What audit procedures should the auditor perform to search for subsequent events?

What is a Subsequent Event?

A subsequent event is an event that occurs after a reporting period, but before the financial statements for that period have been issued or are available to be issued. Depending on the situation, such events may or may not require disclosure in an organization's financial statements. The two types of subsequent events are noted below.

Additional Information

An event provides additional information about conditions in existence as of the balance sheet date, including estimates used to prepare the financial statements for that period.

New Events

An event provides new information about conditions that did not exist as of the balance sheet date.

Subsequent Event Reporting

Generally accepted accounting principles state that the financial statements should include the effects of all subsequent events that provide additional information about conditions in existence as of the balance sheet date. This rule requires that all entities evaluate subsequent events through the date when financial statements are available to be issued, while a public company should continue to do so through the date when the financial statements are actually filed with the Securities and Exchange Commission. Examples of situations calling for the adjustment of financial statements are:

• Lawsuit. If events take place before the balance sheet date that trigger a lawsuit, and lawsuit settlement is a subsequent event, consider adjusting the amount of any contingent loss already recognized to match the amount of the actual settlement.

• Bad debt. If a company issues invoices to a customer before the balance sheet date, and the customer goes bankrupt as a subsequent event, consider adjusting the allowance for doubtful accounts to match the amount of receivables that will likely not be collected.

If there are subsequent events that provide new information about conditions that did not exist as of the balance sheet date, and for which the information arose before the financial statements were available to be issued or were issued, these events should not be recognized in the financial statements. Examples of situations that do not trigger an adjustment to the financial statements if they occur after the balance sheet date but before financial statements are issued or are available to be issued are:

• A business combination

• Changes in the value of assets due to changes in exchange rates

• Destruction of company assets

• Entering into a significant guarantee or commitment

• Sale of equity

• Settlement of a lawsuit where the events causing the lawsuit arose after the balance sheet date

A company should disclose the date through which there has been an evaluation of subsequent events, as well as either the date when the financial statements were issued or when they were available to be issued. There may be situations where the non-reporting of a subsequent event would result in misleading financial statements. If so, disclose the nature of the event and an estimate of its financial effect. If a business reissues its financial statements, disclose the dates through which it has evaluated subsequent events, both for the previously issued and revised financial statements.

Consistency in Disclosing Subsequent Events

The recognition of subsequent events in financial statements can be quite subjective in many instances. Given the amount of time required to revise financial statements at the last minute, it is worthwhile to strongly consider whether the circumstances of a subsequent event can be construed as not requiring the revision of financial statements.

There is a danger in inconsistently applying the subsequent event rules, so that similar events do not always result in the same treatment of the financial statements. Consequently, it is best to adopt internal rules regarding which events will always lead to the revision of financial statements; these rules will likely require continual updating, as the business encounters new subsequent events that had not previously been incorporated into its rules.

Example of a Subsequent Events Disclosure

The following is an example of a typical disclosure of a subsequent event:

The following events and transactions occurred subsequent to December 31, 20XX:

• The company concluded acquisition discussions with ABC Corporation, and paid $10,000,000 in cash to the shareholders of ABC on February 28, 20XX to acquire 100% of the outstanding shares of ABC.

• A jury found that the company was not liable in a lawsuit brought by Smith.

• The company's largest customer, Jones & Company, declared bankruptcy on February 10, 20XX. Given this new information, the company increased its reported allowance for doubtful accounts by $100,000, which is included in these financial statements.

What audit procedure should be performed to search for subsequent events?

What is a subsequent event in audit process?

Would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Which type of subsequent event require consideration by management and evaluation of the auditor?