Subsequent events Flashcards
(3 cards)
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
A. Examine changes in the quoted market prices of investments purchased since year end.
B. Compare the latest available interim financial information with the financial statements being reported upon.
C. Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates.
D. Inquire about payroll checks that were recorded before year end but cashed after year end.
B. Compare the latest available interim financial information with the financial statements being reported upon.
Subsequent events occur between the financial statement date and the report issue date. The auditor must ensure that management has identified, evaluated, recognized, and/or disclosed all material subsequent events.
Audit procedures designed to identify subsequent events include:
Making inquiries of the client and obtaining a management representation letter
Reading minutes of meetings of the board of directors occurring after year end
Making inquiries of a client’s legal counsel about outstanding legal actions and contingencies
Evaluating changes in key accounts (eg, comparinginterim statements with audited statements).
By comparing the latest available interim financial statements (ie, after year end) with those just audited, the auditor can identify significant changes in financial position not explained by normal operations. This is an indication of a possible subsequent event and would require further investigation.
(Choice A) The auditor would not be concerned about securities purchased after year end because their value would not affect the audited financial statements of the prior year.
(Choices C and D) Testing balance sheet accounts and making inquiries about paychecks recorded before year end would not identify subsequent events because neither relates to events occurring after year end.
Things to remember:
Subsequent events occur between the financial statement date and the report issue date. Management is responsible for identifying, evaluating, recognizing, and/or disclosing subsequent events. The auditor will perform procedures such as comparing the latest available interim financial statements (ie, after year end) with those just audited to identify possible subsequent events.
On March 1, a CPA expressed an unmodified opinion on a client’s financial statements. On July 1, the CPA’s quality control program discovered that engagement personnel failed to observe the client’s physical inventory. This omission may impair the CPA’s ability to support the unmodified opinion. If the client’s creditors are currently relying on the audit unmodified opinion, the CPA should first
A. Request that client management communicate to its creditors that the audit opinion should not be relied on.
B. Reissue the auditor report with an explanatory paragraph describing the departure from GAAS.
C. Apply alternative procedures that provide a satisfactory basis for the unmodified audit opinion.
D. Ask the client’s board of directors to disclose this development in their next interim report.
C. Apply alternative procedures that provide a satisfactory basis for the unmodified audit opinion.
After an audit report is issued, the auditor’s quality control program may identify a critical audit procedure that was not performed (ie, subsequently discovered fact). This could result from a miscommunication among the audit staff or failure to note an item in the audit program.
In this instance, because the omitted procedure could impact the audit report reliability, the auditor will first perform alternative procedures. For example, inventory purchase and sales documentation might be used to reconcile the financial statement (F/S) inventory balance to a physical inventory count in July. Should alternative test results show the audit report and F/S are still reliable, no further action is required.
(Choices A and B) Discovering an omitted audit procedure does not indicate that the audit opinion is unreliable or that there are departures from GAAS. The auditor must first determine the impact of the omitted procedure before taking any further action.
(Choice D) Only when alternative test results show the audit report and F/S are not reliable would regulatory agencies and anyone relying on the F/S (eg, a client’s creditor) be notified, possibly through an interim report by the client’s board of directors.
Things to remember:
When an auditor discovers a critical audit procedure has been omitted (eg, subsequently discovered fact), alternative tests must first be considered. If such tests reveal the audit report and associated financial statements are still reliable, the auditor need not take any future action.
On March 12, a CPA completed field work on an engagement to audit financial statements for the year ended December 31. On March 18, an event came to the CPA’s attention that should be disclosed in the notes to the financial statements. The CPA decided to dual date the auditor’s report and dated the report March 12 and March 18. The audit report was released on April 1. Under these circumstances, the CPA was taking responsibility for
A. All subsequent events that occurred through April 1.
B. All subsequent events that occurred through March 12.
C. All subsequent events that occurred through March 12 and the specific subsequent event occurring on March 18.
D. All events that occurred through March 18.
C. All subsequent events that occurred through March 12 and the specific subsequent event occurring on March 18.
Auditors are responsible for performing procedures regarding subsequent events through the original report date (March 12). However, after the report date but before the report release date (April 1), an event may occur that requires a revision to the financial statements (F/S).
Because the newly discovered information will be included in the F/S, auditors must take responsibility for their opinions as they relate to that event. In such situations, auditors have two options:
To dual date the report
To change the report date altogether
By dual dating an audit report—such as by writing “March 12, Year 2, except for the event described in Note J, dated March 18, Year 2”—an auditor assumes responsibility for all subsequent events occurring up to and including March 12, the last day of field work, and also takes responsibility for only the single additional event occurring on March 18 (Choices A and B).
(Choice D) When auditors opt to change a report date rather than dual date it, they indicate that they have obtained sufficient appropriate evidence for and are taking responsibility for all subsequent events up to the new report date (March 18).
Things to remember:
If an audit report has a single date that is changed to later than the original report date, the auditors are responsible for all subsequent events through the new date. If a report is dual dated, the auditors are responsible for only the subsequent events through the original date and the single subsequent event associated with the later date.
