Module 7 Acc 372

Subsequent definition

The year after the balance sheet is audited

What are the two key dates for the f/s audit when demonstrating subsequent events?

Audit report date and audit report issuance date

Audit report date represents

“End of fieldwork”
Auditor has sufficient and appropriate evidence regarding f/s are MM

Between the balance sheet date and the audit report date, what is in the middle?

Auditor obtaining evidence for subsequent events

What is after the audit report date?

Audit issuance date

Audit issuance date

date audit report and f/s are out in the world

Subsequent events definition

auditors must search for subsequent events, which occur between the balance sheet and audit report dates, that should be recognized or non-recognized

Why does the definition of subsequent events make sense?

We are still obtaining evidence and can still change the fs if needed

Procedures performed for subsequent events

discuss with management
read any subsequent f/s (internal)
read board of directors meeting minutes

Recognized subsequent events

• Provide additional information about the conditions existing at the balance sheet date

• Client must record adjustment in fs and may disclose

What types of accounts are most often affected by recognized subsequent events?

Estimates or reserves

(litigation reserve, a4da, warranty reserve)

In more simple terms, subsequent event allows you to

learn info that i can use to evaluate a managerial judgment (estimates and reserves)

Non recognized subsequent event

• Provide information about conditions that occurred AFTER the balance sheet date and did not exist at the balance sheet date

• Fs are not adjusted and disclosures may be appropriate

Are auditors required to perform any procedures after the audit report date?

NO

Subsequent discovery of facts: Placement of A

After the audit report date but before the issuance to users

Dual date audit report

limits another auditor’s responsibility to work regarding issue addressed after audit report date.

1. audit report date

2. date auditor tested refinancing

Subsequent discovery of facts: Placement of B

After audit report issuance to users
Examples are FFR discovery or client restating fs.
These are rare

Subsequent events that provide evidence of conditions that arose after the balance sheet date…

May require disclosure in the F/S.

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

Read the latest interim financial statements issued after year end.

Letter of inquiry to clients attorneys objective

Corroborate information provided by management regarding litigation, claims, and assessments

Letter of inquiry to clients attorneys: Attorney provides

-Description, progress to date, planned action
-Estimate (range) of potential losses

How does an auditor identify attorneys for letters of inquiry?

Ask management, inspect documentation, and look at attorneys bills and legal expenses to see who they are paying

What date should the attorneys letter be closest to?

Audit report date

Are attorneys independent third parties?

NO. this means that no confirmations can be done.

Related party transactions: Auditors responsibility

-Ensure related party transactions identified
-Understand purpose, nature, extent, and fs effect
-KEY: evaluate fs disclosures

Related party transactions: concern

The form of transactions between non-independent parties may not reflect economic substance

Who are related parties?

Parent subsidiary, company owned by management or executives, and families

In the context of the fraud triangle, related party transactions are…

opportunities

Management representation letter: objective

• convert verbal and implicit representations made into writing

• avoid misunderstanding regarding managements responsibilities

What procedure is obtaining Management representation letter?

written inquiry

Management representation letter: key representations

• responsible for preparation and fair presentation of fs

• responsible for ic

• provided access to all info

to whom should the management representation letter be addressed to?

auditor

when should the management representation letter be dated?

audit report date

Management representation letter: examples of things included

subsequent events, litigation, related party transactions

Among other matters, a written representation from management acknowledges management’s responsibility for the presentation of the F/S in conformity with GAAP. This written representation should be signed by…

The CFO and the Chief Executive Officer (CEO)

communication with audit committee: objective

ensure that audit committee has information to appropriately oversee the financial reporting process

communication with audit committee: discusses

-critical accounting policies and practices

-reasonableness of estimates

communication with audit committee: engagement outcomes

-Adjusting entries recorded to correct misstatements

-Schedule of uncorrected misstatements

-Disagreements with management