Question

a) What are subsequent events and when do they occur?
b) What are the two types of subsequent events?
c) Given the mostly historical focus of GPFRs, why is it important that external auditors test for, evaluate, and comment on significant subsequent events?

Answer 1

A)

Subsequent events :-

Subsequent event is the accounting term for a financial transaction that occurs after completion of the balance sheet for a specified period but before the company’s full set of financial statements is prepared. Subsequent events clarify information about a business’ financial picture as reflected by the balance sheet, a financial report that includes all transactions through the report date. The Financial Accounting Standards Board, the authority entrusted with establishing generally accepted accounting principles, publishes detailed requirements for defining and recording subsequent events in financial records.

Accountants evaluate financial transactions or events that occur after the balance sheet has been prepared to determine if the events affect the picture reflected in the company's financial statements. In 2009, the Financial Accounting Standards Board changed elements of its official subsequent event guidance. The FASB lists two types of subsequent events -- recognized and non-recognized -- and the changes require companies to disclose the date through which subsequent events have been evaluated and whether the financial statement date is the issue date or the date on which the statements were available for issue.

B)

The two types of subsequent events are

1. Recognised event

2. Non recognised event

1. Recognised event :-

Recognized subsequent events require adjustments to the financial statements, according to the Federal Accounting Standards Advisory Board. Recognized events, such as changes to assets or liabilities, add evidence about the financial picture reflected on the balance sheet date and alter the estimates or summarization of the financial information included in the report. An example of a recognized subsequent event is if your company resolves a legal case for an amount that differs from the expected liability recorded before the balance sheet date. A recognized subsequent event that adds information about an existing condition is the write-off of a long-standing overdue account when the customer closes his business or files bankruptcy. The Federal Accounting Standards Advisory Board recommends evaluating financial conditions affected by subsequent events if the information is known prior to issuing the balance sheet or the financial statements.

2. Non recognised events :-

Non-recognized subsequent events do not require adjustments to the financial statements. Such events are those that relate to financial conditions that did not exist on the balance sheet date but arose after the date. A fire in your company plant that destroys inventory and other assets is a non-recognized subsequent event because conditions did not exist prior to the balance sheet date. Another example is the loss of expected income due to conditions suffered by a client. The Federal Accounting Standards Advisory Board cautions that while adjustments are not required, disclosure of certain non-recognized events might be necessary to avoid issuing misleading financial information. Disclosure might require reissuance of financial statements.

C)

SA 560, Subsequent Events outlines the auditor’s responsibility in relation to subsequent events. For the purposes of ISA 560, subsequent events are those events that occur between the reporting date and the date of approval of the financial statements and the signing of the auditor’s report.

The overall objective of ISA 560 is to ensure the auditor performs audit procedures that are designed to obtain sufficient appropriate audit evidence to give reasonable assurance that all events up to the (expected) date of the auditor’s report have been identified, properly accounted for/r disclosed in the financial statements.

ISA 560 also covers events that are discovered by the auditor after the date of the auditor’s report but before the financial statements are issued.

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