Question

1. Which of the following events occurring on January 5,2016 is most likely to result in an adjusting entry to the 2015 financial statements?

• a/ The company issued $2 million in convertible bond
• b/ A plant owned by the company was damaged by a flood, resulting in an uninsured loss of inventory
• c/ The company settle and paid a personal injury claim (filed in December 2015) of a formal employee as the result of an accident that had occurred in March 2015. The company had not previously recorded a liability for the claim
• d/ None of answer are correct
• 2. When the auditors select a sample of items from the vouchers payable register for the last month of the period under audit and trace these items to underlying documents, the auditors are gathering evidence primarily in support of the assertion that:
• a/ Cash disbursements were recorded as incurred obligation
• b/ Recorded obligations occurred period to year-end
• c/ Recorded obligations were paid
• d/ None of these

Answer 1

Answer is given below

first one is - option c)

In the given case the injury claim was filed in December 2015 which was the company reporting period. Since the case was pending in the court there was probability of liability for the year. Hence an adjusting entry should be made to the 2015 financial statements

Other events occurred in 2016 and does not have any bearing on financial statement of 2015. Option b will require disclosure in notes to accounts only.

second one answer is option b)

since auditors are taking sample of items for the last month of the period under audit the purpose is to ensure recorded obligations occurred prior to year end. This is an important audit task at the end of the year.