State the two primary types of subsequent events that require consideration by management and evaluation by the auditor, and give two examples of each type.

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State the two primary types of subsequent events that require consideration by management and evaluation by the auditor, and give two examples of each type.

Answer:

• Events that have a direct effect on the financial statements and required adjustment. Examples include declaration of bankruptcy by a customer with an outstanding accounts receivable balance due to deteriorating financial condition; settlement of litigation at an amount different from the amount recorded on the books.
• Events that have no direct effect on the financial statements but for which disclosure is advisable. Examples include a decline in the market value of securities held for temporary investment or resale during the subsequent period; issuance of bonds or equity securities during the subsequent period.

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