What is Subsequent testing in audit?
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Events that occur after a company’s year-end period but before the release of its financial statements Show
What are Subsequent Events?Subsequent events are events that occur after a company’s year-end period but before the release of the financial statements. In other words, subsequent events are events that happen between the cut-off date and the date in which the company issues its financial statements. Depending on the situation, subsequent events may require disclosure in a company’s financial statements. Understanding Reporting Period, Cut-off, and Subsequent EventsThe typical reporting period for a company is 12 months. However, a reporting period does not need to match the calendar year from January 1 to December 31. Typically, companies will choose a year-end corresponding to a period of low activity. For example, retailers usually follow a year-end at the end of January when inventory is low (post-holiday season). The cut-off date refers to the end of the reporting period and the start of the new reporting period. It is important in accrual accounting because cash cycles may not be complete. Therefore, it is necessary to understand which events will be during the current reporting period and which events will be recorded in the next reporting period. Transactions and events are recognized up to the cut-off date. Between the period of the cut-off date and the authorization of financial statements issuance is the subsequent events period. Depending on the type of subsequent event, it may or may not require an adjustment to the financial statements. Transactions and events that change the measurement of transactions before the cut-off date are recognized. ExampleAfter the cut-off period (after the company’s year-end) and before the issuance of financial statements, Company A’s major client unexpectedly goes bankrupt. It is determined that the company will only get 10% of its outstanding accounts receivable from the major client. The event will require an adjustment to the financial statements of Company A. Types of Subsequent EventsThere are two types of subsequent events: 1. Adjusting eventsAn event that provides additional information about pre-existing conditions that existed on the balance sheet date. 2. Non-adjusting eventsA subsequent event that provides new information about a condition that did not exist on the balance sheet date. Accounting for Subsequent EventsFor subsequent events that provide additional information about pre-existing conditions that existed on the balance sheet date, the financial statements are adjusted to reflect this additional information. For example:
For subsequent events that are new events and thus do not provide additional information about pre-existing conditions that existed on the balance sheet, these events are not recognized in the financial statements. However, a subsequent event footnote disclosure should be made so that investors know the event occurred. For example:
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What is Subsequent testing auditing?In this ISA, the term “subsequent events” is used to refer to both events occurring between the date of the financial statements and the date of the auditor's report, and facts discovered after the date of the auditor's report.
How do you test subsequent events in auditing?However the following procedures are typical of a subsequent events review: Enquiring into management's procedures/systems for the identification of subsequent events; Inspection of minutes of members' and directors' meetings; Reviewing accounting records including budgets, forecasts and interim information.
What are subsequent events in auditing?What are Subsequent Events? Subsequent events are events that occur after a company's year-end period but before the release of the financial statements. In other words, subsequent events are events that happen between the cut-off date and the date in which the company issues its financial statements.
What is the auditors role in testing subsequent events?The auditor should perform procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor's report that may require adjustment of, or disclosure in, the financial statements have been identified.
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