Which of the following procedures should an auditor generally perform regarding subsequent events quizlet?

A contingent liability is defined as an existing condition, situation, or set of circumstances involving uncertainty as the possible loss to an entity that will ultimately be resolved when some future event occurs or fails to occur. FASB ASC Topic 450, "Contingencies," states that when a contingent liability exists, the likelihood that the future event will result in a loss or impairment of an asset or the incurrence of a liability can be classified into three categories:
1. Probable. The future event is likely to occur. If the event is probable and the amount of the loss can be reasonably estimated, the loss is accrued by a charge to income.
2. Reasonably possible. The chance of the future event occurring is more than remote but less than likely. When the outcome of the event is judged to be reasonably possible or the amount cannot be estimated, a disclosure of the contingency is made in the footnotes to the financial statements.
3. Remote. The chance of the future event occurring is slight. In general, loss contingencies that are judged to be remote are not disclosed in the footnotes.
Examples of contingent liabilities include: pending or threatened litigation, actual or possible claims and assessments, income tax disputes, product warranties or defects, guarantees of obligations to others, and agreements to repurchase receivables that have been sold.

The fieldwork for the December 31, 2013 audit of Pumpkin Corporation ended on March 13, 2014. The financial statements and auditor's report were issued and mailed to stockholders on March 23, 2014. In each of the situations below, select from the list at the end of the problem the appropriate action to be taken by the auditor. Assume all situations are material.
Situations:
1. On April 5, 2014, you discovered that on February 16, 2014, a flood destroyed the entire uninsured inventory in one of Pumpkin's warehouses.
2. On February 17, 2014, you discovered that on February 16, 2014, a flood destroyed the entire uninsured inventory in one of Pumpkin's warehouses.
3. On February 17, 2014, you discovered that on November 30, 2013, a flood destroyed the entire uninsured inventory in one of Pumpkin's warehouses.
4. On April 5, 2014, you discovered that on March 30, 2014, a fire destroyed one of Pumpkin's 10 plants.
5. On April 7, 2014, you discovered that a debtor of Pumpkin went bankrupt on January 6, 2014.
6. On January 16, 2014, a lawsuit was filed against Pumpkin for a patent infringement action that allegedly took place in early 2001. In the opinion of Pumpkin's attorneys, there is a reasonable (but not probable) danger of a significant loss to Pumpkin.
7. On February 19, 2014, Pumpkin settled a lawsuit out of court that had originated in 2000 and is currently listed as a contingent liability.

Possible Actions:
a. Adjust the December 31, 2013 financial statements.
b. Disclose the information in a footnote in the December 31, 2013 financial statements.
c. Request the entity revise and reissue the December 31, 2013 financial statements. The revision should involve an adjustment to the December 31, 2013 financial statements.
d. Request the entity revise and reissue the December 31, 2013 financial statements. The revision should involve the addition of a footnote, but no adjustment, to the December 31, 2013 financial statements.
e. No action is required.

1. d, 2. b, 3. a, 4. e, 5. c, 6. b, 7. a

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