A1-M10-Subsequent Events

Proceeds from a capital stock issuance in year 2 would not require adjustment to the year 1 financial statements,

But would require disclosure in the financial statements.

Report Date: If adjustments or disclosures are made after the original date of the auditor's report, the auditor may dual date the report to extend responsibility only for the particular subsequent event. The original date of the report is retained for the rest of the financial statements.

(1). Example of dual dating: "January 21,2002, except as to note 2, which is as of Febraury 3, 2002." (2). For nonissuers, dual dating may occur if adjustments or disclosures are made after the original date of the auditor's report.

Client closes books. Year-end work: (300 HRS.) (Jan.15-Feb.10)

(1). Review of subsequent AR collections. (2). Follow up on confirm requests. (3). Search for unrecorded liabilities. (4). Subsequent events audit program: "PRIME"

The following subsequent events occurring after the balance sheet date but before the date the financial statements are issued or are available to be issued are considered to be nonrecognized subsequent events:

(1). Sale of bond or capital stock. (2). Business combination (3). Settlement of litigation, if the litigation arose after the balance sheet date.

Cutoffs: Detail work: (Dec. 27 - Jan.3)

(1). Year-end inventory observation and (2).cutoff tests of cash, AR, inventory. (3). AP, sales, etc.

Client closes books. Report.

(1). obtain management representation letter .(dated Feb.10) at last minute. January 15 - February 10. Auditor Is responsible. Feb 10- date of auditor's report . Auditor is Not responsible. Feb. 15- report issued.

Interim work (1,600 hrs) Detail work: (Jun. 1 to Oct. 20)

(1).confirms of : cash, AR, NR, etc. (2). Cash reconciliations. (3). Special account analysis. (4). Physical inventory observation. (5).Fixed asset verification. (6). Tests of sales and payroll. (7). Internal control review

Client Refusal: If the client refuses to proceed as above, the auditor should notify each member of the board of directors of such refusal, and of the fact that the auditor will take additional steps to prevent further reliance on the auditor's report and the financial statements. (2).

(2). Notify, if applicable, any regulatory agencies having jurisdiction over the client that the auditor's report should no longer be relied on. (3). Notify persons known to be relying or likely to rely on the financial statements that the auditor's report should no longer be relied on.

The following subsequent events occurring after the balance sheet date but before the date the financial statements are issued or are available to be issued are considered to be nonrecognized subsequent events: (2)

(4). Loss of plant or inventory due to fire or natural disaster. (5).Changes in the fair value of assets or liabilities or foreign exchange rates. (6). Entering into significant commitments or contingent liabilities.

Client Refusal: If the client refuses to proceed as above, the auditor should notify each member of the board of directors of such refusal, and of the fact that the auditor will take additional steps to prevent further reliance on the auditor's report and the financial statements.

(DAR them to fix it. Dissociate, Alert agencies, Relying parties. ) Additional steps to prevent further reliance include the following: (1). Notify the client that the auditor's report must no longer be associated with the financial statement.

Inquiry: The auditor should inquire of client's legal counsel concerning litigation, claims, and assessments. The auditor should also inquire of management and those charged with governance about whether any subsequent events have occurred that could affect the financial statements. (2)

(f). unusual accounting adjustments. (g). events that call into question the appropriateness of the entity's accounting policies. (h). events relevant to the measurement of estimates or provisions. (i).events relevant to the recoverability of assets.

Revised Financial Statements Revised financial statements are financial statements that have been revised to correct an error or to reflect the retrospective application of U.S. GAAP. Revised financial statements are considered reissued financial statements.

A nonissuer should disclose in its revised financial statements the dates through which subsequent events have been evaluated in both its issued/ available-to-be-issued financial statements and its revised financial statements.This disclosure is not required for issuers.

Subsequent Event Evaluation Period (GR: CPA responsible up to date FS issued). Public companies and other entities that intend to widely distribute financial statements must evaluate subsequent events through the date the financial statements are issued.

All other entities must evaluate subsequent events through the date that the financial statements are available to be issued.

Report Date: (3). For issuers, dual dating may occur if disclosures are made after the original date of the auditor's report. if adjustments are made to the financial statements without any footnote disclosure, the original date of the report should be used.

Alternatively a later date may be used for the report, but this extents the auditor's responsibility for all subsequent events to this later date.

The question address the subsequent discovery of facts that may have existed at the balance sheet date. Such events will often require an adjustment to the financial statements.

An example is new information discovered about undisclosed lease transactions of the audited period. As a result, the auditor should make further inquiry to determine whether the information is reliable and whether the facts existed at the date of the report.

Changes in accounting personnel at any time would probably not result in

Any subsequent event financial statement adjustment or disclosure.

Resolution of a lawsuit that was disclosed in the prior year's audit report would not be likely to affect the audit report,

As auditors are not required to update their reports for event occurring after the fact.

A technological development that affects the entity's ability to continue as a going concern would not be likely to affect the previous year's audit report,

As auditors are not required to update their reports for events occurring after the fact.

Sales of a subsidiary would not be likely to affect the previous year's audit report,

As auditors are not required to update their reports for events occurring after the fact.

A trade receivable existing at the date of the financial statements that subsequently become uncollectible

Because of bankruptcy of the customer requires an adjustment to the financial statements.

a nonrecognized subsequent event should be disclosed if disclosure is necessary to keep the financial statements from being misleading.

Disclosure should include the nature of the subsequent event and an estimate of the financial effect of the event or a statement that no estimate can be made. Pro forma financial statements showing the effect of the subsequent event if it had occurred on the balance sheet date may also be presented.

Recognized Subsequent Events ($recorded(looking back)). Subsequent events that provide additional information about conditions that existed at the balance sheet date.

Entities must recognize the effects of all recognized subsequent events in the financial statements (for example, by adjustting amounts and/or adding disclosures). Examples of recognized subsequent events include: (1). Settlement of litigation. (2). Loss on an Uncollectible Receivable.

Nonrecognized Subsequent Events = Footnote (looking forward). subsequent events that provide information about conditions that occurred after the balance sheet date and did not exist at the balance sheet date.

Entities should not recognize nonrecognized subsequent events in the financial statements.

Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements.

Re-computing depreciation related to assets sold after year-end is not likely to provide information about subsequent events. Sales occurring after year-end are not considered to be subsequent events.

Subsequent Event Evaluation Period (GR: CPA responsible up to date FS issued).(2) Financial statements are considered to be issued when they have been widely distributed to financial statement users in a form and format that complies with GAAP.

Financial statements are available to be used when they are in a form and format that complies with GAAP and all approvals for issuance have been obtained.

Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statement, that require adjustment to or disclosure in the financial statements.

Reviewing a sample of transactions occurring after year-end to verify the effectiveness of computer controls would not be likely to provide information about subsequent events.

Plant assets sold after the end of the year [that were not related to a current year transaction such as a discontinued operation ]

Have no impact on the current year's financial statements.

Auditor's Responsibility After the Original Date of the Auditor's Report. the auditor has no active responsibility to make any inquiries or to perform any further auditing procedures to discover subsequent events after the original date of the auditor's report.

However, if the auditor becomes aware of any information relating to subsequent events before the report release date, the auditor should consider whether it is necessary to adjust the financial statements or the related disclosures.

In obtaining evidence about subsequent events, an auditor would investigate changes in long-term debt occurring after year-end to determine if there was an unrecorded liability as of the end of the year.

In addition, subsequent sales of LT debt require footnote disclosure.

If an auditor becomes aware of material information existing at the date of the audit report, the auditor should advise the client to issue revised financial statements.

In this case, since the sale did not occur until year 2, there should have been no receivable recorded in year 1.

The fact that an audit procedure was omitted does not necessary mean tat the financial statements are misstated.

Perhaps another procedure compensated for the omission, or perhaps if the auditor applies this or an alternative procedure, he or she will still find that the financial statements are fairly stated.

Obtaining evidence about A/R that were established after year-end would not provide the auditor with information about subsequent events,

Since any information about these A/R would not require adjustment to or disclosure in the prior year financial statements.

Inquiry: The auditor should inquire of client's legal counsel concerning litigation, claims, and assessments. The auditor should also inquire of management and those charged with governance about whether any subsequent events have occurred that could affect the financial statements.

Specific inquiries should be made about the following matters: (a). new commitments, borrowings, or guarantees. (b). sales or acquisitions of assets. (c). increases in capital or issuance of debts. (d). assets appropriated by the government or destroyed (e). developments regarding contingencies.

A subsequent event is an event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued.

Subsequent events can be divided into two categories- recognized subsequent events and nonrecognized subsequent events.`

Examine:

The auditor should examine the latest available interim financial statements and compare them with the financial statements under audit.

Representation letter:

The auditor should obtain a representation letter from management (usually the CEO and CFO) regarding whether any events occurred during the subsequent period that require adjustments to or disclosure in the financial statements.

Post Balance Sheet Transactions:

The auditor should review post balance sheet transactions for proper cutoff and to better evaluate year-end balances.

Minutes:

The auditor should review the minutes of stockholders, directors, and other committee meetings during the subsequent period.

The auditor has no active responsibility to make continuing inquiries between the date of the auditor's report and the date on which the report is submitted.

The auditor's active responsibility stops on the date of the auditor's report.

Subsequent Event Disclosures. Nonissuers must disclose the date through which subsequent events have been evaluated, including whether that date is the date the financial statements were issued or the date that the financial statements were available to be issued.

This disclosure is not required for issuers to avoid potential conflicts with current SEC guidance.

A loss reported on uncollectible accounts is considered a recognized subsequent event that would require adjustment to the financial statement amounts.

This event provides us with additional information that should be used to adjust the estimate for allowance for doubtful accounts. This event probably would not be disclosed in the financial statements.

Negotiations that require compensation adjustments retroactive to the year under audit would be considered a recognized subsequent event that would require adjustment to the financial statement amounts.

This information should be used to adjust accounts related to compensation for union employees.

Settlement in year 2 of litigation related to a year 2 event would not require adjustment

To the year 1 financial statements, but would require disclosure in the financial statements.

After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements,

Unless information, with existed the report date and may affect the report, comes to the auditor's attention. In this case the auditor would perform procedures to determine if the information affects the report and is important to the external users.

When performing procedures regarding subsequent events, the auditor generally will compare the latest available interim financial statements

With financial statements being audited to determine if any significant subsequent event occurred that would need to be reflected in the statements being audited.

Bank cut-off statements generally are reviewed for only a week to ten days subsequent to year-end. Reviewing them for a longer period such as "several months"

Would provide little additional audit evidence regarding the YE FS and thus would not be a cost beneficial procedure.

Loss on an Uncollectible Receivable: The effects of a customer's bankruptcy filing after the balance sheet but before the date that the financial statements

are issued or available to be issue should be considered when determining the amount of the uncollectible receivable to be recognized in the financial statements on the balance sheet date.

Re-issuance of Financial Statements When an entity reissues its financial statements, the entity should not recognize events that occurred between the date the original financial statements were issued or

available to be issued and the date that the financial statements were reissued unless an adjustment is required by GAAP or other regulatory requirements.

Settlement of Litigation: If litigation that arose before the balance sheet date is settled after the balance sheet date

but before the date that the financial statements are issued or available to be issued, the settlement amount should be considered when the determining the liability to be reported on the balance sheet date.

Auditor's Responsibility for Subsequent Events. The period between the date of financial statements and the date of the auditor's report is called the subsequent period. During this period, the auditor has an active responsibility to investigate certain subsequent events.During the

subsequent period, the auditor should obtain an understanding of the procedures management has established to identify subsequent events and should perform the following procedures: (P). Post Balance Sheet Transaction. (R). Representation Letter. (I). Inquiry. (M). Minutes. (E). Examine.

Significant business events occurring subsequent to the date of financial statements,

such as a loss of resulting from a flood, require no adjustment to the statements, but may require significant additional disclosure.

(1).The natural disaster is an example of a subsequent event occurring after the date of the auditor's report that the auditor has no obligations to investigate. (2). The resolution of a disclosed contingency is an example of a subsequent event occurring after the date of the auditor's report that

the auditor has no obligation to investigate. (3) sale of subsidiary occurring after the date of the auditor's report is an example of a subsequent event that the auditor has no obligation to investigate.

Auditor Action: (3). if the effect on the financial statements cannot be determined on a timely basis, providing, notification that the financial statements and auditor's report should not be relied upon.in addition,

the client should be advised to discuss with the SEC, stock exchanges, and appropriate regulatory agencies (where applicable) the new disclosures or revisions. regardless of which disclosure method above is used, the auditor must become satisfied that appropriate steps have been taken by the client.

If the auditor believes that

the financial statements need to be revised to reflect a subsequent event and management does not make the revision, the auditor should express a qualified or adverse opinion.

If information that materially affects the report and other person's reliance on it is discovered (and confirmed by the auditor) after issuance of the report, the auditor should advise the client to immediately disclose the new information and its impact on

the financial statements to persons currently relying on or likely to rely on the financial statements.this may be accomplished by: (1). advising the client to issue revised financial statements (along with a new audit report) describing the reasons for revisions.

If information that materially affects the report and other person's reliance on it is discovered (and confirmed by the auditor) after issuance of the report, the auditor should advise the client to immediately disclose the new information and its impact on the financial statements (2)

to persons currently relying on or likely to rely on the financial statements. this may be accomplished by: (2). advising the client to make the necessary disclosures and revisions to any imminent financial statements (accompanied by an auditor's report for a subsequent period); or

The sale of a fixed asset is a non recognized subsequent event that

would not require disclosure or adjustment in the financial statements.