Company A hired Q to perform its year-end audit. Subsequent to year-end, A discovers that one of its customers, who owes Company A a material amount, has filed for bankruptcy protection. Assume that Q completed the audit work prior to the date of bankruptcy filing but has not yet issued the audit report. In this case, Q should:
A) ignore the event since it does not apply to the current year under audit.
B) notify those individuals known to be relying on its work of the bankruptcy.
C) perform additional work, as deemed necessary given the circumstances.
D) None of the above.

Question

Quizplus · Accepted Answer

In this case, Q should perform additional work as deemed necessary given the circumstances. The bankruptcy of a material customer is considered a subsequent event that may affect the financial statements. Since Q has not yet issued the audit report, it should perform additional audit procedures to assess the impact of the bankruptcy on A's financial statements. Once the additional work is completed, Q should modify the audit report accordingly to reflect any material effects of the event. Simply ignoring the event or notifying individuals known to be relying on its work of the bankruptcy would not be sufficient in this case.

Company a Hired Q to Perform Its Year-End Audit