Concepts and Standards - Subsequent Events and Related Issues

Question 1

An auditor is considering whether the omission of a substantive procedure considered necessary at the time of an audit may impair the auditor’s present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if the

Answer 1

Results of other procedures that were applied tend to compensate for the procedure omitted.

Question 2

Subsequent events affecting the realization of assets ordinarily will require adjustment of the financial statements under examination because such events typically represent

Answer 2

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

Why?

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 3

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

Answer 3

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

Question 4

Before reissuing a report which was previously issued on the financial statements of a prior period, a predecessor auditor should

Answer 4

Obtain a letter of representation from the successor auditor.

Why?

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 5

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

Answer 5

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

Why?

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 6

Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor’s report would require disclosure in the financial statements?

Answer 6

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.

Note:

A major drop in the quoted market price of the stock of the corporation is NOT needed 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 7

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

Answer 7

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

Question 8

Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, year 1?

Answer 8

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

Question 9

After issuing an auditor’s report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless

Answer 9

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

Question 10

Which of the following circumstances most likely would require an auditor to apply an omitted procedure after the audit report issuance date?

Answer 10

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

Note:

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 11

Under which of the following circumstances may audited financial statements contain a note disclosing a subsequent event which is labeled unaudited?

Answer 11

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

Note:

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 12

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?

Answer 12

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

Note:

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 13

A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor’s fieldwork. The auditor should

Answer 13

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

Why?
The transaction described is a type 2 subsequent event (since the acquisition provided evidence of a condition which came into existence after year-end) and therefore the proper accounting approach would be note disclosure rather than adjustment.

Question 14

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Answer 14

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

Question 15

On February 25, a CPA issued an auditor’s report expressing an unqualified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating financial condition of the entity’s principal customer that led to the customer’s bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA’s next course of action most likely would be to

Answer 15

Notify each member of the entity’s board of directors about management’s refusal to adjust the financial statements.

Note:

AU-C 560 requires the auditor to notify each member of the board of directors of such refusal and that he or she will take steps to prevent future reliance upon the audit report. Ordinarily the auditor will then notify the clients and regulatory agencies that the report should no longer be associated with the financial statements, and when possible, notify persons known to be relying upon the financial statements.

Question 16

Six months after issuing an unqualified opinion on audited 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

Answer 16

Assess the importance of the omitted procedures to the auditor’s ability to support the previously expressed opinion.

Question 17

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

Answer 17

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

Question 18

Which of the following procedures should an auditor generally perform regarding subsequent events?

Answer 18

Compare the latest available interim financial statements with the financial statements being audited.

Question 19

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?

Answer 19

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.

Why?

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 20

After an audit report containing an unqualified opinion on a nonissuer (nonpublic) client’s financial statements was issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor should

Answer 20

Take no action because the auditor has no obligation to make any further inquiries.

Why?

No action need be taken since the event arose after the issuance of the auditor’s report. See AU-C 560 for a discussion of auditor responsibility when subsequent to the issuance of the auditor’s report the auditor becomes aware of a fact that existed at the date of the auditor’s report.

Question 21

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Answer 21

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

Question 22

Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s subsequent events?

Answer 22

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

Question 23

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?

Answer 23

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

Question 24

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Answer 24

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

Note:

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

Question 25

“Subsequent events” for reporting purposes are defined as events which occur subsequent to the

Answer 25

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

Note:

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 26

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

Answer 26

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

Question 27

The auditor’s report ordinarily should be dated as of the date on which the

Answer 27

Auditor has obtained sufficient appropriate audit evidence.

Note:

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 28

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

Answer 28

Require disclosure to keep the financial statements from being misleading.

Question 29

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?

Answer 29

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

Note:

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 30

What happens if the auditor report is dual dated for subsequent event occurying after the completion of fiendwork, the auditor responsibility for events that occur subsequent to completion of fieldwork is

Answer 30

Limited to the specific event for which the report is dual dated.

Question 31

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

Answer 31

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

Note:

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 32

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?

Answer 32

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

Question 33

An auditor’s decision concerning whether or not to “dual date” the audit report is based upon the auditor’s willingness to

Answer 33

Extend auditing procedures.

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 34

Before reissuing the prior year’s auditor’s report on the financial statements of a former client, the predecessor auditor should obtain a letter of representations from the

Answer 34

Former client’s management = Yes

Successor auditor = Yes

Question 35

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Answer 35

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

Question 36

A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor’s fieldwork. The auditor should

Answer 36

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

Question 37

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Answer 37

Investigate changes in capital stock recorded after year-end.