Ethical Obligations and Decision-Making in Accounting 2nd Edition by Steven Mintz, Roselyn Morris

Exercise 7

A subsequent event is one that occurs after the date of the financial statements (i.e., December 31, 2010) but prior to the auditor having dated (or possibly issued) the audit report (i.e., March 15, 2011).  One type of subsequent event is where additional evidence becomes available before the statements have been issued that shed light on certain estimates previously made in the statements. A good example is additional evidence about the collectibility of a receivable that relates to its valuation in the December 31, 2010 financial statements but is not uncovered until January 31, 2011.   Why is it important from an auditing perspective that an auditor be required to adjust the financial statement amounts for some material subsequent events? If an auditor fails to live up to this standard, what is the potential liability exposure for the auditor?