Question

Given the following four subsequent events (unrelated) for the December 31, 2019 year-end:

1. On January 15, 2020, a major customer declared bankruptcy. (3 marks)
2. On January 25, 2020 a fire destroyed a major supplier building that warehouses inventory. (3 marks)
3. On January 4^, 2020, an investment analyst downgraded the stock of the auditee. (3 marks)

            The audit report date is February 15, 20207.

Required:

      State clearly the type of subsequent event (Type I or Type II), if any, and the required impact on the financial statements.

Answer 1

i) Major customer declared bankruptcy

The company has not issued financial statements for the year. If the company has no indication that customer is going to be bankrupt before the end of financial year, it is TYPE 2 subsequent events. No effect should be given to the financial statements.The account receivables if any need not be given effect but a subsequent event note should be given in audit report that event did occur. Since the customer was major it may effect the going concern of the entity. A note on going concern should also be given.

ii) Fire destroyed a major supplier building that warehouses inventory

The event occurred after the balance sheet date and there is no indication of event on the balance sheet date. so It is TYPE 2 subsequent event. No effect should be given in financial statements, but to be disclosed in notes that occurrence of same event and consequences of the same.

iii) An investment analyst downgraded the stock of auditee

  The event occurred after the balance sheet date and there is no indication of event on the balance sheet date. so It is TYPE 2 subsequent event. No effect should be given in financial statements, but to be disclosed in notes that occurrence of same event and consequences of the same.