Subsequent Events A1 M9

Question 1

What are the difference in Type 1 and Type 2 subsequent events?

Answer 1

Type 1 is Recognized because it existed before balance sheet date year ended and auditor found out subsequently.

Type 2 (nonrecognized) subsequent event because the event did not exist at year-end but arose after year-end. Nonrecognized subsequent events should be disclosed in the footnotes and should not include any adjustments to the financial statement amounts.

Question 2

When to dual date vs. Extended date?

Answer 2

Dual dating is used when there is a subsequent event occurring after the original date of the auditor’s report, and the auditor wishes to extend responsibility only for the one event.
* Adjustments or disclosures made after the original report date require the auditor to dual date or extend the date.
* Extended date assumes responsibility for all transactions subsequent to original audit date.

Question 3

What should an Auditor do after discovering subsequent events?

Answer 3

1. Check the info for reliability and to see if it existed at the report date
2. Determine whether there are persons relying or likely to rely on the financials
3. If others are relying or likely than the auditor would request that management disclose the newly discovered information and issue revised financial statements.
4. The auditor would give public notice that he/she is no longer associated with the FS only after determining that there are persons relying on the information and only if the client refuses to issue revised FS.

Question 4

What procedures will the Auditor perform during the review of subsequent events?

Answer 4

• An auditor would most likely obtain a letter from the entity’s legal counsel describing any pending litigation, unasserted claims, or loss contingencies, to obtain evidence that might impact the year-end financial statements.
• An auditor would investigate changes in long-term debt occurring after year-end to determine if there was an unrecorded liability as of the end of the year.
• In addition, subsequent sales of LT debt require footnote disclosure.
• Compare the latest available interim financial statements with the statements being audited

Question 5

What will cause the Auditor to investigate further in previously filed financial statements?

Answer 5

1. discovery of facts that may have existed at the balance sheet date. Such events will often require an adjustment to the financial statements. An example is new information discovered regarding significant unrecorded transactions from the year under audit. As a result, the auditor should make further inquiry to determine whether the information is reliable and whether the facts existed at the date of the report.
2. The resolution of a disclosed contingency is an example of a subsequent event occurring after the date of the auditor’s report that the auditor has no obligation to investigate.

Question 6

What type of subsequent events, before the report date, will require disclosure in the notes only?

Answer 6

• New convertible Bonds

Question 7

What type of subsequent events, after the balance sheet date BUT before the the financial statemenment report release date, will require adjustments?

All F/S affected events aft BS date but b4 fs release date.

Answer 7

• A loss reported on uncollectible accounts is considered a recognized subsequent event that would require adjustment to the financial statement amounts. This event provides us with additional information that should be used to adjust the estimate for allowance for doubtful accounts.
• Negotiations that require compensation adjustments retroactive to the year under audit would be considered a recognized subsequent event that would require adjustment.
• Settled litigations before f/s report release date.

Question 8

What is the Auditor’s responsibility regarding subsequent events?

Answer 8

• The auditor has no active responsibility to make continuing inquiries between the date of the auditor’s report and the date on which the report is submitted. The auditor’s active responsibility stops on the date of the auditor’s report.
• The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date of the auditor’s report.
• The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained.

Question 9

What is Gross Margin%

Answer 9

GM% = Sales (net) - COGS / Sales (net)

Question 10

What is Year-over-Year % Change?

Answer 10

Year-over-Year % Change = New-Old / Old

Question 11

When is data most reliable?

Answer 11

• The reliability of data increases when an entity has strong internal control
• the data comes from external resources (vs. internal resources)