CPA Exam AUD: Subsequent Events and Audit Procedures

Subsequent Events: Key Concepts for the CPA AUD Exam

Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are issued or available to be issued. Auditors must understand how these events affect the financial statements and the audit report. AU-C Section 560 (Subsequent Events and Subsequently Discovered Facts) and ASC 855 (Subsequent Events) provide the authoritative guidance.

Two Types of Subsequent Events

Under GAAP, there are two types of subsequent events:

Type I: Recognized Subsequent Events (Conditions Existing at the Balance Sheet Date). These events provide additional evidence about conditions that existed at the date of the balance sheet and affect estimates inherent in the financial statements. Type I events require adjustment of the financial statements. Examples include the settlement of litigation after year-end for an amount different from the accrued amount, when the underlying cause of the litigation existed before year-end; the collection or determination that a receivable is uncollectible after year-end, when the debtor's financial condition existed before year-end; and the discovery of a fraud or error that occurred before year-end.

Type II: Nonrecognized Subsequent Events (Conditions Arising After the Balance Sheet Date). These events provide evidence about conditions that did not exist at the balance sheet date but arose after that date. Type II events do not require adjustment of the financial statements but may require disclosure. Examples include a fire or natural disaster occurring after year-end that destroys significant assets, the issuance of debt or equity after year-end, a business combination occurring after year-end, and the loss of a major customer after year-end due to conditions arising after the balance sheet date.

The Auditor's Responsibility During the Subsequent Period

The subsequent period extends from the balance sheet date through the date of the auditor's report. During this period, the auditor should perform procedures to identify subsequent events that may require adjustment or disclosure. Required procedures include inquiring of management about whether any subsequent events have occurred that might affect the financial statements, reading minutes of meetings held after year-end, reading the entity's latest interim financial statements, and inquiring about the current status of items involving subjective judgments or that were unresolved at year-end.

The auditor should also inquire about new commitments, borrowings, or guarantees, about whether unusual adjustments were made after year-end, about whether any events have occurred that raise going concern doubts, and about significant changes in capital stock, long-term debt, or working capital.

Dual Dating of the Audit Report

If a subsequent event occurs after the date of the auditor's report but before the financial statements are issued, and the event requires disclosure or adjustment, the auditor may dual-date the report. Dual dating means the auditor dates the report as of the original date, except for the note related to the subsequent event, which is dated as of the later date. For example, the report might read: "February 15, 20X2, except for Note 12, as to which the date is March 1, 20X2." The significance of dual dating is that the auditor's responsibility for events after the original report date is limited to the specific event disclosed in the cited note.

Alternatively, the auditor may choose to date the entire report as of the later date, which extends the auditor's responsibility for all subsequent events through that later date. This option requires the auditor to extend subsequent event procedures through the new report date.

Subsequently Discovered Facts

Subsequently discovered facts are facts that become known to the auditor after the date of the auditor's report and that, had they been known before, might have caused the auditor to revise the report. When the auditor becomes aware of such facts after the report has been issued, the auditor should discuss the matter with management, determine whether the financial statements need to be revised, and if revision is needed, inquire how management intends to address the matter. If management revises the financial statements, the auditor performs the procedures necessary in the circumstances, issues a new report, and includes an emphasis-of-matter paragraph or other-matter paragraph that refers to the note disclosing the reason for the revision. If management does not revise the financial statements when the auditor believes revision is needed, the auditor should notify management and those charged with governance and take action to prevent future reliance on the original report.

Omitted Procedures Discovered After Report Issuance

If after issuing the report, the auditor becomes aware that one or more audit procedures considered necessary were omitted, the auditor should assess the importance of the omitted procedures and whether other procedures performed partially compensate. If the omitted procedures impair the auditor's ability to support the opinion, the auditor should apply the omitted procedures or alternative procedures. If the auditor is unable to perform the necessary procedures and the lack of evidence impairs the ability to support the opinion, the auditor follows the same process as for subsequently discovered facts.

Exam Tips for Subsequent Events

• Type I events require financial statement adjustment; Type II events require disclosure only.
• Dual dating limits the auditor's responsibility to the specific disclosed event after the original report date.
• The subsequent period runs from the balance sheet date to the date of the auditor's report.
• Subsequently discovered facts after report issuance require the auditor to assess whether financial statement revision is needed.
• The auditor is required to perform subsequent event procedures; this is not optional.