Namiki, CPA, is auditing the financial statements of Taylor Corporation for the

Question

Namiki, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 2009. Namiki plans to complete the fieldwork and sign the auditor's report about March 10, 2010. Namiki is concerned about events and transactions occurring after December 31, 2009, that may affect the 2009 financial statements.

Required:

a. What general types of subsequent events require Namiki's consideration and evaluation?

b. What auditing procedures should Namiki consider performing to gather evidence concerning subsequent events?

Explanation / Answer

a) For the financial statements audit, the two types of subsequent events that requires Namiki's consideration and evaluation are: 1) Control events that reveal information about a material weakness that existed as of the end of the reporting period. If the event reveals information about a material weakness, the auditor should issue an adverse opinion on the effectiveness of internal control over financial reporting (and issue an adverse opinion on management's assessment of internal control over financial reporting if management's report does not appropriately assess the effect of the subsequent event). If the auditor is unable to determine the effect of the subsequent control event on the effectiveness of the company's internal control, the auditor should disclaim any opinion. 2) Control events that create or reveal information about a new condition that did not exist as of the end of the accounting period. If the information has the material effect on the company, the auditor should include an explanatory paragraph describing the event and its effects or directing the reader's attention to the event and its effects as disclosed in management's report. b) The auditing procedures that Namiki should consider performing to gather evidence concerning the subsequent events includes the following: 1) Compare the latest available interim statements with the financial statements being audited. 2) Ascertain whether the interim statements were prepared on the same basis as the audited financial statements. 3) Inquire whether any contingent liabilities or commitments existed as the balance sheet date or the date of inquiry 4) Inquire whether there was any significant change in the capital stock, long-term debt or the working capital on the date of inquiry. 5) Read or inquire about the minutes of meetings of the stockholders or the board of directors. 6) Inquire of the client's legal council concerning litigation, claims and assessments. 7) Obtain a management representation letter, dated as of the Namiki's audit report, as to whether any subsequent events would require adjustment or disclosure. 8) Make such additional inquiries or perform such additional procedures Namikis consider necessary and appropriate. 9) Examine or inquire about findings including its internal auditing reports completed after year end.

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