Question

Describe what audit procedures you (the auditor) likely performed which resulted in your discovery of these subsequent events.

1. South Face’s largest customer, Ratagonia, filed bankruptcy (due to deteriorating financial condition) in January 2020. South Face has a material accounts receivable balance due from Ratagonia as of December 31, 2019.

Answer 1

This type of events are called subsequent events, if a transaction occurs after the balance sheet date, they are called subsequent events.

These events, if material, are required to be disclosed in the financial statements of 2019, eventhough it has occured in 2020.

Events such as the purchase or sale of a business segment, the sale of a large amount of stock or the issuance of bond, and events that create catastrophic losses for your client require serious consideration by Auditor.

Subsequent events may be identified, by performing the following activities,

1. Look at all documents related to the event, including the sale contract or proof of cash disbursement and/or loan paperwork for the purchase of the segment.
2. Make any third-party confirmations with the transaction’s other party.
3. Read the minutes of directors and shareholders meetings,
4. If you determine that the event is significant enough, you must include pro forma financial information in your audit report.