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Subsequent Event

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What is a Subsequent Event?

When it comes to preparing financial statements, the period after the balance sheet date but before the financial statements are officially issued is crucial. This time frame is referred to as the “subsequent events” period. Subsequent events include transactions and other occurrences that happen after the balance sheet date. Despite occurring after this date, these events can have significant implications for the financial statements.

As auditors, it’s essential to evaluate these events carefully. This evaluation helps ensure that the financial statements provide a true and fair view of the company’s financial position at the balance sheet date. This will generally occur some time in Q1 of the following calendar year. For instance, if a major lawsuit is settled or a significant acquisition is made after the balance sheet date but before the financial statements are issued, this information needs to be considered and disclosed. 

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Recognized V.S. Non-Recognized Subsequent Events

The auditor’s identification of recognized subsequent events is crucial for ensuring the financial statements accurately represent the company’s condition at the balance sheet date, including adjustments for events that have a material effect on the financials. In contrast, pinpointing nonrecognized subsequent events is key to providing transparency about significant occurrences after the balance sheet date that could influence the company’s future financial outcomes, without altering the current period’s statements.

Type I Recognized Subsequent Events

The first type consists of those events that provide additional evidence concerning conditions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements. The resulting impact of recognized subsequent events consists of either adjustments made to the financial statements, or disclosures made by management. Examples of these recognized subsequent events will include:

1) Settlement of pending litigation

2) Uncollectible of accounts receivables

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Type I Subsequent Event Example (1): Settlement of Pending Litigation

The settlement of pending litigation is classified as a Type I recognized subsequent event in accounting. This classification applies when events provide additional evidence about conditions that existed at the balance sheet date. For instance, if a company settles a lawsuit after the balance sheet date but before the financial statements are issued, this settlement confirms the liability’s existence and likely magnitude as of the balance sheet date. Therefore, the financial statements must be adjusted to reflect this new information, ensuring they accurately represent the company’s financial position.

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Type I Subsequent Event Example (2): Loss on Accounts Receivable

The recognition of a loss on accounts receivable after the balance sheet date but before the financial statements are issued is considered a Type I recognized subsequent event. This type of event provides further evidence about conditions that already existed at the balance sheet date. For example, if a major customer declares bankruptcy shortly after the balance sheet date, it indicates that the receivable was already at risk as of that date. Accordingly, the financial statements should be adjusted to reflect this loss, ensuring they accurately convey the financial health of the company.

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Auditor's Responsibility During Subsequent Events Period

Audit period – During the audit period, the auditor will obtain sufficient appropriate audit evidence to provide an audit opinion as of the balance sheet date. Some audit procedures to be performed during the audit period include: 

1) Confirmation 

2) Footing

3) Inquiry 

4) Vouching

5) Examination 

6) Inspection 

7) Cutoff tests

8) Analytical procedures

9) Recalculation 

10) Observation 

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Subsequent events period – During the audit period, the auditor will obtain sufficient appropriate audit evidence to provide an audit opinion as of the balance sheet date.

During the subsequent period, the auditor should be able to obtain an understanding of the procedures in which management has determined these events. The auditor should perform the following audit procedures during the subsequent events period:

1) Inquiry

2) Obtain a representation letter

3) Post balance sheet transactions

4) Minutes

5) Examination of interim financial statements

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Between the audit report date and the audit issuance date – Generally, the auditor will not be required to make any further inquiries or test further audit procedures after the original date of the auditor’s report has passed. With that being said, if the auditor does discover any information that pertains to subsequent events or before the report release date, the auditor should use professional judgment to decide to either adjust the financial statements, or related footnote disclosures.

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