of subsequent events:

a. The first type consists of events or transactions that provide additional evidence
about conditions that existed at the date of the balance sheet, including the
estimates inherent in the process of preparing financial statements (that is,
recognized subsequent events).

b. The second type consists of events that provide evidence about conditions that
did not exist at the date of the balance sheet but arose after that date (that is,
nonrecognized subsequent events).

6. Financial statements are available to be issued. Financial statements are considered
available to be issued when they are complete in a form and format that complies with
GAAP and all approvals necessary for issuance have been obtained,

Responses:

a. On December 14, 2009, the auditor discovered that a debtor of Tracy Brewing went bankrupt on July 15, 2009, due to declining financial health. The sale had taken place January 15, 2009. Because the event occurred before August 19, the auditors should adjust the allowance account and disclose the event.
1. Adjust the June 30, 2009, financial statements.

b. On December 14, 2009, the auditor discovered that a debtor of Tracy Brewing went bankrupt on October 2, 2009. The sale had taken place April 15, 2009, but the amount appeared collectible at June 30, 2009, and August 19, 2009. 4. No ...

Solution Summary

For each event, an explanation of two or three sentences is presented for better understanding of the issues involved. The appropriate FASB statement is also referenced in the solution.

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