An auditor is concerned with the balance sheet as of a particular date, such at 12/31. Sometimes events occur or become know subsequent to the balance sheet date and before the issuance of the audit report.
An auditor's responsibility for subsequent events and related audit procedures is addressed in the AICPA's Codification of Auditing Standards.
Subsequent events are classified as two major types:
Type 1-Events that reveal conditions existing at or before the balance sheet date and require adjustment to the financial statements.
Type 2-Events that reveal conditions arising after the balance sheet date and require disclosure in, but not adjustment to, the financial statements.
Can anyone give me some examples to the two types of events. These are important when dealing with completing the audit.
A significant understatement of a liability for a transaction that was unrecorded at year, but affected the reporting period
Disclosure of the settlement of pending litigation ...
The solution presents four examples of Type 1 and four examples of Type 2 subsequent events. Type 1 events will require changes to the amounts in the financial statement. Type 2 events will be disclosed in the subsequent event footnote as part of the financial statement disclosures.