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Subsequent events review of items for disclosure

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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.

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Solution Preview

Type 1:

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 ...

Solution Summary

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.

Similar Posting

Subsequent Events Treatment for Financial Audit of Flowmeter Inc

See attached file for suggested format for answers.

In connection with the audit of Flowmeter, Inc., for the year ended December 31, 20X0, Hirsch, CPA, is aware that certain events and transactions that took place after December 31, 20X0, but before Hirsch issues his report dated February 8, 20X1,
may affect the company's financial statements.

The following material events or transactions have come to his attention.

1. On January 3, 20X1, Flowmeter, Inc., received a shipment of raw materials from Canada.
The materials had been ordered in October 20X0 and shipped FOB shipping point in
November 20X0.

2. On January 15, 20X1, the company settled and paid a personal injury claim of a former
employee as the result of an accident that occurred in March 20X0. The company had not
previously recorded a liability for the claim.

3. On January 25, 20X1, the company agreed to purchase for cash the outstanding stock of
Porter Electrical Company. The acquisition is likely to double the sales volume of
Flowmeter, Inc.

4. On February 1, 20X1, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting
in an uninsured loss of inventory.

5. On February 5, 20X1, Flowmeter, Inc., issued and sold to the general public $2 million in
convertible bonds.


For each of the above events or transactions, indicate the audit procedures that should have brought the item to the attention of the auditor and the form of disclosure in the financial statements including the reasons for such disclosure.

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