Subsequent Facts and Events. The following unrelated events occurred after the balance sheet date but before the audit report was prepared:

1 The granting of a retrospective pay increase to selected employees.

2 Receipt of a letter from the tax authorities stating that additional income tax is due for a prior year.

3 Filing of an antitrust suit by the federal government.

4 Declaration of a stock dividend.

5 Sale of a fixed asset at a substantial profit.

Required:

A. Define “review for subsequent events” and “subsequent events”

B. Identify what procedure to identify events the auditor might have used to bring each of these items to the auditor’s attention. (Hint: See Illustration 11.8.)

C. Discuss the auditor’s responsibility to recognize each of these in connection with the audit report.

[Adapted and reprinted with permission of AICPA. Copyright © 2000 & 1985 by American Institute of Certified Public Accountants.]