Green, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 20X1. Green plans to complete the fieldwork and sign the auditor's report about May 10, 20X2. Green is concerned about events and transactions occurring after December 31, 20X1, that may affect the 20X1 financial statements.
a. What are the general types of subsequent events that require Green's consideration and evaluation?
According to the American Institute of Certified Public Accountants, "an independent auditor's report ordinarily is issued in connection with historical financial statements that purport to present financial position at a stated date and results of operations and cash flows for a period ended on that date" (AICPA, 2006). However, according to past experience, there have proven to be many events or transactions that sometimes occur after the balance-sheet date, but prior to the issuance of the financial statements that can have a material effect on the financial statements themselves, subsequently requiring an adjustment or disclosure in the statements. These occurrences, according to the AICPA are referred to as "subsequent events," may require dollar adjustments to the financial statements and/or disclosure" (AICPA, 2006).
AICPA literature identifies "two types of subsequent events - Type I and Type II" (AICPA, 2006). Type I subsequent events provide evidence about conditions that existed at the balance sheet date. Examples of a Type I subsequent event can take the form of a lawsuit being settled for a different amount than was accrued, or the client issuing a stock dividend or declaring a stock split during the subsequent period. In both cases, the auditor is required to adjust the financial statement figures to reflect the impact of these events. Footnote disclosure might also be required in many cases to provide additional information to interested parties.
Type II subsequent events indicate conditions...