Subsequent events are transactions or events occurring after the balance sheet date but before the financial statements are issued or available to be issued. They are categorized as:
Recognized Subsequent Events: Provide additional information about conditions existing at the balance sheet date (e.g., litigation settlements or uncollectible receivables due to bankruptcy).
Nonrecognized Subsequent Events: Relate to conditions arising after the balance sheet date (e.g., natural disasters, stock sales, or business combinations).
Public Entities: Evaluate subsequent events through the date financial statements are issued.
Other Entities: Evaluate through the date the financial statements are available for issuance.
Events between the original issuance and reissuance dates are recognized only if required by GAAP.
Nonissuers disclose the date through which subsequent events were evaluated.
Nonrecognized subsequent events require disclosure if omission would make financial statements misleading. Pro forma financial statements may be included.
The auditor actively investigates subsequent events occurring between the financial statement date and the audit report date by:
Reviewing post-balance sheet transactions.
Obtaining management representation letters.
Inquiring about new commitments, borrowings, guarantees, or developments affecting the financial statements.
Reviewing board meeting minutes and interim financial statements.
The auditor has no active responsibility for subsequent events post-report date unless:
The report is included in an offering document.
The auditor becomes aware of material events before the release date.
Adjust financial statements or disclosures as necessary.
If material events are discovered, the auditor advises the client to disclose and revise the financial statements. Possible actions include:
Issuing revised financial statements with a new audit report.
Making necessary disclosures in future financial statements.
Notifying relevant regulatory bodies if the client refuses to act.
Dual dating extends responsibility only for specific subsequent events while retaining the original date for the rest of the financial statements. For example:
"January 21, 20X2, except as to Note 2, which is as of February 3, 20X2."
Alternatively, the auditor can update the report date entirely, extending responsibility for all subsequent events.
If the client refuses to disclose or revise financial statements for material subsequent events:
Notify the board of directors.
Disassociate the auditor’s report from the financial statements.
Notify regulatory agencies and users of the financial statements.
The auditor may also issue a qualified or adverse opinion if the financial statements remain uncorrected. Consulting legal counsel is recommended in such cases.
As of August 13, a CPA had obtained sufficient appropriate audit evidence with respect to fieldwork on an engagement to audit financial statements for the year ended June 30. On August 27, an event came to the CPA's attention that should be disclosed in the notes to the financial statements. The event was properly disclosed by the entity, but the CPA decided not to dual date the auditor's report and dated the report August 27. Under these circumstances, the CPA was taking responsibility for: