16-31&32 6 31. The auditor\'s opinion on the faimess of financial statements may
ID: 2591684 • Letter: 1
Question
16-31&32
6 31. The auditor's opinion on the faimess of financial statements may be affected b events Define what is commonly referred to in auditing as a subsequent event, and de two general types of subsequent events. a. scribe the b. Identify those auditing procedures that the auditor should apply at or near the completim of fieldwork to disclose significant subsequent events 7 16-32 Linda Reeves, CPA, receives a telephone call from her client, Lane Company. The compuny's controller states that the board of directors of Lane has entered into two contractual arrange ments with Ted Forbes, the company's former president, who has recently retired. Under one agreement, Lane Company will pay the ex-president $7,000 per month for five years if he does not compete with the company during that time in a rival business.U agreement, the company will pay the ex-president $5,000 per month for fiv advisory services as the company may request from the ex-president. e years for such agreements Lane's controller asks Reeves whether the balance sheet as of the date the two were signed should show $144,000 in current liabilities and $576,000 in long-term liahilities,. whether the two agreements should be disclosed in a contingencies note to the financial statements Ine Kealey has accumulated known asd How should Linda Reeves reply to the controller's questions? Explain.Explanation / Answer
Solution:-
16 -31
a. Define what is commonly referred to in auditing as a subsequent event, and describe the twogeneral types of subsequent events:-
The subsequent events refer to events that occur after the date of the balance sheet but prior to the date of the auditors' report. Subsequent events are broken up in two categories, type 1 and type 2.
Type 1 subsequent events provide additional evidence as to the conditions that existed at the balance sheet date, and affects the estimates inherent in the process of preparing financial statements. It is also required that the financial statement amounts be adjusted to reflect the changes in estimates resulting from the additional evidence.
Type 2 subsequent events involves conditions coming into existence after the balance sheet date. These events do not require adjustment to the dollar amounts shown in the financial statements, but they should be disclosed in the financial statement notes if the statements otherwise would be misleading.
b. Identify those auditing procedures that the auditor should apply at or near the completion offieldwork to disclose significant subsequent events:-
The auditors should
16-32 linda reeves cpa, receives a telephone call. how should she reply to the questions:-
The alternative given by the controller is not acceptable. At the time of signing the contract or the agreement, there were no liabilities created. The obligation of Lane Company arises only as the ex-president accomplishes his obligations under the agreements.
In the first agreement, Lane Company is obligated to pay only if the ex-president honors his agreement not to contend; in the second agreement, payments are required to be made only if advisory services are delivered. Basically, both agreements are obligation that should be defined as a note to the company's financial statements.
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