Auditing and Assurance Services 1st Edition by Iris Stuart

Exercise 31

Subsequent events. The following events occurred between the end of the year, December 31, 2012, and the date of the audit report, March 1, 2013. Assume that the impact of each of these events on the financial statements is material.
• A warehouse owned by the company you are auditing burned down on February 15, 2013. The warehouse contained 20% of its inventory.
• You learned that a new customer signed an agreement to purchase a substantial amount of inventory from your audit client in the future.
• An accounts receivable customer filed for bankruptcy on February 1, 2013. The account was previously considered to be collectible.
• The company signed an agreement to purchase another company on February 28, 2013.
• Gasoline is a major raw material purchased by your audit client. You learn that its price is expected to increase dramatically in the future.
a. Determine whether the events are type I or type II subsequent events.
b. Describe the appropriate accounting treatment for these events. Should they be recorded in the financial statements or disclosed in the footnotes
c. What audit evidence would you gather to determine the impact of the events
d. Does your responsibility as the auditor change if the events are immaterial Explain your answer.