AUDITING Type 1 subsequent event is additional information about conditions that

Question

AUDITING

Type 1 subsequent event is additional information about conditions that existed at the balance sheet date. The financial statement numbers should be adjusted to reflect this information; footnote disclosure may also be necessary.

Type 2 subsequent event is information about conditions that did not exist at the balance sheet date. These conditions came about after the balance sheet date. The financial statement numbers should not be adjusted for these events, but they should be considered for disclosure.

List and explain in a few sentences three type 1 subsequent events and three type 2 subsequent events.

Explanation / Answer

Type 1:

1) 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.

2) 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.

3) Fraud: a material fraud was discovered by the bookkeeper. The payables ledger assistant had been diverting funds into a fictitious supplier bank account, set up by the employee, which had been occurring for the past six months. The employee was immediately dismissed, legal proceedings against the employee have been initiated and the employee’s final wages have been withheld as partreimbursement back to the company.

Type 2: Only disclosure is required

1) Sale of a bond or capital stock issue.

2) Purchase of a business.

3) Settlement of litigation when the event giving rise to the claim took place subsequent to the balance-sheet date.

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