Completing the Audit: Subsequent Events and Discovery of Facts | Auditing and Attestation | CPA Exam

In this session, I discuss subsequent events and discovery of facts in completing the audit.
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Conduct a post-balance-sheet review for subsequent events.
The auditor must review transactions and events that occurred after the balance sheet date to determine whether any of these transactions or events affect the fair presentation or disclosure of the current period statements. The auditing procedures required by auditing standards to verify these transactions and events are commonly called the review for subsequent events or post-balance-sheet review.

The auditor’s responsibility for reviewing subsequent events is normally limited to the period beginning with the balance sheet date and ending with the date of the auditor’s report.

Types of Subsequent Events
Two types of subsequent events require consideration by management and evaluation by the auditor: those that have a direct effect on the financial statements and require adjustment of the current year’s financial statement amounts and those that have no direct effect on the financial statement amounts but for which disclosure is required.

Those That Have a Direct Effect on the Financial Statements and Require Adjustment
Some events that occur after the balance sheet date provide additional information to management that helps them determine the fair presentation of account balances as of the balance sheet date. Information about those events helps auditors in verifying the balances. For example, if the auditor is having difficulty determining the correct valuation of inventory because of obsolescence, the sale of raw material inventory as scrap in the subsequent period will indicate the correct value of the inventory as of the balance sheet date.

Subsequent period events, such as the following, require an adjustment of account balances in the current year’s financial statements if the amounts are material:

Declaration of bankruptcy by a customer with an outstanding accounts receivable balance because of the customer’s deteriorating financial condition

Settlement of litigation at an amount different from the amount recorded on the books

Disposal of equipment not being used in operations at a price below the current book value

When subsequent events are used to evaluate the amounts included in the year-end financial statements, auditors must distinguish between conditions that existed at the balance sheet date and those that came into being after the end of the year. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation took place after year-end. For example, assume one type of a client’s inventory suddenly becomes obsolete because of a technology change after the balance sheet date. The sale of the inventory at a loss in the subsequent period is not relevant in the valuation of inventory for obsolescence in this case.

Auditors of accelerated filer public companies must inquire about and consider any information about subsequent events that materially affects the effectiveness of internal control over financial reporting as of the end of the fiscal period. If auditors conclude that the events reflect a material weakness that existed at year-end, they must give an adverse opinion on internal control over financial reporting. If they are unable to determine the effect of the subsequent event on the effectiveness of internal control, they must disclaim their opinion on internal control.

Those That Do Not Have a Direct Effect on the Financial Statements but for Which Disclosure May Be Required
Subsequent events of this type are events that provide evidence about conditions that did not exist at the date of the balance sheet being reported on but arose after the balance sheet date and may be significant enough to require disclosure. Examples of these types of nonrecognized subsequent events include:

A decline in the market value of securities held for temporary investment or resale

The issuance of bonds or equity securities



A decline in the market value of inventory as a consequence of government action barring further sale of a product

The uninsured loss of inventories as a result of fire

A merger or an acquisition

There are two categories of audit procedures for the subsequent events review:

Procedures normally integrated as a part of the verification of year-end account balances

Procedures performed specifically for the purpose of discovering events or transactions that must be recognized as subsequent events