Subsequent Events and Related Issues Flashcards
What are the auditors objectives related to subsequent events & subsequently discovered facts?
1) Obtain sufficient appropriate evidence about whether subsequent events are appropriately reflected in the F/S in accordance with financial reporting framework
2) To respond appropriately to subsequently discovered facts
3) Predecessor auditor who is requested to reissue a previously issued auditor report is to determine whether that report is still appropriate before reissuing the report
Define subsequent events-
Events occurring after financial statement date and auditors report
- Changing number
- Changing disclosures
What are subsequently discovered facts?
Facts that became known after the date of the auditors report, HAD THEY BEEN KNOWN TO THE AUDITOR, it may have caused the auditor to revise the audit report
What are the two types of subsequent events?
1) Those that require adjustment to the F/S (appropriate when the event provides better information)
- Litigation: It is probable that there will be an unfavorable outcome and perhaps the most likely outcome would be $1M. They should make an accrual for the subsequent event at the balance sheet. Suppose that after fieldwork, the engagement partner gets a call from CFO telling auditors that it would only be $750,000 from a settlement. This resolution would result in adjustment to the F/S.
2) Requiring disclosure: When a subsequent event that is unrelated to items that are not related at the balance sheet BUT ARE MATERIAL (Maybe from a hurricane after the balance sheet date)
What are the auditors procedures to DETECT subsequent events?
1) Understanding IC related to subsequent events
2) Inquire of management of any subsequent events (should be documented in management rep letter)
3) Read minutes of those charged with governance
4) Read any interim F/S subsequent to year-end (or “scan” accounting records for Y/E)
If management does not cooperate on Subsequent Discovery of Facts, what should happen?
- Notify those in charge with governance
- Notify management, regulators, and any known users not to rely on the financials or audit report
- Consult with legal counsel about exposure to legal liability
Subsequently discovered facts BEFORE the report release date, what should you do?
Discuss with management to determine if there needs to be revision
If management agrees to revise:
- The auditor should perform appropriate procedures to evaluate the revision
- Either date the audit report at this later date or “dual date” the report for the revision
- Obtain written representation from management up to the additional date
If we discover subsequent events AFTER the report reals date, what should happen?
Discuss with management and determine the F/S need to be restated
If they revise
- The auditor should perform procedures to evaluate revision
- Assess whether management response is timely and appropriate
- If the OPINION is different than previously stated opinion, the auditor should add EMPHASIS OF MATTER OR OTHER MATTER PARAGRAPH to describe the issues involved
If they DO NOT revise:
- Evaluate the steps taken by management are timely and appropriate to communicate with the user
- If they do not take steps, the auditor should notify management that the auditor will take steps the users from relying on the audit report (consult with attorney, notify regulatory agency, inform known users)
If a predecessor auditor has to reissue the audit report, what needs to happen?
1) Read the F/S of the subsequent periods
2) Compare the prior-period F/S with those of the subsequent period
3) Inquire of management about any information that might affect the previous presentation and any subsequent events; and obtain a written representation letter from management
4) Obtain a representation letter from the SUCCESSOR AUDITOR about matters affect the F/S audited by the predecessor
