Problem

The term subsequent event refers to an event that occurs after the date of the audited balance sheet but prior to the date of the auditors' report. Subsequent events can be divided into two broad categories. The first are those that provide additional evidence about facts that existed either on or before the balance sheet date (Type 1 events). The second are those that involve facts that came into existence after the balance sheet date (Type 2 events). Type 1 events require adjustment to the financial statements while Type 2 events only require financial statement disclosure.

Dillon & Company CPAs are auditing the financial statements of PDQ Manufacturing as of December 31, 2009. During the fieldwork of its audit (March 2010), the auditors noted the following situations: A major customer who owed PDQ $10,000 in accounts receivable (a material amount) filed for Chapter 7 bankruptcy. A warehouse where the customer stored some of its inventory for resale had a fire. Estimated damage could not yet be quantified. In addition, the company's board treasurer was killed in a tragic plane crash. Dillon & Company is now ready to issue its audit opinion.

1. What should Dillon & Company CPAs do as a result of the customer bankruptcy?

2. What type of subsequent event is the death of the board treasurer?

3. Does the death of the board treasurer require an adjustment to the 12/31/09 financial statements?

4. What should Dillon & Company CPAs do to adjust the financial statements for the fire in the warehouse?