CPA Quiz: Subsequent Events
20 questions · exam conditions
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Subsequent EventsQuestion 1 of 20

You are auditing an issuer for the year ended December 31, 20X4. On March 5, 20X5, after the audit report date but before the financial statements are issued, you become aware of a material subsequent event (a major customer bankruptcy) that existed at year-end and would have required an adjustment to the allowance for credit losses. Management agrees to revise the financial statements. What procedures should the auditor perform related to this subsequent event?

Take no action because the audit report date has passed; subsequent events after the report date are management's responsibility
Perform necessary audit procedures on the revision, extend subsequent events procedures through the new report date, and reissue the report with an updated date
Withdraw the audit report and prohibit issuance of the revised financial statements
Reissue the report without any additional procedures because only disclosure (not adjustment) is involved
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CPA Quiz

CPA Quiz: Subsequent Events

Practice Subsequent Events in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Subsequent Events, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

You are auditing an issuer for the year ended December 31, 20X4. On March 5, 20X5, after the audit report date but before the financial statements are issued, you become aware of a material subsequent event (a major customer bankruptcy) that existed at year-end and would have required an adjustment to the allowance for credit losses. Management agrees to revise the financial statements. What procedures should the auditor perform related to this subsequent event?

  1. Take no action because the audit report date has passed; subsequent events after the report date are management's responsibility
  2. Perform necessary audit procedures on the revision, extend subsequent events procedures through the new report date, and reissue the report with an updated date (correct answer)
  3. Withdraw the audit report and prohibit issuance of the revised financial statements
  4. Reissue the report without any additional procedures because only disclosure (not adjustment) is involved
Explanation: The standard tested is PCAOB AS 2801 for issuers, outlining procedures when financial statements are revised for subsequent events after the report date but before issuance. The event is a material Type I bankruptcy discovered March 5, 20X5, prompting revision. Guidance requires extending procedures to the new date and reissuing the report, aligning with the correct choice. Choice A is wrong as responsibility continues until issuance; Choice C is excessive; Choice D ignores required procedures for adjustments. Rule: for revisions, update procedures and report date. Emphasize timing of discovery and impact to ensure ongoing relevance.

Question 2

You are the auditor of a nonissuer in a financial statement audit. The client's warehouse was destroyed by a tornado on January 18, 20X5, after the December 31, 20X4 balance sheet date but before the audit report date. The destroyed inventory represented approximately 35% of total inventory at year-end, and the loss was not covered by insurance. What is the most appropriate response to this subsequent event?

  1. Adjust the December 31, 20X4 inventory balance to reflect the loss because the destruction confirms conditions existing at year-end (Type I).
  2. No financial statement action is needed because the event occurred after year-end and does not affect the audit report.
  3. Disclose the loss in the notes as a nonrecognized subsequent event (Type II) and consider the effect on the auditor's report if disclosure is omitted. (correct answer)
  4. Withdraw from the engagement because the event occurred after year-end and indicates pervasive misstatement.
Explanation: This question addresses Type II subsequent events under AU-C 560, which arise from conditions that did not exist at the balance sheet date but may require disclosure if material. The tornado destruction on January 18, 2X5 represents a Type II event because natural disasters are conditions arising after year-end, not evidence of conditions existing at December 31, 20X4. The correct answer (C) properly identifies this as a nonrecognized subsequent event requiring disclosure given the material impact (35% of inventory destroyed without insurance coverage), and notes the auditor must consider the effect on the audit report if management omits required disclosure. Answer A incorrectly treats this as a Type I event requiring adjustment when the tornado damage did not exist at year-end. Answer B fails to recognize the disclosure requirement for material Type II events and the potential audit report implications. Answer D suggests an inappropriate response as this is not a pervasive misstatement issue. The decision framework emphasizes that events creating new conditions after year-end (fires, floods, strikes) are Type II events requiring disclosure but not adjustment, with the auditor evaluating materiality and the adequacy of management's disclosures.

Question 3

In a nonissuer financial statement audit for Pine Ridge Distribution, the auditor learns on February 10, 20X5 (after the December 31, 20X4 balance sheet date but before the audit report date) that a major customer owing $1.8 million at year-end filed for bankruptcy on January 20, 20X5 due to long-standing liquidity problems that existed before year-end. Management believes no adjustment is needed because the filing occurred after year-end. Based on this subsequent event, what adjustment is required?

  1. No adjustment or disclosure is required because the bankruptcy occurred after the balance sheet date (Type II).
  2. Adjust the allowance for credit losses (and bad debt expense, if applicable) because the bankruptcy provides additional evidence about conditions existing at year-end (Type I). (correct answer)
  3. Disclose the bankruptcy only in the notes without adjusting receivables because it is a nonrecognized subsequent event (Type II).
  4. Issue a qualified opinion due to a scope limitation because the bankruptcy occurred after year-end.
Explanation: This question tests the auditor's understanding of Type I subsequent events under AU-C 560, which require adjustment when they provide additional evidence about conditions existing at the balance sheet date. The key fact is that the customer's bankruptcy on January 20, 20X5 was due to "long-standing liquidity problems that existed before year-end," making this a Type I event requiring adjustment of the allowance for credit losses. The correct answer (B) aligns with professional standards because the bankruptcy provides evidence about the collectibility of the receivable at December 31, 20X4, necessitating an adjustment to reflect the conditions that existed at year-end. Answer A incorrectly classifies this as a Type II event when the underlying financial distress existed at year-end. Answer C similarly misclassifies the event type and would result in inadequate financial reporting. Answer D incorrectly suggests a scope limitation when the auditor has obtained sufficient evidence about the subsequent event. The professional judgment framework requires auditors to evaluate whether subsequent events provide evidence about conditions existing at the balance sheet date (Type I - adjust) versus conditions arising after that date (Type II - disclose only).

Question 4

You are the auditor of a nonissuer for the year ended December 31, 20X4. On March 10, 20X5, after the audit report date, you discover facts that existed at February 15, 20X5 (the report date) indicating that a material liability was understated at year-end. Management refuses to revise the financial statements and intends to issue them as originally presented. What is the most appropriate response to this subsequent event?

  1. Do nothing because your responsibility ends on the audit report date
  2. Notify management and those charged with governance; if they do not take appropriate action, take steps to prevent reliance on the auditor's report (including notifying appropriate parties) (correct answer)
  3. Automatically change the opinion to adverse without further communication
  4. Dual-date the report to the date you discovered the facts and allow issuance without revision
Explanation: This tests AU-C 560 for nonissuers on actions when facts discovered after the report date indicate needed revisions but management refuses. Facts discovered March 10, 20X5, understate a material liability existing at February 15, 20X5 report date. Guidance mandates notifying governance and preventing reliance if no action, distinguishing from Type I/II by focusing on post-report discovery. Choice A ignores ongoing duties; Choice C is premature; Choice D misuses dual-dating. Framework: notify and escalate for unaddressed discoveries. Prioritize timing of awareness and materiality to protect users.

Question 5

You are auditing a nonissuer for the year ended December 31, 20X4. On January 27, 20X5, a court ruled against the entity in a lawsuit that was filed in November 20X4 and was assessed as reasonably possible at year-end with disclosure but no accrual. The ruling makes the loss probable and estimable as of the ruling date and indicates conditions existed at December 31, 20X4. What is the most appropriate response to this subsequent event?

  1. Treat as a Type II event and disclose only, because the ruling occurred after year-end
  2. Treat as a Type I event and accrue the loss at December 31, 20X4 (and update related disclosures) (correct answer)
  3. No action is required if the entity intends to appeal the ruling
  4. Issue an adverse opinion because any lawsuit ruling after year-end requires adverse opinion
Explanation: This tests AU-C 560 on Type I events updating loss contingencies. The ruling on January 27, 20X5, for a November 20X4 lawsuit evidences year-end conditions, making loss probable. Guidance requires accrual as Type I. Choice A is incorrect for Type I; Choice C ignores if appealing; Choice D is wrong. Framework: update for new evidence (Type I); disclose new losses (Type II). Prioritize ruling timing and materiality.

Question 6

You are auditing an issuer for the year ended December 31, 20X4. On January 8, 20X5, management received a regulator's notice of noncompliance related to operations that occurred throughout 20X4; the notice indicates probable penalties and provides new information supporting that a liability existed at December 31, 20X4. The amount is estimable and material. Based on the identified subsequent event, what adjustment is required?

  1. Adjust and accrue the penalty at December 31, 20X4 as a Type I subsequent event (correct answer)
  2. Disclose only as a Type II subsequent event because the notice was received after year-end
  3. No adjustment or disclosure is required because regulatory matters are excluded from subsequent events
  4. Issue a qualified opinion due to a scope limitation caused by the regulator
Explanation: The concept is PCAOB AS 2801 for Type I events evidencing year-end liabilities. The notice on January 8, 20X5, about 20X4 operations supports a material liability at December 31, 20X4. This requires adjustment as Type I per guidance. Choice B is wrong for Type I; Choice C excludes improperly; Choice D misapplies qualification. Rule: adjust for confirmatory evidence (Type I); disclose new (Type II). Emphasize evidence timing and financial effect.

Question 7

An auditor is performing an audit of a client with a December 31, Year 1, year-end. The auditor completed most fieldwork procedures on February 15, Year 2. On February 20, Year 2, the client signed a definitive agreement to acquire another company in a transaction that will double the client's size. The auditor plans to issue the audit report on February 28, Year 2.

Given the information in the passage, what is the auditor's most appropriate course of action regarding the acquisition agreement?

  1. Issue the report dated February 15, Year 2, and ignore the event as it is a management decision.
  2. Perform procedures related to the acquisition and change the audit report date to February 28, Year 2. (correct answer)
  3. Require the client to adjust the December 31, Year 1 financial statements to reflect the acquisition.
  4. Issue a disclaimer of opinion because the event creates too much uncertainty.
Explanation: The acquisition agreement is a material Type II subsequent event that occurred before the report date. The auditor must extend subsequent event procedures to the new report date (February 28) to ensure that any necessary disclosures are adequate. Changing the report date to February 28 extends the auditor's responsibility for all subsequent events to that date. An alternative would be to dual date the report.

Question 8

An audit client's major customer declared bankruptcy on January 25, Year 2. The client's financial statements have a December 31, Year 1 year-end, and the auditor's report is dated February 15, Year 2. The client had a significant accounts receivable balance from this customer at year-end. The auditor's investigation reveals that the customer's financial condition had been deteriorating for several months prior to December 31, Year 1. How should this subsequent event be handled?

  1. The financial statements should be adjusted to reflect the loss on the receivable. (correct answer)
  2. The event should be disclosed in the notes to the financial statements, but no adjustment is needed.
  3. The auditor should issue a qualified opinion due to the uncertainty.
  4. No action is required as the bankruptcy occurred after the balance sheet date.
Explanation: This is a Type I subsequent event because the customer's bankruptcy provides additional evidence about a condition (the deteriorating financial health and uncollectibility of the receivable) that existed at the balance sheet date (December 31, Year 1). Therefore, the financial statements should be adjusted to reflect the estimated loss.

Question 9

An auditor completed fieldwork and dated the audit report February 28. On March 5, before the client issued the financial statements, the auditor became aware of a material event that occurred on March 2. What is the auditor's responsibility regarding this new information?

  1. The auditor has no responsibility as the event occurred after the audit report date.
  2. The auditor must actively perform procedures to search for such events until the financial statements are issued.
  3. The auditor should determine whether the event requires adjustment or disclosure and discuss the matter with management. (correct answer)
  4. The auditor should immediately withdraw the original report and refuse to be associated with the financial statements.
Explanation: Although the auditor has no obligation to perform procedures after the audit report date, if the auditor becomes aware of a fact that may affect the financial statements before they are issued, the auditor has a responsibility to discuss the matter with management and consider whether the financial statements need to be amended.

Question 10

Subsequent to a client's December 31 year-end, a fire destroyed a significant portion of the client's manufacturing plant. The fire occurred on January 30, before the auditor issued the report on February 20. The loss is material and is not insured. What action should the auditor recommend to the client?

  1. Adjust the December 31 financial statements to recognize the loss.
  2. Disclose the event in the notes to the December 31 financial statements. (correct answer)
  3. Postpone the issuance of the audit report until the full amount of the loss can be determined.
  4. Disregard the event as it has no bearing on the financial position at December 31.
Explanation: This is a Type II subsequent event. The fire provides evidence of a condition that did not exist at the balance sheet date. Since the event is material, it does not require adjustment to the financial statements, but it does require disclosure in the notes to prevent the financial statements from being misleading.

Question 11

An auditor has concluded that a client must adjust its financial statements for a material Type I subsequent event. Management refuses to make the adjustment. The auditor's report has not yet been issued. The auditor should issue which type of opinion?

  1. An unmodified opinion with an emphasis-of-matter paragraph describing the event.
  2. A disclaimer of opinion because of a management-imposed scope limitation.
  3. A qualified or adverse opinion depending on the pervasiveness of the misstatement. (correct answer)
  4. An unmodified opinion, as the auditor's responsibility is limited to disclosure.
Explanation: Management's refusal to adjust the financial statements for a material Type I subsequent event results in a departure from GAAP. This constitutes a known misstatement. The auditor should express a qualified opinion if the misstatement is material but not pervasive, or an adverse opinion if it is both material and pervasive.

Question 12

Subsequent to the issuance of an audit report, an auditor becomes aware of a fact that existed at the report date which would have caused the auditor to revise the report. What is the auditor's most appropriate first step?

  1. Notify the Securities and Exchange Commission of the potential misstatement.
  2. Contact all parties who are known to be relying on the financial statements.
  3. Discuss the matter with the appropriate level of management and those charged with governance. (correct answer)
  4. Immediately issue a revised audit report and restated financial statements.
Explanation: When an auditor discovers a subsequently discovered fact, the first step is to determine its reliability and whether it existed at the report date. This involves discussing the matter with management and, if appropriate, those charged with governance to assess the situation and determine management's intended actions.

Question 13

After an audit report and financial statements have been issued, the auditor discovers a fact that was not known at the report date. If the auditor determines the fact is material and that users are relying on the statements, and management agrees to revise the financials, the auditor should:

  1. Insist that management notify all known users but take no further action on the revised statements.
  2. Perform audit procedures on the revision and issue a new audit report on the revised financial statements. (correct answer)
  3. Notify regulatory agencies that the original audit report should no longer be relied upon.
  4. Only require management to disclose the effect of the new information in the following year's financial statements.
Explanation: When management properly revises the financial statements for a subsequently discovered fact, the auditor's responsibility is to perform the necessary audit procedures on the adjustments or revisions and issue a new audit report. The new report should be dated no earlier than the date of completion of the additional procedures and should include an emphasis-of-matter or other-matter paragraph explaining the reason for the revision.

Question 14

An auditor is reviewing events that occurred after the balance sheet date but before issuing the audit report. Which of the following events would most likely require disclosure in the financial statements but not an adjustment?

  1. A settlement of a lawsuit for an amount different from the amount accrued at year-end, related to an incident before year-end.
  2. The determination that an account receivable from a major customer is uncollectible due to the customer's bankruptcy.
  3. The issuance of a significant amount of common stock or long-term debt. (correct answer)
  4. The discovery of an error in the calculation of depreciation expense for the year under audit.
Explanation: The issuance of stock or debt is a Type II subsequent event. It represents a new condition that arose after the balance sheet date. If material, it requires disclosure but not adjustment to the financial statements. The other three options are all Type I events, as they provide evidence of conditions that existed at the balance sheet date and would require adjustment.

Question 15

After the balance sheet date but prior to the audit report date, a client experiences a significant and sudden decline in the market value of its portfolio of equity securities. The decline appears to be other than temporary. The auditor's primary responsibility regarding this event is to:

  1. Require the client to adjust the carrying value of the securities as of the balance sheet date.
  2. Issue a qualified opinion because the financial statements do not reflect current market values.
  3. Evaluate the adequacy of the client's disclosure of the event in the notes to the financial statements. (correct answer)
  4. Disregard the event as market fluctuations are normal business risks.
Explanation: A market decline that occurs after the balance sheet date is a Type II subsequent event because it reflects a condition that did not exist at the balance sheet date. It does not require adjustment to the year-end financial statements. However, if the decline is material, the auditor must ensure that the event and its potential impact are adequately disclosed in the notes.

Question 16

An auditor's report is dual-dated, with the primary date being March 1 and a second date of March 5 related to a specific note disclosure. This dual-dating implies that the auditor's procedures subsequent to March 1 were:

  1. Extended to cover all events up to March 5.
  2. Limited to the specific event referenced in the March 5 date. (correct answer)
  3. Concluded for all matters on March 1.
  4. Insufficient, requiring a revision of the March 1 date.
Explanation: Dual-dating is a technique used by auditors to limit their responsibility. The auditor's responsibility for subsequent events is extended to the second, later date (March 5) only for the specific event to which that date relates. For all other matters, the auditor's responsibility ends on the primary date of the report (March 1).

Question 17

An auditor is performing subsequent event procedures for an audit with a December 31 year-end. Which of the following items discovered in January would most likely be classified as a Type I subsequent event?

  1. The acquisition of a new subsidiary company.
  2. A significant change in the company's executive management team.
  3. The resolution of a federal tax dispute that was pending at December 31. (correct answer)
  4. The issuance of a new series of corporate bonds to raise capital.
Explanation: A Type I subsequent event provides evidence about a condition that existed at the balance sheet date. The resolution of a tax dispute pending at year-end provides a more definitive measure of the liability or asset that existed on December 31. The other options (acquisition, management change, bond issuance) are all new events or conditions that arose after the balance sheet date and would be classified as Type II events.

Question 18

A client's year-end is December 31. On January 15, the client enters into a significant, noncancelable lease for a new facility, a transaction that was not contemplated at year-end. The auditor's report date is February 28. How should this event be reflected in the December 31 financial statements?

  1. The financial statements should be adjusted to record the right-of-use asset and lease liability.
  2. The auditor should modify the opinion due to the material nature of the transaction.
  3. The event requires disclosure in the notes to the financial statements. (correct answer)
  4. The event can be ignored as it does not impact the financial position as of December 31.
Explanation: Entering into a significant lease after year-end is a Type II subsequent event because the obligation did not exist at the balance sheet date. As the transaction is material, it should be disclosed in the notes to the financial statements to inform users of a significant change that could affect future operations and cash flows.

Question 19

An auditor completed fieldwork on February 26, Year 2, for a December 31, Year 1, year-end. On March 3, Year 2, a significant event requiring disclosure occurred. The auditor decides to dual-date the report. The primary reason for dual-dating the audit report is to:

  1. Extend the auditor's responsibility for all subsequent events to the later date.
  2. Inform the reader that the financial statements have been restated.
  3. Highlight the auditor's disagreement with management regarding the event.
  4. Limit the auditor's responsibility for events occurring after the completion of fieldwork to the specific event referenced. (correct answer)
Explanation: Dual-dating the audit report (e.g., "February 26, Year 2, except for Note X, as to which the date is March 3, Year 2") limits the auditor's responsibility for all events after the primary report date to only the specific event that is noted. This avoids extending the auditor's responsibility for all other subsequent events to the later date.

Question 20

During the subsequent events review, an auditor learns that a new environmental regulation was passed after year-end. The regulation will require the client to incur significant, material costs for equipment modification in the next fiscal year. The auditor should ensure that:

  1. A loss contingency is accrued in the year-end financial statements.
  2. The auditor's report is dual-dated to specifically mention the regulation.
  3. There is adequate disclosure of the event and its estimated financial impact. (correct answer)
  4. An emphasis-of-matter paragraph is included in the auditor's report.
Explanation: This is a Type II subsequent event because the obligating event (the passage of the regulation) occurred after the balance sheet date. It does not require an adjustment or accrual in the current year's financial statements. However, due to its material future impact, it requires clear disclosure in the notes to avoid making the financial statements misleading. An emphasis-of-matter paragraph is an auditor choice, but adequate disclosure by management is the primary requirement.