C is corrent because the transaction described is a Type 2 subsequent event. Type 2 events provide evidence with respect to conditions that did not exist at the date of the balance sheet being reported on but arose subsequent to that date. Type 2 events do not require financial statement adjustment. However, these events may be disclosed to keep the financial statements from being misleading.
A is incorrect because the auditor does not issue financial statements of any kind for the client. Financial statements are the responsibility of management.
B is incorrect because financial statement adjustment is appropriate only for Type 1 subsequent events. Type 1 events provide additional evidence with respect to conditions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements.
D is incorrect because the opinion paragraph of the auditor’s report should not be modified for a subsequent event. If the auditor wishes to emphasize an unusually important subsequent event, the information should be presented in a separate explanatory paragraph preceding the opinion paragraph.
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