Subsequent Events and Subsequently Discovered Facts Flashcards
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A. Confirming a sample of material accounts receivable established after year-end
B. Comparing the financial statements being reported on with those of the prior period
C. Investigating personnel changes in the accounting department occurring after year-end
D. Inquiring as to whether any unusual adjustments were made after year-end
D.
One of the auditor’s procedures to determine the occurrence of subsequent events that may require adjustment or disclosure is asking management if any unusual adjustments were made after year-end. For example, as an auditor you can inquire about whether the books were closed on time, and if they weren’t was it because of a ton of last minute entries that weren’t made, or adjustments to intercompany balances that may have an effect on a subsidiary’s ability to meet certain ratios for loan covenants? Confirming a sample of accounts receivable established after year-end is usually done to determine if proper cutoff was made. Comparison between the current and the prior year financial statements is unlikely to uncover evidence about the occurrence of subsequent events — rather a comparison of the current statements to the latest interimstatementsandananalysisofthoseinterimstatementsshouldbedone.Investigatingpersonnelchangesin the accounting department occurring after year-end would be more likely when possible misconduct, rather than a subsequent event, is being considered.
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?
A. New convertible bonds are issued to expand the company’s product line.
B. A loss is reported on uncollectible accounts of an acknowledged distressed customer.
C. A fixed asset used in operations is sold at a substantial profit.
D. Negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter.
The correct answer is (A).
Subsequent events, for which conditions existed at the balance sheet date, require adjustment to the financial statements. Events for which condition did not exist at the balance sheet date, but still represent important information, should be disclosed. Issue of new convertible bonds after the calendar year-end, but before the audit report date is an event for which conditions did not exist at the balance sheet date. The information is important enough, for which disclosure needs to be made.
(B) is incorrect because adjustments are normally required for significant events known prior to or at the balance sheet date. A loss reported on uncollectible accounts receivable as a result of a customer’s distressed financial condition would be indicative of conditions existing at the balance sheet date, thereby calling for an adjustment of the financial statements before their issuance.
(C) is incorrect because the sale of a fixed asset used in operations for substantial profit requires adjustment to the financial statements as fixed asset existed on the Balance Sheet.
(D) is incorrect because negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter, and that will affect the financial statements and adjustment is clearly required.
When an auditor of a nonissuer becomes aware that one or more auditing procedures that the auditor considered necessary in the circumstances existing at the time of the audit were omitted from the audit of the financial statements,
A. If the auditor needs to perform a previously omitted or alternative procedure, but is unable to do so, as long as the auditor documents the attempt, the auditor has discharged his or her responsibility.
B. The US GAAS guidance relevant to this matter relates to the period subsequent to the audit report release date regarding when the auditor became aware of the omission.
C. If the auditor needs to perform a previously omitted or alternative procedure, but is unable to do so, the auditor should seek legal advice to determine the appropriate course of action.
D. The US GAAS guidance relevant to this matter relates to the period subsequent to the audit report date regarding when the auditor became aware of the omission.
The correct answer is (B).
The relevant time period for US GAAS guidance for such omitted procedures begins subsequent to the audit report release date; not the audit report date.
Incorrect answer (A): The auditor cannot discharge his or her responsibility for an omitted procedure by documenting the attempt to perform it or alternate procedures. However, the auditor is required to document new or additional audit procedures performed after the date of the audit report for inclusion in the audit file.
The auditor should document:
- The circumstances encountered
- The new or additional audit procedures performed, audit evidence obtained, and conclusions reached, and their effect on the audit report
- When and by whom the resulting changes to audit documentation were made and reviewed
Incorrect answer (C): If the auditor needs to perform a previously omitted or alternative procedure but is unable to do so, the auditor may, but is not required, to seek legal advice to determine an appropriate course of action concerning the auditor’s responsibilities to the entity; regulatory authorities having jurisdiction over the entity; and users relying, or likely to rely, on the audit report.
Incorrect answer (D): if the auditor becomes aware of the omission before the report is released, the auditor can withhold the report until the appropriate action is taken.
Editor Note: It is rare for the auditor to perform new or additional audit procedures or to draw new conclusions after the date of the audit report. The guidance provides only two examples of such circumstances, i.e., this one, omitted procedures, and subsequently discovered facts.
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
A. Determine that changes in employee pay rates after year-end were properly authorized
B. Recompute depreciation charges for plant assets sold after year-end
C. Investigate changes in long-term debt occurring after year-end
D. Inquire about payroll checks that were recorded before year-end but cashed after year-end
C.
The auditor should perform other auditing procedures with respect to the period after the balance sheet date for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure including investigating changes in long-term debt after year-end. Other procedures are applied to transactions occurring after the balance sheet date for the purpose of assurance that proper cutoffs have been made, and for the purpose of obtaining information to aid in the evaluation of the assets and liabilities as of the balance sheet date. Answers a., b., and d. would not provide evidence about subsequent events as a. is a test of controls and b. and d. are not common procedures.
After the balance sheet date, an auditor’s client suffers a material loss from a decline in the value of marketable securities. Which of the following actions should the auditor advise the client to take?
A. Adjust the financial statements to include the material loss.
B. Expand audit procedures to test the current prices of marketable securities the client holds.
C. Restate the financial statements as if the material loss occurred at the balance sheet date, including disclosure in the notes.
D. Disclose the material loss in the financial statements to assure that the financial statements are not misleading.
The correct answer is (D).
Events or transactions with a material effect on the financial statements which occur subsequent to balance sheet date but prior to the date that Financial Statements are issued for which conditions did not exist on the balance sheet date is a type 2 subsequent event should be disclosed in the financial statements to ensure financial statements do not become misleading.
There is no need to restate the financial statements as if the material loss occurred at the balance sheet date as this is not a type 1 event and conditions did not exist on the balance sheet date.
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A. Determine whether inventory ordered before the year-end was included in the physical count.
B. Inquire about payroll checks that were recorded before year-end but cashed after year-end.
C. Investigate changes in capital stock recorded after year-end.
D. Review tax returns prepared by management after year-end.
C.
An auditor should perform auditing procedures with respect to the period after the balance sheet date for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure. These procedures should cover the period from the date of the financial statements to as near as practicable to the audit report date. For example, the auditor generally should inquire of and discuss with officers and other executives having responsibility for financial and accounting matters as to whether there was any significant change in the capital stock, long-term debt, or working capital to the date of inquiry. Regarding incorrect answers a. and b., the determination of whether inventory ordered before the year-end was included in the physical count as well as inquiries about payroll checks recorded before year-end, but cashed after year-end are examples of procedures to determine proper cutoff, not the occurrence of subsequent events. Regarding incorrect answer d., a review of tax returns prepared after year-end would generally not be as likely to reveal the occurrence of subsequent events as would changes in capital stock after year-end.
Before issuing an unmodified report on a compliance audit, an auditor becomes aware of an instance of material noncompliance occurring after the period covered by the audit. The least appropriate response by the auditor would be to
A. Discuss the matter with management and, if appropriate, those charged with governance
B. Issue a qualified compliance report describing the subsequent noncompliance
C. Determine whether the noncompliance relates to conditions that existed as of period end or arose subsequent to the reporting period
D. Modify the standard compliance report to include a paragraph describing the nature of the subsequent noncompliance
The correct answer is (B).
An unmodified (or unqualified) report is a clean opinion by an auditor. It means that the financial statements contain no material misstatements, errors, scope limitations, etc. An auditor was ready to issue an unmodified report but became aware of an instance of material non-compliance that occurred after the covered period for the audit. This is considered a subsequent event. While the auditor has no obligation to perform any audit procedures related to compliance during the “subsequent” period, the auditor may learn of a non-compliant item. The subsequent period is any time beyond the period covered by the auditor’s report but before the report release date.
The auditor should discuss the matter with management and those charged with governance. The auditor will try to determine whether non-compliance relates to conditions that already existed or arose during the subsequent period. The auditor will most likely include a paragraph describing the nature of the subsequent non-compliance. The auditor is least likely to issue a qualified compliance report.
The definition of a subsequent event is an event
A. Occurring between the date of the financial statements and the audit report release date
B. That existed at the date of the financial statements
C. Occurring between the date of the financial statements and the date of the audit report
D. That arose after the date of the financial statements
C.
A subsequent event is an event occurring between the date of the financial statements and the date of the audit report; not incorrect answer a., the audit report release date. Incorrect answers b. and d., existed at the date of the financial statements and arose after the date of the financial statements, respectively, refer to the timing of conditions that gave rise to a particular event and are used in some financial reporting frameworks to determine the appropriate treatment (adjustment vs. disclosure) of the subsequent event in the financial statements.
Six months after issuing an unmodified opinion on financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client’s material accounts receivable balances. The auditor should first
A. Request the client‘s permission to undertake the confirmation of such accounts receivable.
B. Perform alternative procedures to provide a satisfactory basis for the unmodified opinion.
C. Assess the importance of the omitted procedures to the auditor’s ability to support the previously expressed opinion.
D. Inquire whether there are persons currently relying, or likely to rely, on the opinion.
C.
When the auditor concludes that an auditing procedure considered necessary at the time of the audit in the circumstances then existing was omitted from the audit, the auditor should assess the importance of the omitted procedure to the auditor’s present ability to support the previously expressed opinion regarding those financial statements taken as a whole. The reason for this is because there may have been alternative procedures performed throughout the audit that may compensate for the engagement team not sending additional confirmations in this instance. The other answer alternatives are steps that should be performed after the required assessment
On February 17, year 2, a company had a fire that destroyed a plant. The building and equipment had a net carrying amount of $550,000 as of December 31, year 1. The company anticipates that insurance proceeds of $300,000 will be received. The audit of the financial statements dated December 31, year 1, was completed February 25, year 2. How should the fire be reported in the financial statements for the year ended December 31, year 1?
A. The loss of $250,000 should be recorded as of December 31, year 1, and disclosed in the notes to the financial statements.
B. The value of the building and equipment should be adjusted to $250,000 as of December 31, year 1, and the adjustment disclosed.
C. The December 31, year 1, financial statements should disclose the effect of the fire with no financial statement adjustment.
D. The December 31, year 1, financial statements should be adjusted without disclosure.
The correct answer is (C).
Subsequent events are the events occurring subsequent to the balance sheet date but before the audit report date and which comes to the attention of the auditor before the audit report is issued. When a condition did not exist on the balance sheet date it does not affect the balance sheet, and hence no adjustment is required instead only proper disclosure is sufficient.
So a fire destroying the plant and equipment is a Type 1 subsequent event requiring no adjustment and only disclosure.
After issuing an audit report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless
A. Information,which existed at the audit report date and may affect the audit report, comes to the auditor’s attention
B. Management of the entity requests the auditor to reissue the audit report.
C. Information about an event that occurred after the audit report date comes to the auditor’s attention.
D. Final determinations or resolutions are made about contingencies that were disclosed in the financial statements.
A.
After the date of the audit report, the auditor has no obligation to make any further or continuing inquiries or perform any other auditing procedures with respect to the audited financial statements covered by that report, unless new information which may affect the report becomes known by the auditor.
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?
A. The cost-to-benefit ratio of performing additional procedures to better determine the impact of the newly discovered facts.
B. The potential impact on financial statements and associated audit reports for the previous five years.
C. The client’s willingness to pay additional fees for the additional procedures to be performed.
D. The client’s willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statements.
The correct answer is (D).
Upon subsequent discovery of facts that existed at the date of the audit report, the factor that the auditor should consider the most important is the client’s willingness to issue revised financial statements or disclosures to persons known to be relying on the financial statements as this shows that the client will also cooperate with the auditor to take necessary steps to ensure that these parties are notified that auditor’s report can no longer be relied upon.
(A) is incorrect because the cost-to-benefit ratio of performing additional procedures to better determine the impact of the newly discovered facts should not be a reason which the auditor should consider as subsequent events that might require adjustments or disclosure irrespective of costs and benefits involved.
(B) is incorrect because the subsequent discovery of facts may affect the report of the current year only and need not affect the report for the last five years.
(C) is incorrect because the client’s willingness to pay additional fees for the additional procedures to be performed has no relation to the auditor performing procedures on the subsequent discovery of facts if this affects the auditor’s ability to support the opinion expressed in the audit report.
Which of the following events requires adjustment to the financial statements for the year ended December 31, year 1?
A. Loss on an accounts receivable as the result of a customer suffering a major loss from a flood in January, year 2.
B. Loss on an accounts receivable as the result of a customer suffering a deteriorating financial condition that led to bankruptcy filing in January, year 2.
C. Loss of inventory due to an earthquake in January, year 2.
D. Sale of a major bond issue in January, year 2.
The correct answer is (B).
Subsequent events are Events/transactions with a material effect on Financial Statements which occur subsequent to Balance Sheet date, but prior to the date that Financial Statements are issued
There are two types
Type 1 events - Provide evidence of conditions existing at Balance Sheet date that require an adjustment in the Financial Statements
Type 2 events - Do not affect Financial Statements, as the condition did not exist at Balance Sheet Date, but may still need to be disclosed to ensure Financial Statements do not become misleading
A loss on an accounts receivable as the result of a customer suffering a deteriorating financial condition that leads to a bankruptcy filing in January, year 2 will most certainly require adjustments to the financial statements as the condition existed on the balance sheet date.
Losses from natural disasters are not predictable and conditions did not exist on Balance Sheet, and therefore, the losses from the flood and earthquake should be reported in year 2 a major bond issue is also not a condition that existed on the Balance sheet date.
