Question

R14-2 Differentiate between the two types of subsequent events. List some audit procedures that may identify subsequent events? LO2 R14-3 Discuss the auditor's responsibility for detecting subsequent events prior to the completion of field work. LO2 R14-4 Explain the process of "engagement wrap-up?" Why is it important? LO3 R14-5 Provide an example of why an auditor would reevaluate control risk near the end of the audit. Provide a different example of why an auditor would reevaluate fraud risk near the end of the audit. LO3 R14-6 Discuss actions an auditor would take when misstatements identified during the audit are not corrected by the client. LOS R14-7 Explain the process of an engagement quality control review. LO3 R14-8 What are the audit file assembly deadlines and the audit file retention policies for the audit files for public and private company audits? Provide an analysis of why you think the deadlines and policies are different for public versus private company audits. LO3 R14-9 Evaluate why the accounting assumption of "going concern" is of interest to auditors. Are there specific audit procedures that must Y be performed related to the going concern assumption? Why or why not? LO4 nada

Answer 1

Solution to Question R14-2 :-

There are two types of subsequent events: 1) Recognized subsequent events 2) Unrecognized subsequent events

Differences between the two types of subsequent events are as follows:

• Recognized subsequent events are events that were ongoing during the year and have concluded after the year-end but before the date of issue of the financial statements. On the other hand, unrecognized subsequent events are events that were not ongoing during the year, that is to say, these events, if continuing, start occuring after the year-end and if non-continuing, occur after the year-end.
• The entity is required to alter its financial statements in order to make the necessary adjustments for recognized subsequent events. Whereas, there is no such requirement to alter the financial statements for unrecognized subsequent events. Instead the entity must give a separate disclosure of such events as a footnote.
• Not altering the financial statements for recognized subsequent events will make them misleading and will hamper their true and fair view. On the other hand, failure to give a separate disclosure for unrecognized subsequent events does not hamper true and fair view of the financial statements, it is only required to enable the investors to know that such an event has occured in the entity.

The following audit procedures should be used to identify subsequent events:-

• Review existing procedures (if any) laid down by the management to identify these events.
• Study minutes of the meetings of the members, Board of directors and other important executive committees (if any) held after the balance sheet date.
• Ascertain the status of litigations, claims etc. against the company from its legal advisors.
• Inquire, or extend previous oral or written inquiries, of the entity’s legal counsel concerning litigation and claims
• Read the entity’s latest available budgets, cash flow forecasts and other related management reports for periods after the date of the financial statements.
• Obtain written representation from the management that all relevant events have been appropriately accounted for/dealt with.
• Obtain an assurance from management about the:
  1. Current status of items that were accounted for on the basis of estimates.
  2. Any events occurred or likely to occur which will require change in the existing accounting policies.
  3. Any events which may cast doubts about the validity of entities going concern assumption.