Reference no: EM133168840

Question - You have finished the fieldwork for an audit engagement and are about to write up the file for the audit partner in charge of the file. So far, any problems that arose were dealt with easily. Management agreed to the changes you proposed, and you expect to issue an unqualified opinion. However, two events have just occurred. Both events occurred in the week of April 1, and the company's fiscal year ends December 31.

First, your client settled a lawsuit against it that had been unresolved for the past two years. The company's legal representative had previously informed you that the lawsuit could be settled for $200,000, an amount that was twice the level of materiality for the audit but was properly recorded in the client's accounts. You have just learned that the lawsuit was settled for $400,000. Apparently, the new CEO wanted to settle the lawsuit so that she could proceed with her new business plan.

The second event that has just come to light is also related to the new CEO. The company has just announced a new bond issue for $4,000,000, to fund a possible business expansion.

Required -

a) Explain the effect these two events will have, if any, on the financial statements in your audit.

b) If the new bond issue is not adjusted or disclosed by the client in the financial statements, what type of audit opinion would you issue. Explain your answer.