A January bankruptcy may provide evidence about December credit losses. A fire caused by a new February event ordinarily requires disclosure if material, rather than a December adjustment.
Subsequent events occur after the balance sheet date but before the financial statements are issued or are available to be issued. First-in, first-out (FIFO) is the inventory cost method used in the table below. Under U.S. generally accepted accounting principles (GAAP), each event falls into one of two classes, and the auditor evaluates recorded amounts and disclosures against that classification.
- Recognized subsequent event: conditions existed at the balance sheet date, and the event supplies additional evidence about them. The evidence may require adjustment or confirm an amount already recorded.
- Nonrecognized subsequent event: conditions arose after the balance sheet date. The statements are not adjusted, but a material event is disclosed with an estimate of its financial effect or a...
HIGH-FREQUENCY: Ask what existed at the balance sheet date. A January bankruptcy following year-end financial distress supplies evidence for the December credit-loss estimate.
Common mistakes
- Classifying by filing date alone. A January bankruptcy following year-end distress requires reassessment of the December allowance. The recorded allowance may already be adequate; any adjustment depends on expected recoveries and the balance already recorded.
- Searching to the release date. There is no general continuing search after the report date, but revision procedures and other engagement-specific responsibilities still apply.
- Dual dating an issuer's silent adjustment. An issuer's auditor dual dates for a disclosed event only; an adjustment recorded without a note keeps the original date under PCAOB standards.
Bottom line
- Recognized events supply evidence about existing conditions and may confirm or change recorded amounts; material nonrecognized events require disclosure of nature and estimated effect or inability to estimate.
- SEC filers and qualifying conduit bond obligors evaluate through issuance; other entities use availability for issuance. All entities other than SEC filers disclose the evaluation date and cutoff used.
- Understand management's identification process, examine relevant subsequent transactions, read minutes and interim information, inquire of management, governance and counsel, and obtain report-date representations.
- No general continuing search is required after the report date; required responses, revisions and other engagement-specific duties can require additional procedures.
Exam shortcut
Evaluate the condition, existing treatment, materiality and timing. An event can confirm an adequate estimate; inventory held at year-end does not make every subsequent loss adjusting evidence. After release, discuss and evaluate the fact, determine whether revision is necessary, assess management's response and audit a necessary revision. Prevention-of-reliance actions follow the applicable circumstances. For dating, keep nonissuer restricted-amendment conditions separate from the issuer rule for an undisclosed adjustment.
The full lesson (about 4,852 words, 32 min read) adds 5 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- III.H1
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