Subsequent Events and Related Issues

Question 1

On February 9, Brown, CPA, expressed an unmodified (unqualified) opinion on the financial statements of Web Co. On October 9, during a peer review of Brown’s practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first
Request Web’s permission to perform substantive procedures that would provide a satisfactory basis for the opinion.
Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements.
Take no additional action because subsequent events have no effect on the financial statements that were reported on.
Assess the importance of the omitted procedures to Brown’s present ability to support the opinion.

Answer 1

Assess the importance of the omitted procedures to Brown’s present ability to support the opinion.

This answer is correct because the Professional Standards require that an auditor in such a situation first assess the importance of the omitted procedure to his/her present ability to support the previously expressed opinion.

Question 2

Jones, CPA, examined the 20X5 financial statements of Ray Corp. and issued an unmodified opinion on March 10, 20X6. On April 2, 20X6, Jones became aware of a 20X5 transaction that may materially affect the 20X5 financial statements. This transaction would have been investigated had it come to Jones’ attention during the course of the examination. Jones should
Take no action because an auditor is not responsible for events subsequent to the issuance of the auditor’s report.
Contact Ray’s management and request their cooperation in investigating the matter.
Request that Ray’s management disclose the possible effects of the newly discovered transaction by adding an unaudited footnote to the 20X5 financial statements.
Contact all parties who might rely upon the financial statements and advise them that the financial statements are misleading.

Answer 2

Contact Ray’s management and request their cooperation in investigating the matter.

This answer is correct because the first step is to contact the firm’s management and request cooperation in investigation of the matter.

Question 3

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
Confirming a sample of material accounts receivable established after year-end.
Comparing the financial statements being reported on with those of the prior period.
Investigating personnel changes in the accounting department occurring after year-end.
Inquiring as to whether any unusual adjustments were made after year-end.

Answer 3

Inquiring as to whether any unusual adjustments were made after year-end.

The requirement is to identify a procedure that an auditor would perform to obtain evidence about the occurrence of subsequent events. Answer (d) is correct because an auditor will inquire of officers and other executives having responsibility for financial and accounting matters whether any unusual adjustments have been made during the period from the balance sheet date to the date of inquiry. See AU-C 560 for auditing procedures performed to identify subsequent events.

Question 4

After issuing an auditor’s report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless
Information about a material transaction that occurred just after the auditor’s report was issued is deemed to be reliable.
A final resolution is made of a contingent liability that had been disclosed in the financial statements.
Information that existed at the report date and may affect the report comes to the auditor’s attention.
An event occurs just after the auditor’s report was issued that affects the entity’s ability to continue as a going concern.

Answer 4

Information that existed at the report date and may affect the report comes to the auditor’s attention.

This answer is correct because when the auditor becomes aware of information that existed at the report date that might have affected the audit report had it been known, it should be investigated.

Question 5

Before reissuing a report which was previously issued on the financial statements of a prior period, a predecessor auditor should
Review the successor auditor’s working papers.
Examine significant transactions or events since the date of previous issuance.
Obtain a signed engagement letter from the client.
Obtain a letter of representation from the successor auditor.

Answer 5

Obtain a letter of representation from the successor auditor.

This answer is correct because the professional standards state that a predecessor auditor should obtain a letter of representation from the successor auditor. The predecessor auditor should also read the current financial statements and compare them to the prior period statements.

Question 6

The auditor’s report ordinarily should be dated as of the date on which the
Report is delivered to the client.
Auditor has obtained sufficient appropriate audit evidence.
Fiscal period under audit ends.
Review of the working papers is completed.

Answer 6

Auditor has obtained sufficient appropriate audit evidence.

This answer is correct because the audit report should not be dated earlier than the date on which the auditors have obtained sufficient appropriate audit evidence to support their opinion on the financial statements—ordinarily the last day of fieldwork.

Question 7

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year-end but arose after year-end. These events may be important to the auditor because they may
Require adjustments to the financial statements as of the year-end.
Have been recorded based on preliminary accounting estimates.
Require disclosure to keep the financial statements from being misleading.
Have been recorded based on year-end tests for asset obsolescence.

Answer 7

Require disclosure to keep the financial statements from being misleading.

This answer is correct because these “type 2” subsequent events may require disclosure, but they do not result in adjustment of the financial statements.

Question 8

Zero Corp. suffered a loss that would have a material effect on its financial statements on an uncollectible trade account receivable due to a customer’s bankruptcy. This occurred suddenly due to a natural disaster ten days after Zero’s balance sheet date, but one month before the issuance of the financial statements and the auditor’s report. Under these circumstances,
The

financial

statements

should be

adjusted
The event

requires financial

statement

disclosure, but

no adjustment
The auditor’s

report should

be modified

for a lack of

consistency
Yes
No
No
Yes
No
Yes
No
Yes
Yes
No
Yes
No

Answer 8

No
Yes
No

This Answer is Correct
The requirement is to determine proper accounting and auditing treatment of uncollectibility of an account receivable resulting from a customer’s bankruptcy due to a natural disaster occurring after a client’s balance sheet date. Answer (d) is correct because a customer’s major casualty loss after year-end will result in a financial statement note disclosure with no adjustment and no audit report modification due to consistency.

Question 9

Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor’s report would not require disclosure in the financial statements?
Sale of the bond or capital stock issue.
Loss of plant or inventories as a result of fire or flood.
A major drop in the quoted market price of the stock of the corporation.
Settlement of litigation when the event giving rise to the claim took place after the balance sheet date.

Answer 9

A major drop in the quoted market price of the stock of the corporation.

This answer is correct because a major drop in the quoted market price of the corporation’s stock would not have financial statement effects and accordingly, need not be disclosed as a subsequent event.

Question 10

The predecessor auditor, who is satisfied after properly communicating with the successor auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor’s report should make
No reference to the report or the work of the successor auditor.
Reference to the work of the successor auditor in the scope and opinion paragraphs.
Reference to both the work and the report of the successor auditor only in the opinion paragraph.
Reference to the report of the successor auditor only in the scope paragraph.

Answer 10

No reference to the report or the work of the successor auditor.

This answer is correct because no reference to the work or the report of the successor auditor is to be made in this situation.

Question 11

After an audit report is issued, an auditor discovers that an important audit procedure was not performed. Which of the following procedures is acceptable in this situation?
No further action is necessary if the audit report can still be supported.
Let the current report stand and correct material errors on the next audit report.
Immediately notify known users of the omitted audit procedure.
Require that the client notify financial statement users of the omitted procedures.

Answer 11

No further action is necessary if the audit report can still be supported.

This answer is correct because action is only required when the auditor finds that the audit report cannot be supported (or is unable to determine that it can be supported).

Question 12

On March 1, Green, CPA, expressed an unmodified (unqualified) opinion on the financial statements of Ajax Co. On July 1, Green’s internal inspection program discovered that engagement personnel failed to observe Ajax’s physical inventory. Green believes that this omission impairs Green’s ability to support the unmodified opinion. If Ajax’s creditors are currently relying on Green’s opinion, Green should first
Request Ajax’s management to communicate to its creditors that Green’s opinion should not be relied on.
Reissue Green’s auditor’s report with an explanatory paragraph describing the departure from GAAS.
Undertake to apply the alternative procedures that would provide a satisfactory basis for Green’s opinion.
Advise Ajax’s board of directors to disclose this development in its next interim report.

Answer 12

Undertake to apply the alternative procedures that would provide a satisfactory basis for Green’s opinion.

This answer is correct because, after determining that the procedure should have been performed and is still considered important, the auditor should undertake to apply procedures that would provide a satisfactory basis for the opinion that was issued.

Question 13

If, during an audit, the successor auditor becomes aware of information that may indicate that financial statements reported on by the predecessor auditor may require revision, the successor auditor should
Ask the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter.
Notify the client and the predecessor auditor of the matter and ask them to attempt to resolve it.
Notify the predecessor auditor who may be required to revise the previously issued financial statements and auditor’s report.
Ask the predecessor auditor to arrange a meeting with the client to discuss and resolve the matter.

Answer 13

Ask the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter.

This answer is correct because the auditor should not contact the predecessor auditor directly due to the confidential relationship with the client.

Question 14

Which of the following circumstances most likely would require an auditor to apply an omitted procedure after the audit report issuance date?
The auditor’s report is unsupported as a result of the omitted procedure.
Generally accepted accounting principles are violated.
The client has requested that the procedure be performed.
The engagement letter requires the procedure to be performed.

Answer 14

The auditor’s report is unsupported as a result of the omitted procedure.

This answer is correct because when an auditor discovers (1) that the audit report is unsupported due to an omitted procedure and (2) believes it likely that users may be relying upon the statements, the auditor should attempt to perform that procedure.

Question 15

After issuing an auditor’s report, an auditor becomes aware of facts that existed at the report date that would have affected the report had the auditor known of the facts at the time. What is the first thing the auditor should do?
Notify each member of the board of directors that the auditor’s report may not be associated with the financial statements from this point forward.
Issue revised financial statements and auditor’s report describing the reason for the revision in a note to the financial statements.
Determine whether there are persons currently relying on, or likely to rely on, the financial statements and whether those persons would attach importance to the information.
Notify regulatory agencies having jurisdiction over the client that the auditor’s report should not be relied upon from this point forward.

Answer 15

Determine whether there are persons currently relying on, or likely to rely on, the financial statements and whether those persons would attach importance to the information.

This answer is correct because after determining that the facts are reliable, the auditor should consider (1) whether the audit report would have been affected by the information if that information had been available, and (2) whether individuals are likely to be relying upon those statements.

Question 16

A major customer of an audit client suffers a fire just prior to completion of year-end fieldwork. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should
Advise management to disclose the event in notes to the financial statements.
Disclose the event in the auditor’s report.
Withhold submission of the auditor’s report until the extent of the direct effect on the financial statements is known.
Advise management to adjust the financial statements.

Answer 16

Advise management to disclose the event in notes to the financial statements.

This answer is correct because conditions which come into existence after year-end which may have a significant direct effect on the financial statements should be disclosed in the notes to the financial statements.

Question 17

Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, year 1?
Uninsured loss of inventories purchased in year 1 as a result of a flood in year 2.
Settlement of litigation in year 2 over an event that occurred in year 2.
Loss on an uncollectible trade receivable recorded in year 1 from a customer that declared bankruptcy in year 2.
Proceeds from a capital stock issuance in year 2 which was being approved by the board of directors in year 1.

Answer 17

Loss on an uncollectible trade receivable recorded in year 1 from a customer that declared bankruptcy in year 2.

This answer is correct because the loss on the trade receivable may be a “type 1” subsequent event requiring an adjustment if the company was in weak financial condition as of the end of year 1; note that while the question does not make clear the situation regarding the receivable, the other replies are much less likely to require adjustment under any circumstances

Question 18

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
Determine whether inventory ordered before the year-end was included in the physical count.
Inquire about payroll checks that were recorded before year-end but cashed after year-end.
Investigate changes in capital stock recorded after year-end.
Review tax returns prepared by management after year-end.

Answer 18

Investigate changes in capital stock recorded after year-end.

This answer is correct because auditors should make inquiries of officers and other executives having responsibility for financial and accounting matters, including inquiries on (1) matters including contingent liabilities existing at the date of the balance sheet, (2) whether there was any significant change in capital stock, long-term debt, or working capital, (3) current status of items in the financial statements, and (4) any unusual adjustments.

Question 19

An auditor’s decision concerning whether or not to “dual date” the audit report is based upon the auditor’s willingness to
Extend auditing procedures.
Accept responsibility for subsequent events.
Permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor’s report.
Assume responsibility for events subsequent to the issuance of the auditor’s report.

Answer 19

Extend auditing procedures.

This answer is correct. If the auditor becomes aware of a subsequent event that has occurred after the completion of fieldwork, but before the issuance of the report (which should be disclosed), the auditor may dual date the report. Additionally, the auditor may date the report as of the date of the subsequent event and extend the procedures for review of subsequent events to that date. Thus, the decision whether or not to dual date the report is based upon the auditor’s willingness to extend audit procedures.

Question 20

After issuance of the auditor’s report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless
A final resolution of a contingency that had resulted in a qualification of the auditor’s report is made.
A development occurs that may affect the client’s ability to continue as a going concern.
An investigation of the auditor’s practice by a peer review committee ensues.
New information is discovered concerning undisclosed related-party transactions of the previously audited period.

Answer 20

New information is discovered concerning undisclosed related-party transactions of the previously audited period.

This answer is correct because when an auditor becomes aware of information which relates to financial statements previously reported on by him/her and which existed at the date of the report, but which was not known to the auditor at the date of the report, inquiries are required if the additional information is of such a nature and from such a source that s/he would have investigated it had it come to his/her attention during the examination.

Question 21

An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. The prior-period financial statements are restated in the current period to conform with generally accepted accounting principles. The auditor’s updated report on the prior-period financial statements should
Express an unmodified opinion concerning the restated financial statements.
Be accompanied by the original auditor’s report on the prior period.
Bear the same date as the original auditor’s report on the prior period.
Qualify the opinion concerning the restated financial statements because of a change in accounting principle.

Answer 21

Express an unmodified opinion concerning the restated financial statements.

This answer is correct because the auditor should indicate that the statements have been restated and should express an unmodified opinion with respect to the restated financial statements. An other-matter paragraph to the report should disclose (1) the date of the auditor’s previous report, (2) the type of opinion previously expressed, (3) the circumstances or events that caused the auditor to express a different opinion, and (4) that the updated opinion differs from the previous opinion.

Question 22

Which of the following events occurring after the issuance of an auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
A lawsuit is resolved that is explained in a separate paragraph of the prior year’s auditor’s report.
New information is discovered concerning undisclosed related-party transactions of the prior year.
A technological development occurs that affects the entity’s ability to continue as a going concern.
The entity sells a subsidiary that accounts for 35% of the entity’s consolidated sales.

Answer 22

New information is discovered concerning undisclosed related-party transactions of the prior year.

This answer is correct because such undisclosed related-party transactions might well result in restatement of the financial statements since the condition was in effect as of year-end, yet not disclosed.

Question 23

This answer is correct because such undisclosed related-party transactions might well result in restatement of the financial statements since the condition was in effect as of year-end, yet not disclosed.

Answer 23

When the event occurs between the date of the auditor’s original report and the date of the reissuance of the report.

This answer is correct because when the subsequent event occurs between the date of the original report and the date of the reissuance of the report, the event may be labeled unaudited.

Question 24

Which of the following material events occurring subsequent to the December 31, 20X5 balance sheet would not ordinarily result in an adjustment to the financial statements before they are issued on March 2, 20X6?
Write-off of a receivable from a debtor who had suffered from deteriorating financial condition for the past 6 years. The debtor filed for bankruptcy on January 23, 20X6.
Acquisition of a subsidiary on January 23, 20X6. Negotiations had begun in December of 20X5.
Settlement of extended litigation on January 23, 20X6, in excess of the recorded year-end liability.
A 3-for-5 reverse stock split consummated on January 23, 20X6.

Answer 24

Acquisition of a subsidiary on January 23, 20X6. Negotiations had begun in December of 20X5.

This answer is correct because the condition (acquisition of a subsidiary) did not arise until after year-end. Footnote disclosure of this transaction, however, is necessary.

Question 25

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
Examine changes in the quoted market prices of investments purchased since the year-end.
Compare the latest available interim financial information with the financial statements being reported upon.
Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates.
Inquire about payroll checks that were recorded before the year-end but cashed after the year-end.

Answer 25

Compare the latest available interim financial information with the financial statements being reported upon.

This answer is correct because a comparison of interim financial information with the financial statements is performed when such interim information is available.

Question 26

“Subsequent events” for reporting purposes are defined as events which occur subsequent to the
Balance sheet date.
Date of the auditor’s report.
Balance sheet date but prior to the date of the auditor’s report.
Date of the auditor’s report and concern contingencies which are not reflected in the financial statements.

Answer 26

Balance sheet date but prior to the date of the auditor’s report.

This answer is correct because subsequent events are those events or transactions which occur subsequent to the balance-sheet date, but prior to the date of the auditor’s report, that have a material effect on the financial statements and, therefore, require adjustment or disclosure in the statements.

Question 27

With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditor’s report, the auditor’s responsibility for events occurring subsequent to the completion of fieldwork is
Extended to include all events occurring until the date of the last subsequent event referred to.
Limited to the specific event referred to.
Limited to all events occurring through the date of issuance of the report.
Extended to include all events occurring through the date of submission of the report to the client.

Answer 27

Limited to the specific event referred to.

This answer is correct because when an audit report is dual dated for a subsequent event occurring after completion of fieldwork, the auditor’s responsibility for events occurring subsequent to the completion of the fieldwork is limited to the specific event for which the report is dual dated. If the auditor dates the report as of the subsequent event occurring after the completion of fieldwork, the auditor’s responsibility is extended to all events occurring to the date of the last subsequent event.

Question 28

A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor’s fieldwork. The auditor should
Advise management to adjust the balance sheet to reflect the acquisition.
Issue pro forma financial statements giving effect to the acquisition as if it had occurred at year-end.
Advise management to disclose the acquisition in the notes to the financial statements.
Disclose the acquisition in the opinion paragraph of the auditor’s report.

Answer 28

Advise management to disclose the acquisition in the notes to the financial statements.

This answer is correct 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.

Question 29

When a contingency is resolved immediately subsequent to the issuance of a report which was qualified with respect to the contingency, the auditor should
Insist that the client issue revised financial statements.
Inform the audit committee that the report cannot be relied upon.
Take no action regarding the event.
Inform the appropriate authorities that the report cannot be relied upon.

Answer 29

Take no action regarding the event.

This answer is correct because when a contingency is resolved immediately subsequent to the issuance of a report which was qualified with respect to the contingency, the auditor is not required to take any action regarding the event. Resolution of the contingency after the issuance of the report is not subsequent discovery of facts existing at the date of the auditor’s report. Because the contingency did result in a qualified report, the auditor was aware of the facts existing at the date of the auditor’s report. Also, the auditor’s responsibility for continuing inquiry is precluded by AU 561.

Question 30

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
Examine a sample of transactions that occurred since the year-end to verify the effectiveness of computer controls.
Inquire of management whether there have been significant changes in working capital since the year-end.
Recompute depreciation charges for plant assets sold for substantial gains since the year-end.
Reperform the tests of controls that indicated significant deficiencies in the operation of internal control.

Answer 30

Inquire of management whether there have been significant changes in working capital since the year-end.

This answer is correct because a typical audit inquiry is to ask management whether there has been a change in working capital since year-end.

Question 31

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
Determine that changes in employee pay rates after year-end were properly authorized.
Recompute depreciation charges for plant assets sold after year-end.
Inquire about payroll checks that were recorded before year-end but cashed after year-end.
Investigate changes in long-term debt occurring after year-end.

Answer 31

Investigate changes in long-term debt occurring after year-end.

The requirement is to identify the most likely procedure to be performed in obtaining evidence about subsequent events. Answer (d) is correct because changes in long-term debt occurring after year-end may require note disclosure. Answers (a) and (b) are incorrect because auditors will not generally test changes in employee pay rates after year-end or recompute depreciation expense for plant assets sold. Answer (c) is incorrect because payroll checks issued near year-end may frequently be cashed after year-end and their investigation will not in general be directly related to obtaining evidence about subsequent events. See AU-C 560 for the responsibilities of auditors with respect to subsequent events.

Question 32

Subsequent events affecting the realization of assets ordinarily will require adjustment of the financial statements under examination because such events typically represent
The culmination of conditions that existed at the balance sheet date.
The final estimates of losses relating to casualties occurring in the subsequent events period.
The discovery of new conditions occurring in the subsequent events period.
The preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

Answer 32

The culmination of conditions that existed at the balance sheet date.

This answer is correct because subsequent events affecting the realization of assets ordinarily will require adjustment of the financial statements because such events typically represent the culmination of conditions that existed at the balance sheet date.

Question 33

An auditor concludes that a substantive auditing procedure considered necessary during the prior period’s audit was omitted. Which of the following factors would most likely cause the auditor promptly to apply the omitted procedure?
There are no alternative procedures available to provide the same evidence as the omitted procedure.
The omission of the procedure impairs the auditor’s present ability to support the previously expressed opinion.
The source documents needed to perform the omitted procedure are still available.
The auditor’s opinion on the prior period’s financial statements was unmodified (unqualified).

Answer 33

The omission of the procedure impairs the auditor’s present ability to support the previously expressed opinion.

This answer is correct because if the auditor concludes that the omission of the procedure impairs his/her present ability to support a previously expressed opinion and the auditor believes that persons may be relying on the financial statements, the omitted procedure or alternative procedures should be applied to provide a satisfactory basis for the opinion.

Question 34

Ajax Company’s auditor concludes that the omission of an audit procedure considered necessary at the time of the prior audit impairs the auditor’s present ability to support the previously expressed unmodified (unqualified) opinion. If the auditor believes there are stockholders currently relying on the opinion, the auditor should promptly
Notify the stockholders currently relying on the previously expressed unmodified opinion that they should not rely on it.
Advise management to disclose this development in its next interim report to the stockholders.
Advise management to revise the financial statements with full disclosure of the auditor’s inability to support the unmodified opinion.
Undertake to apply the omitted procedure or alternate procedures that would provide a satisfactory basis for the opinion.

Answer 34

Undertake to apply the omitted procedure or alternate procedures that would provide a satisfactory basis for the opinion.

This answer is correct because the professional standards require that the auditor promptly undertake to apply the omitted procedure or alternative procedures that would provide a satisfactory basis for the audit opinion.

Question 35

Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s subsequent events?
Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting records.
Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date.
Review the treasurer’s monthly reports on temporary investments owned, purchased, and sold.
Obtain a letter from the entity’s attorney describing any pending litigation, unasserted claims, or loss contingencies.

Answer 35

Obtain a letter from the entity’s attorney describing any pending litigation, unasserted claims, or loss contingencies.

This answer is correct because the professional standards require this procedure.

Question 36

Which of the following events occurring after the issuance of the auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
The auditor discovers that the entity intends to present comparative financial statements in subsequent years.
Litigation that had been disclosed in the financial statements is resolved.
A subsidiary that accounts for 30% of the entity’s consolidated net revenue is sold.
New information regarding significant unrecorded transactions from the year under audit is discovered.

Answer 36

New information regarding significant unrecorded transactions from the year under audit is discovered.

This answer is correct because the significant unrecorded transactions might have impacted the auditor’s report when issued had that information been known—the audit report may be misleading.

Question 37

This question has been amended to conform to new Auditing Standards

Wilson, CPA, completed the field work of the audit of Abco’s December 31, Year 1, financial statements on March 6, Year 2, at which time Wilson believed that sufficient appropriate audit evidence had been obtained to support the auditor’s opinion. However, a subsequent event requiring adjustment to the Year 1 financial statements occurred on April 10, Year 2, and came to Wilson’s attention on April 24, Year 2, which preceded the issuance of the audit report on Abco’s Year 1 financial statements. If the adjustment is made without disclosure of the event, Wilson’s report ordinarily should be dated

March 6, Year 2.
April 10, Year 2.
April 24, Year 2.
Using dual dating.

Answer 37

March 6, Year 2.

When a subsequent event occurs requiring adjustment of the financial statements but no disclosure of that subsequent event is made, the report will still be dated when sufficient appropriate audit evidence had been obtained, that is, March 6, Year 2.

Question 38

Which of the following events that occurred after a client’s calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements?
New convertible bonds are issued to expand the company’s product line.
A loss is reported on uncollectible accounts of an acknowledged distressed customer.
A fixed asset used in operations is sold at a substantial profit.
Negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter.

Answer 38

New convertible bonds are issued to expand the company’s product line.

Correct!) GAAP requires that material changes in debt (or capital) structure during the subsequent events period be disclosed in the financial statements. Such changes would not require adjustment.

Question 39

Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report?
The cost-to-benefit ratio of performing additional procedures to better determine the impact of the newly discovered facts.
The potential impact on financial statements and associated audit reports for the previous five years.
The client’s willingness to pay additional fees for the additional procedures to be performed.
The client’s willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.

Answer 39

The client’s willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.

Correct! When such facts are discovered after the report release date, the auditor has an obligation to discuss the matter with management and determine whether the financial statements require revision. If so, then management’s willingness to issue revised financial statements to known users of the entity’s financial statements is a primary concern to the auditor.

Question 40

An auditor is considering whether the omission of the confirmation of investments impairs the auditor’s ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if
The results of alternative procedures that were performed compensate for the omission.
The auditor’s assessed level of detection risk is low.
The omission is documented in a communication with the audit committee.
No individual investment is material to the financial statements taken as a whole.

Answer 40

The results of alternative procedures that were performed compensate for the omission.

The auditor may not have to perform the omitted confirmation procedures if alternative (redundant) procedures compensate for the omission and limit audit risk to an acceptably low level.

Question 41

Subsequent to issuing a report on audited financial statements, a CPA discovers that the accounts receivable confirmation process omitted a number of accounts that are material, in the aggregate. Which of the following actions should the CPA take immediately?
Bring the matter to the attention of the board of directors or audit committee.
Withdraw the auditor’s report from those persons currently relying on it.
Perform alternative procedures to verify account balances.
Discuss the potential financial statement adjustments with client management.

Answer 41

Perform alternative procedures to verify account balances.

The auditor should immediately gather sufficient appropriate audit evidence with respect to the receivables in question in order to determine whether the financial statements are fairly stated and whether the previously expressed opinion is appropriate.

Question 42

Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?
Review the cut-off bank statements for the period after the year end.
Inquire with the client’s legal counsel concerning litigation.
Investigate significant deficiencies in internal control previously communicated to the client.
Analyze related party transactions to discover possible irregularities.

Answer 42

Inquire with the client’s legal counsel concerning litigation.

In reviewing subsequent events, the auditor would read the latest interim financial statements and board of directors’ minutes, inquire with legal counsel concerning litigation, claims, and assessments, and make specific inquiries of management.

Question 43

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
Recomputing a sample of large-dollar transactions occurring after year end for arithmetic accuracy.
Investigating changes in stockholders’ equity occurring after year end.
Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising after year end.
Confirming bank accounts established after year end.

Answer 43

Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising after year end.

An auditor performs a variety of procedures to obtain evidence about subsequent events. These procedures include inquiring with the entity’s legal counsel concerning litigation, claims, and assessments arising after year end.

Question 44

Zero Corp. suffered a loss that would have a material effect on its financial statements on an uncollectible trade account receivable due to a customer’s bankruptcy.

This occurred suddenly, due to a natural disaster ten days after Zero’s balance sheet date, but one month before the issuance of the financial statements and the auditor’s report. Under these circumstances,

The financial statements should be adjusted
The event requires financial statement disclosure, but no adjustment
The auditor's report should be modified for a lack of consistency
Yes
No
No
Yes
No
Yes
No
Yes
Yes
No
Yes
No

Answer 44

No
Yes
No
 You Answered Correctly!
The occurrence of a natural disaster ten days after the balance sheet date which results in a material loss is an example of a Type II subsequent event. A Type II event pertains to conditions that arose subsequent to the balance sheet date and therefore do not require adjustment of the financial statements. Such events must, however, be disclosed if they are material. No report modification is necessary.

Question 45

An auditor issued an audit report that was dual dated for a subsequent event occurring after the audit report date but before release of the auditor’s report.

The auditor’s responsibility for events occurring subsequent to the audit report date was

Limited to include only events occurring up to the date of the last subsequent event referenced.
Limited to the specific event referenced.
Extended to subsequent events occurring through the date of release of the report.
Extended to include all events occurring since the audit report date.

Answer 45

Limited to the specific event referenced.

When a subsequent event disclosed in the financial statements occurs after audit report date but before release of the report, the auditor may elect to dual date his/her report. In doing so, the auditor is limiting responsibility for events occurring subsequent to the audit report date to the specific event referenced.

Question 46

Which of the following procedures would an auditor be most likely to perform in obtaining evidence about subsequent events?
Determine that changes in employee pay rates after year end were properly authorized.
Recompute depreciation charges for plant assets sold after year end.
Inquire about payroll checks that were recorded before year end but cashed after year end.
Investigate changes in long-term debt occurring after year end.

Answer 46

Investigate changes in long-term debt occurring after year end.
You Answered Correctly!
The auditor should inquire with management as to whether there was any significant change in capital stock, long-term debt, or working capital after year end.

Question 47

Which of the following procedures would an auditor be most likely to perform to obtain evidence about the occurrence of subsequent events?
Confirming a sample of material accounts receivable established after year end.
Comparing the financial statements being reported on with those of the prior period.
Investigating personnel changes in the accounting department occurring after year end.
Inquiring as to whether any unusual adjustments were made after year end.

Answer 47

Inquiring as to whether any unusual adjustments were made after year end.

To obtain evidence about the occurrence of subsequent events, the auditor most likely would inquire as to whether any unusual adjustments were made after year end.