Brad Scarlett is reviewing the results of the subsequent events

Brad Scarlett is reviewing the results of the subsequent events audit procedures. Brad is writing a report for the audit partner based on these results and will be attending a meeting tomorrow with the partner and representatives of the company to discuss them. The issue will be whether the should be amended or additional notes included for these subsequent events.

Many of the items are not material and Brad will recommend that no action be taken with respect to these. However, there are several items that Brad believes are material and should be discussed at the meeting. These are:

• The board is planning to issue shares in a private offering on February 15.

• The share issue is to fund the purchase of a 60% stake in another company. The negotiations are in the final stages and although the contract is not yet signed, it will be signed by February 15.

• A lawsuit was filed in court in the week after year-end claiming damages for illness allegedly caused by chemicals used at a subsidiary company’s manufacturing plant in the 2000s. This is the tenth such lawsuit filed and the client has denied responsibility in all cases because it was unreasonable to believe at that time that these chemicals had adverse health effects. The claimant has new scientific evidence that counters this defense.

• The review of subsequent cash receipts has revealed that several of the receivables that were considered doubtful have now been paid.

The year-end for the company is December 31 and the is due to be signed on February 20.


For each item, discuss what type of subsequent event it is and the appropriate treatment in the financial statements.

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