The business world can move quickly. Between the time an auditor completes an audit and the time that audit becomes public, a lot can happen. Some of these subsequent events can dramatically change the accuracy of the financial statements – perhaps even making them totally obsolete. How should an auditor deal with these changes after the fact?
Read the AU 560 standard from this week’s required resources. Imagine that your firm has recently completed audits of three clients that have the following problems:
1.For Client A, you are currently preparing the audit report. You have no actual concerns about the audit, but the client will have a difficult time paying off its bonds that are due within the next 6 months. The client will likely go into bankruptcy if it does not successfully pay off the bonds. The client has a plan, however, to offer bondholders common stock in exchange for the bonds.
2.For Client B, you issued an audit report 4 months ago. The client’s board of directors just informed you that the last year’s financial statements were reported in error. A significant liability and associated asset had been excluded from the balance sheet, when in fact they should have been disclosed on the balance sheet.
3.Client C’s fiscal year is now over, but you have not yet released the financial statement. The week after Client C’s fiscal year end, a competitor released a new product that effectively makes about 25% of Client C’s inventory instantly obsolete and worthless.
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