Subsequent Events and Discovery of facts. CPA Exam Simulation.
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In this video, I work a CPA simulation covering subsequent events and subsequent discovery of facts. CPA candidates or accounting students?
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"Subsequent Events" and "Discovery of Facts" are terms in auditing. They relate to information and events that come to light after a set of financial statements have been prepared but before they have been issued, as well as after they've been issued.
1. Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued. They are significant because they can provide additional evidence about conditions that existed at the balance sheet date or conditions that arose subsequent to the balance sheet date.
There are typically two types of subsequent events:
a. Type 1 - Recognized Subsequent Events: These are events that provide additional evidence about conditions that existed at the balance sheet date. Financial statements should be adjusted to reflect these events.
Example: If a company's financial year ends on December 31 and it goes bankrupt on January 10 due to financial difficulties it was experiencing in December, that bankruptcy would be considered a recognized subsequent event, and the financial statements would need to be adjusted accordingly.
b. Type 2 - Non-Recognized Subsequent Events: These are events that provide evidence about conditions that arose after the balance sheet date. Financial statements are not adjusted for these events, but disclosure might be necessary if the event is material to prevent the financial statements from being misleading.
Example: A natural disaster damaging the company's factory in February wouldn't be reflected in the company's December 31 financial statements with an adjustment, but it might be disclosed in the notes if the damage is expected to have a significant financial impact on the company.
2. Discovery of Facts
Discovery of facts pertains to situations where, after the financial statements have been issued, it becomes evident that those statements contain material misstatements due to either error or fraud that existed at the date of their issuance.
When there's a discovery of facts subsequent to the issuance of financial statements:
The auditor and client should discuss the need for revision of the financial statements.
If the financial statements are revised, they should be reissued with a new auditor's report. The date of the original report remains the same, but an emphasis of matter or explanatory paragraph should be added, indicating the reason for the revision.
If the financial statements aren't revised, and the auditor believes there are persons relying on the financial statements who would attach importance to the information, then the auditor should take steps to prevent future reliance on the financial statements.
In conclusion, subsequent events and discovery of facts are essential concepts in auditing as they relate to the accuracy and reliability of financial statements. Both are designed to ensure that users of financial statements have the most accurate and up-to-date information available.
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"Subsequent Events" and "Discovery of Facts" are terms in auditing. They relate to information and events that come to light after a set of financial statements have been prepared but before they have been issued, as well as after they've been issued.
1. Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued. They are significant because they can provide additional evidence about conditions that existed at the balance sheet date or conditions that arose subsequent to the balance sheet date.
There are typically two types of subsequent events:
a. Type 1 - Recognized Subsequent Events: These are events that provide additional evidence about conditions that existed at the balance sheet date. Financial statements should be adjusted to reflect these events.
Example: If a company's financial year ends on December 31 and it goes bankrupt on January 10 due to financial difficulties it was experiencing in December, that bankruptcy would be considered a recognized subsequent event, and the financial statements would need to be adjusted accordingly.
b. Type 2 - Non-Recognized Subsequent Events: These are events that provide evidence about conditions that arose after the balance sheet date. Financial statements are not adjusted for these events, but disclosure might be necessary if the event is material to prevent the financial statements from being misleading.
Example: A natural disaster damaging the company's factory in February wouldn't be reflected in the company's December 31 financial statements with an adjustment, but it might be disclosed in the notes if the damage is expected to have a significant financial impact on the company.
2. Discovery of Facts
Discovery of facts pertains to situations where, after the financial statements have been issued, it becomes evident that those statements contain material misstatements due to either error or fraud that existed at the date of their issuance.
When there's a discovery of facts subsequent to the issuance of financial statements:
The auditor and client should discuss the need for revision of the financial statements.
If the financial statements are revised, they should be reissued with a new auditor's report. The date of the original report remains the same, but an emphasis of matter or explanatory paragraph should be added, indicating the reason for the revision.
If the financial statements aren't revised, and the auditor believes there are persons relying on the financial statements who would attach importance to the information, then the auditor should take steps to prevent future reliance on the financial statements.
In conclusion, subsequent events and discovery of facts are essential concepts in auditing as they relate to the accuracy and reliability of financial statements. Both are designed to ensure that users of financial statements have the most accurate and up-to-date information available.
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