What are the types of subsequent events the auditor should identify and evaluate as part of...

What are the types of subsequent events the auditor should identify and evaluate as part of performing an audit? Give an example of each type of subsequent event. How should the client treat each type in the financial statements?

Expert Solution

Adjusting event
An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not
appropriate. These events are also known as events after balance sheet date that results in adjustment to the financial statements due to providing additional information of the events which exist at the date of financial statements.

Example of Adjusting event: Company has a legal case pending in court for total amount of $100000 and it has possibility to lose is 70% and company has created a contingent liability of $70000 in its financial statements as on 31-12-2019 and balance sheet signing date is 28-03-2020. Judgement was given against company on 15-02-2020 which resulted in a liability to pay $100000. Therefore as the conditions for liability existed as on 31-12-2019 and it got confirmed before balance sheet date i.e. 28-03-2020, Company should increase its liability by $30000 so as to adjust it in its financial statements as on 31-12-2019. These events are called adjusting event.

Non-adjusting event
An event after the reporting period that is indicative of a condition that arose after the end of the reporting period. These type of events do not require any adjustment in Financial statements.

For example- Company is preparing its financial statements for 31-12-2019 and its balance sheet date is 28-03-2020. Meanwhile, it decided to declare dividend for 2019 on 13-02-2020 and declared the same as on 18-02-2020. As the conditions to declare dividend existed after end of reporting period i.e. 31-12-2019, therefore it does not require any adjustment in financial statements as on 31-12-2019. These

ekkarill92 answered 2 years ago

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