whats commonly referred to in auditing as a subsequent event
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SUMMARY:
A research synthesis team formed past the Auditing Section of the American Accounting Clan recently authored a paper (Chung et al. 2013) addressing the audit of subsequent events (SEs). The audit of SEs is a difficult audit area, as approximately i-3rd of the Public Visitor Accounting Oversight Lath's inspection reports and numerous Securities and Exchange Commission enforcement releases identify deficiencies in this area (Chung et al. 2013). Chung et al. (2013) developed a model and proposed a series of research questions encouraging future academic research in this surface area. In this paper, we address several of these questions past surveying 76 practicing auditors. We summarize the auditors' responses and nowadays recommendations that may exist useful in improving audits of SEs.
INTRODUCTION
A inquiry synthesis team formed past the Auditing Department of the American Accounting Association recently published a newspaper (Chung et al. 2013) describing the audit processes related to subsequent events (SEs). The authors conclude that the audit of SEs is a difficult audit expanse and back up this assertion with their finding that approximately one-third of the Public Company Accounting Oversight Board's (PCAOB) inspection reports and numerous Securities and Exchange Commission (SEC) enforcement releases place deficiencies in this area. Chung et al. (2013) developed a model and proposed a series of unexamined research questions encouraging time to come academic enquiry in this expanse. In this paper, we address several of these questions by surveying 76 practicing auditors at a large regional public accounting house, asking open-ended questions about factors affecting audits of SEs and recommendations for improving SE procedures.
Using scale survey items, Janvrin and Jeffrey (2007) surveyed auditors regarding their SE experiences and practices. i They found that although auditors more often than not conduct procedures designed to discover SEs, these procedures are oft unsuccessful. The present study adds to the SE audit literature by taking a step toward investigating several additional inquiry questions proposed by Chung et al. (2013) using an open-ended response approach and qualitative information analysis.
We summarize auditors' responses and, drawing from their responses, discuss recommendations that may be useful in improving audits of SEs. Specifically, we discuss SE audit plan considerations, the SE period, engagement time budgets, and auditor-client relationships. However, our results and recommendations should be interpreted with circumspection as our study involves a relatively small number of auditors from one audit firm.
Groundwork
Professional standards crave auditors to (one) search for SEs, (2) evaluate the impact of any SEs on the financial statements, and (3) ensure that SEs are resolved appropriately (AU Section 560, PCAOB 2003). The search includes procedures specifically intended to observe SEs such equally reviewing the latest available board minutes and interim financial statements, making management inquiries, and obtaining written representations. Cloth Blazon I SEs (i.due east., the underlying condition existed at balance canvas appointment) should be recognized in the fiscal statements, whereas material Type 2 SEs (i.east., the underlying condition did not exist at balance canvass appointment) should be disclosed (PCAOB 2003, AU Sections 560.03, 560.05). ii
Unlike auditing a recorded balance such as an account receivable, or substantiating a known transaction such as the auction of property, the inspect of SEs involves an open-ended search from the residual sheet date through the date of the audit report encompassing all meaning accounts and transactions without knowing specifically what ane is searching for (Chung et al. 2013). Supporting the notion that auditing SEs is inherently complex, Chung et al. (2013) examined PCAOB inspection reports and numerous SEC enforcement releases terminal that properly identifying, evaluating, and resolving SEs tin can be problematic for both management and auditors. Auditors struggle to audit SEs finer due, in function, to the inherent complexity associated with searching through a seemingly boundless universe of potential SEs and the continuous nature of the SE search (Chung et al. 2013, 192).
Little academic research on SEs exists. Janvrin and Jeffrey (2007) examined how auditors search for and discover SEs and factors that influence this process. The authors surveyed 106 auditors at big public accounting firms and institute that auditors deem SE show to be important. The authors conclude that auditors generally follow suggested procedures (e.g., review of interim financial statements) to search for SEs, but are more than likely to discover SE prove when minimal historical testify exists and their balance sheet date judgments do not meet prior expectations. Further, Janvrin and Jeffrey (2007) find that auditors are more likely to search for SE show (1) when evaluating nonroutine accounts, (2) when evaluating show that may impact the financial statements as a whole rather than one account, and (3) when they accept aplenty time to conduct the search. Finally, they report that auditors are more than likely to find SE show when the search period (from balance sheet appointment to report date) is longer.
Chung et al. (2013) discuss the audit processes related to SEs and problems that have arisen related to these processes in exercise. In particular, they draw from relevant academic enquiry to develop a theoretical model and nowadays a serial of unexamined research questions to facilitate hereafter academic inquiry on this topic. The authors reviewed a number of PCAOB inspection reports and SEC enforcement releases that identified deficiencies in the audit of SEs. Some deficiencies were noted in the noun testing phase of the audit, while others pertained to the agile SE search stage. Some deficiencies related to issues in the search for SEs, while others related to problems with auditors' evaluation of SEs (i.due east., the auditors were aware of the SE but did non sympathize the implications of the SE for their audit piece of work or their assessment of fair presentation). Based on their research, Chung et al. (2013) proposed 34 inquiry questions (some of which they suggest could be addressed using a survey methodology) to guide future research into the causes of SE audit deficiencies and the development of strategies to amend SE audit effectiveness.
METHOD
To investigate why SE inspect deficiencies may occur and what might exist washed to improve things, we surveyed practicing auditors. Seventy-six auditors at a big regional public bookkeeping firm participated in this research. The participating firm is one of the 25 largest firms in the U.S. (SourceMedia 2012). Recruitment emails were sent by an audit partner to all 445 auditors at the firm. Second-asking emails were sent after ane week. The response rate was 17.1 percent. The recruitment electronic mail included a link to an Internet-based survey site that hosted the anonymous survey. Participant demographics are presented in Table ane.
Tabular array 1
Participant Demographics
We asked open-ended survey questions to address a subset of enquiry questions adapted from the recommendations of Chung et al. (2013). We reconcile our survey questions to several of Chung et al.'due south (2013) formally proposed enquiry questions (RQ) in the next section. To analyze the responses, nosotros used content assay to code the data following procedures recommended by Creswell (2003). Using open up coding (Strauss and Corbin 1998), data were coded into major categories by each author independently. The authors then resolved discrepancies by indepth discussion and negotiated consensus.
RESULTS
For contextual purposes, we obtained and reviewed the participating house'south SE audit program. 3 Nosotros also asked participants to describe how their firm audits SEs. Table 2 presents a summary of responses to this question. Client research was the most-cited SE procedure. One partner summarized the house'south SE inspect procedures as follows:
TABLE 2
Briefly Depict How Your Firm Audits Subsequent Events
We accept an internally adult checklist to ask questions. We besides review subsequent lath minutes and talk to the client or board regarding minutes that take not been completed, especially if nosotros are aware of a possible event. We also update the legal letters through the date of issuance of the report or within three days prior to issuance.
Another partner responded as follows:
Inquiry, [obtaining] representations from management and internal/external counsel, review of board minutes, subsequent financial argument review and enquiry of those outside of CFO/Controller (simply done inconsistently inside the firm), review of subsequent action in key areas primarily of judgment (but also done very inconsistently in the firm).
Three other auditors also noted inquiry of client personnel outside of financial direction as an SE audit procedure, even though mention of such an "outside" corroborative inquiry is absent from the firm's SE program.
Search for and Evaluation of Subsequent Events
Auditors must search for information about material SEs and get together sufficient show about the SEs in order to accordingly evaluate them. Chung et al. (2013) propose that auditors' searches for and evaluation of SEs may be impacted by various factors including certain judgment and controlling heuristics and biases such as availability and representativeness heuristics (RQ9), overconfidence bias (RQ10), client preference bias (RQ11), accountability and justification requirements (RQ12), framing effects (RQ13), confirmation bias (RQ14), primacy effect (RQ15), and fourth dimension pressure (RQ16). Chung et al.'southward (2013) RQ18 asks what additional factors touch auditors' searches for and evaluation of SEs. In an effort to gain more insight into this matter, we asked participants to hash out any factors that may affect their search for and evaluation of subsequent events. Table 3 summarizes auditors' responses to this question.
TABLE 3
What Factors May Affect Your Search for and Evaluation of Subsequent Events?
Familiarity with the client and client activities is the nearly-cited factor that would bear upon an auditor'southward search for and evaluation of SEs, followed by client risk assessments. As one partner explained:
The industry the client is in, history and cognition of the customer and the industry, materiality, and also gamble assessments for the client.
Some other partner stated:
Known litigation or potential litigation, possible malpractice lawsuits and their condition (I piece of work in the healthcare area), known settlements from Medicare or Medicaid subsequently year-end. Client interactions—[for] some clients I volition expand this search due to past history. With others, at that place is little risk—[it] depends on who is relying on the financial statements.
A unlike partner responded as follows:
Items of high degree of judgment in the twelvemonth-finish fiscal statements at year-end or subsequent adverse operating results along with known contingencies where we know there may exist ongoing action regarding development of the situation.
Chung et al.'s (2013, 170) model of the auditor's cognitive approach to the audit of SEs suggests that auditors may demonstrate a feedback loop whereby their evaluation of an SE may cause them to expand the search for SEs. They draw this loop in their model as Link nine, which reconnects the evaluation phase dorsum to the search phase via a dotted line. The authors as well question whether fourth dimension pressure might cause auditors to skip this footstep (RQ17). To examine these proposals, we asked auditors the following questions: "If you were reviewing audit documentation and realized more evidence is needed to evaluate a subsequent result, what would you do?" and; "How likely would fourth dimension pressure (eastward.g., audit engagement hours are over budget or a deadline is fast approaching) affect your answer to the higher up question?" Tabular array 4 reports a summary of auditor responses to the question on what to do if more than SE evidence is needed after evaluation.
Tabular array iv
If You Were Reviewing Inspect Documentation and Realized More than Prove Is Needed to Evaluate a Subsequent Event, What Would Y'all Do?
In add-on to the obvious responses of obtaining the necessary additional evidence, three auditors mentioned that they would aggrandize the search for SEs, providing some support for Link 9 in Chung et al.'s (2013, 170) model and the link in Janvrin and Jeffrey'south (2007, 299) SE model, which also depicts the evaluation stage reconnecting dorsum to the search phase via a dotted line. For the question on whether time pressure would touch auditors' actions, nosotros had participants answer on a calibration of 1 (very unlikely) to 7 (very probable). Both the hateful and median response was 3 (i.e., somewhat unlikely) suggesting that, on boilerplate, if additional testify were needed, fourth dimension pressure would not affect auditors' pursuit of the necessary evidence. However, three auditors (a partner, a senior, and a staff auditor) selected vii, suggesting that time pressure may influence this feedback loop step for some auditors. Indeed, an inspect senior responded equally follows:
Depends on what my workload is like and whether I have fourth dimension for information technology.
Resolution of Subsequent Events
After evaluating SE inspect prove, auditors must decide on how the event should be resolved (i.e., recognized, disclosed, or ignored). Resolution is oft negotiated with clients, and these negotiations must be handled delicately (Chung et al. 2013). Auditors are challenged by the often-competing priorities of ensuring that the fiscal statements are materially authentic while maintaining a good relationship with the client (Perreault and Kida 2011).
Chung et al. (2013) advise that the audit of SEs may be influenced by the nature of the process whereby lower-level auditors search for SEs and higher-level auditors evaluate and negotiate/resolve them (RQ19). They also propose that time pressure level (RQ20 and RQ21), negotiation timing (RQ22), accountability and justification requirements (RQ23), commitment escalation (RQ24), and client risk (RQ25) may impact the resolution of SEs. Chung et al.'due south (2013) RQ26 asks what other factors tin influence the negotiation and resolution of SEs. Accordingly, we asked participants to talk over any factors that may influence their negotiation and resolution of subsequent events with clients. Table 5 summarizes their responses.
TABLE five
What Factors May Influence an Auditor's Negotiation and Resolution of Subsequent Events with Clients?
Materiality considerations and the SE'due south potential event on financial statement users are the most-cited factors. Related relevant excerpts from participant responses follow (all partners):
By experience with client, materiality (both quantitatively and qualitatively), the amount of judgment required to evaluate the subsequent consequence.
Financial condition of the client, significance, and materiality of the particular.
Materiality, past history with the customer, qualitative significance of the event.
Seven auditors mentioned timing considerations every bit a cistron that may affect SE negotiation with a client. For case, two partners responded with the post-obit:
Identification of the event late during the audit appointment.
Timing is almost always an issue.
A manager cited the following related factors:
Deadlines, pressure level from the client.
A staff auditor responded as follows:
Pressure level from the customer, particularly if they are a large client that partners are trying to please; time constraints.
Another manager responded equally follows:
Timeliness of [client/chaser] responses, amount of detailed information the client tin can provide, client awareness of disclosure requirements for subsequent events.
Interestingly, five auditors were adamant that no factors would influence their negotiating a SE with a customer. Relevant responses follow.
A manager responded:
No negotiation—GAAP will always exist applied.
2 different partners responded:
If it's a material subsequent event, there is no negotiation.
Typically, the standards and firm policies are clear as to what should/should not exist disclosed. Deviance from that isn't tolerated.
Deficiencies in Subsequent Events Auditing
Chung et al. (2013) examined PCAOB inspection reports and SEC enforcement releases and, in light of the numerous audit deficiencies identified in the SE area, concluded that identifying and resolving SEs is hard for auditors. Chung et al. (2013) asked why auditors have so much difficulty in accordingly identifying (RQ1) and appropriately evaluating (RQ3) SEs. To address this event, we asked participants to hash out any factors that could brand it hard for auditors to successfully identify and evaluate subsequent events. Tabular array half-dozen reports a summary of auditor responses.
TABLE 6
What Are Some Factors That Could Brand It Difficult for Auditors to Successfully Identify and Evaluate Subsequent Events?
The top four reasons cited all focus on the important function of the client: customer uncooperativeness, the clients' failure to identify SEs, poor advice from the client, and client fraud. Excerpts from three partners provide relevant examples of this position:
If [a] deadline is near, clients can be very uncooperative in disclosing subsequent events.
Integrity of management. If they [the client] wanted to non tell me something, it would be difficult for me to detect information technology.
Lack of cooperation and communication from direction and/or owners of the customer.
Other response themes include timing issues and missing documentation. Four respondents placed at to the lowest degree some of blame for SE difficulties on auditors. A staff auditor responded as follows:
Lack of time and preparation in identifying and questioning the client on such events.
Improving Subsequent Events Auditing
Prior enquiry indicates that the apply of decision aids tin amend auditor judgment and help less-experienced auditors (Bonner, Libby, and Tan 1996; Lowe and Reckers 2000; Bedard and Graham 2002; Rose, McKay, and Norman 2012). Although the use of decision aids in the SE audit context has non yet been explored, Chung et al. (2013) suggest that using determination aids could potentially mitigate SE judgment biases. Chung and colleagues' RQ7 inquires as to how firms are currently utilizing determination aids in the audit of SEs (if at all). We asked participants to discuss any tools, such equally determination aids, that they utilize in the audit of SEs. Table 7 presents a summary of responses to this question. Twenty-seven auditors mentioned the firm's standard SE checklist as a determination assistance. Beyond this, lilliputian else is mentioned.
TABLE 7
Please Talk over Whatever Tools, Such as Decision Aids, That You Use in the Audit of Subsequent Events
Several enquiry questions proposed by Chung et al. (2013) include queries regarding what can be done to improve the auditing of subsequent events (e.thousand., RQ1, RQ3, RQ5, RQ7, RQ30, and RQ34). Consequently, we asked auditors to discuss what can be washed to amend the auditing of subsequent events. Table 8 presents a summary of participant answers.
Tabular array 8
What Can Exist Washed to Improve the Auditing of Subsequent Events?
Although the leading response theme is "non much," auditor responses in the other categories do in fact suggest a number of possibilities. Relevant excerpts pertaining to the "not much" category from two partners follow:
Not much—it is truly dependent upon the client disclosing to the audit squad and willing to disclose in the financials.
The auditing hasn't really been the problem. The disclosures nowadays more of the problem … the client doesn't want to give an outside party too much information, which tin be seen past some as an admission that sure liabilities are owed.
As noted, other respondents offer several suggestions. Response themes in these categories include improving communication with clients, client training, integrating SE procedures into "core" fieldwork procedures, and allocating more of the date upkeep to auditing SEs.
A manager suggested the following:
Brand information technology more a part of the regular audit procedures; sometimes it feels like an afterthought and we sometimes rush through the plan and so that we can get the report issued.
A staff accountant echoed these sentiments:
Taking more than time to consummate the chore. I find that information technology is a actually quick process at the very end to get the financials out the door.
Another staff auditor provided the following response:
Attempt non to add it in the "wrap-upwards" stage. One time we run into the end of the tunnel, I retrieve we can accept a tendency to throw it all together chop-chop. If we add notes to our subsequent events documentation about things nosotros see during standard inspect procedures, which could mayhap have a related subsequent event [implication], we have some specific items to address.
A senior manager suggested the post-obit:
Communication with management throughout the audit process; heed to what the client's employees may tell you about what is happening; keep an open up mind about the possibility of a subsequent event; keep your ears open up when working in the client's office; know your customer—be aware of what is happening in their manufacture, and what the client's needs are for the time to come.
DISCUSSION
We surveyed 76 practicing auditors at a large regional public accounting firm asking open up-ended questions near factors affecting audits of SEs and recommendations for improving SE procedures. Using Likert-type calibration survey items, Janvrin and Jeffrey (2007) find that although auditors more often than not follow recommended SE audit procedures, the procedures are ofttimes unsuccessful. This report adds to the SE inspect literature past analyzing auditors' open-ended responses to questions on factors that may influence SE searches, evaluation, negotiation and resolution, sources of SE inspect difficulties, and ways to improve the auditing of SEs. Nosotros contribute to the SE inspect literature by providing a glimpse into the actions and reactions of some individuals involved in the audit of SEs and delve deeper into the connections between the various (or lack of) SE procedures.
Drawing from the auditors' responses, nosotros now present some recommendations that may be useful in improving audits of SEs. Specifically, we hash out audit plan considerations (client research, SE procedures, customer knowledge, and conclusion aids), the SE menses, engagement time budgets, and auditor-client relationships. Our recommendations should be interpreted with caution, however, as our study involves a relatively small number of auditors from 1 audit house. In some cases, recommendations are based on the suggestions of very few participants. We elaborate on this point when discussing the limitations of our written report below.
Audit Program Considerations
Client Inquiry
A few auditors noted inquiry of client personnel outside of financial management as an SE audit procedure, even though mention of such an "exterior" corroborative inquiry is absent from the participating house'south SE audit program. Ane partner even noted that this procedure was performed inconsistently within the firm. The notion of interviewing individuals other than the controller or CFO, such as individuals in operations, certainly has merit. If non already included in their SE audit programs, then firms might consider adding explicit language to their internal SE checklists instructing auditors to as well question client personnel outside of financial direction on SE matters.
Integrating SE Procedures into the Substantive Testing Phase
Several respondents suggested that SE procedures exist made more a role of regular audit procedures, as opposed to being tacked on to the wrap-up phase of the audit. This idea also has some entreatment. Auditors should exist because SE implications throughout their fieldwork. To encourage this consideration, audit firms may wish to add specific steps to the audit programs for each account group (if non already included in such programs). For example, the following might be added to the accounts receivable audit program: "In performing the audit steps above, describe any transactions or events you noted that may have subsequent events implications." Some firms have avant-garde audit program software whereby accountant responses to certain program steps automatically menstruum through to other summary memos and programs (Carson and Dowling 2012). Such a summary program could exist developed for SEs. Thus, the summary SE program could include relevant auditor notes on SEs made during the substantive testing phase, in addition to the wrap-up steps described in the standard SE audit program.
Noesis of the Client
Auditor knowledge of the client and client activities was the leading response theme for the question on what factors influence auditors' searches for and evaluation of SEs. Clearly, familiarity with the customer is an important determinant of a successful SE audit. Indeed, the level of auditors' customer-specific knowledge has been institute to be positively related to accountant functioning over fourth dimension (Knechel, Krishnan, Pevzner, Shefchik, and Velury 2013). Auditors tin gain customer-specific noesis past serving the same client year after year (Chi, Huang, Liao, and Xie 2009). However, this is non always possible due to scheduling conflicts, auditor turnover, or audit partner rotation. Audit firms might consider other ways to raise auditors' familiarity with client activities, such as devoting time in the planning phase of the audit to obtain background data and cognition of the client's business and including some type of "understanding the client" memo in the planning section of the inspect file (Blokdijk, Drieenhuizen, Simunic, and Stein 2006).
Decision Aids
Chung et al. (2013) indicate that determination aids could mitigate SE judgment biases and may help less-experienced auditors. They note that the use of decision aids in the SE audit context has not yet been explored. Outside of the participating business firm'southward SE checklist, respondents did not reference any other decision aid used to assist them in the inspect of SEs. We conducted some Internet searches (focused on sites such as the American Institute of Certified Public Accountants and diverse educational accounting and CPA house websites) and reviewed some auditing textbooks and found very petty guidance in terms of SE decision aids for auditors. Consequently, nosotros drafted our own flowchart that may exist used as a decision aid to assist auditors in SE procedures. Figure 1 is intended to assist auditors in the identification and evaluation of SEs. This decision aid relates simply to SEs regarding contingent liabilities. There are other types of SEs that would not be covered by this decision assist. four Firms may consider adding something like to their SE audit programs or training materials in order to aid their auditors (especially juniors) in this difficult audit area.
FIGURE i
Determination Aid for Auditing Subsequent Events Regarding Contingent Liabilities
FIGURE 1
Decision Aid for Auditing Subsequent Events Regarding Contingent Liabilities
Effigy 1 begins by encouraging auditors to consider SEs throughout the noun testing phase of the inspect as opposed to just considering SEs during the wrap-up phase. Side by side, five specific SE procedures are presented for the auditor to follow in an attempt to identify material SEs that chronicle to losses (realized or contingent). If a material SE with loss implications is identified, then auditors must make up one's mind: (one) if the condition existed at the balance canvass date, (2) whether loss likelihood is likely, possible, or remote and, if applicable, (three) whether a reasonable loss gauge tin be made. The flowchart ends with the SE resolutions.
Subsequent Events Flow
The "subsequent period" is the period after the balance sail date through the audit report date. Janvrin and Jeffrey (2007) find that auditors are more likely to observe SE prove when the search period (from rest canvass engagement to report engagement) is longer. If the SE period is longer, then in that location is more time for some effect or transaction with SE implications to occur, and there is more time for the auditor to discover it. Although a longer period may be helpful in clarifying a situation that existed at the balance canvas date, a drawn out SE period may testify problematic for auditors. Auditors may wish to limit their exposure to a long SE period to mitigate the take chances that they might miss something. Indeed, two respondents mention the timely issuance of the audit report as a manner to ameliorate the auditing of SEs. One partner noted:
Timely issuance of inspect reports subsequent to fieldwork.
A senior responded as follows:
Go audits done sooner so in that location isn't as great of a span for events to happen.
The sentiments of these auditors are understandable and firms should do what they tin to promote the timely issuance of financial statements and limit the length of the SE search period. However, nosotros do recognize that this proposition has more to do with auditors covering their bases and less to practise with actually improving audits of SEs.
Engagement Fourth dimension Upkeep
Some respondents indicated that more time should be allocated to auditing SEs. Although most audit budgets are usually pretty tight, firms might consider calculation a slight "cushion" to various college-risk inspect areas during the noun testing phase to allow auditors to reverberate on SE implications. Additionally, firms may wish to consider devoting a little more fourth dimension to SEs in the wrap-up phase. Like to fraud brainstorming discussions that engagement teams typically hold at the beginning of an inspect, firms might consider having teams hold a live discussion on SEs in the wrap-upward stage of the inspect.
Auditor-Client Relationships
Several auditors noted that the nature of their relationship and interactions with the client might influence the effectiveness of their search for and evaluation of SEs, equally well every bit their negotiation/resolution of SEs with the client. Loftier-quality accountant-client relationships are important. Prior research suggests that relationship problems are a primary determinant of clients switching audit firms (Fontaine, Letaifa, and Herda 2013). Research also indicates that high-quality auditor-customer relationships atomic number 82 to more value-added service provided to the client (Herda and Lavelle 2013). 5 The present study suggests that strong accountant-customer relationships may help auditors in identifying and evaluating SEs, and may as well be helpful in negotiating SE adjustments and/or disclosures with clients. Chung et al. (2013, 188) note that in calorie-free of the little existing authoritative guidance with respect to SEs, auditors may be particularly susceptible to the influence of client preferences when negotiating the resolution of an SE. This highlights the importance of mutual trust and stiff relationships between auditors and clients. A trusting human relationship will likely reduce the risk that clients will withhold information with SE implications from auditors. Rather, the client would trust the auditor with the information knowing that the auditor would act in the best long-term interests of the client, while complying with relevant professional standards. Trusting relationships come near through fair treatment and common commitment (de Ruyter and Wetzels 1999; Herda and Lavelle 2013).
Limitations
Our study has limitations. We caution that the comments from our 76 participants at ane audit firm might non exist representative of a larger auditor population. Therefore, our results and corresponding recommendations may not generalize to auditors at other, larger firms. Future research could involve more auditors and auditors with larger accounting firms that serve a meaning number of publicly traded companies. As well, this study only begins to address the many research questions proposed by Chung and colleagues (2013). Futurity enquiry could accost more than of the questions using alternative methodologies, such every bit confront-to-face interviews or experiments.
Implications
Being mindful of this study's limitations, we now summarize the practical implications of our research. Auditors should consider SE implications throughout the noun testing stage of the audit and may wish to also question customer personnel exterior of financial management as role of their normal SE audit procedures. Audit house management should work to ensure that all audit team members have an appropriate level of client and industry cognition, as this may impact their ability to identify and evaluate SEs. Audit firms may wish to add a decision assist (similar to Figure one) to their SE audit programs or preparation materials to assistance auditors in this area. Firms may wish to limit the length of the SE period by promoting the timely issuance of fiscal statements. Audit firms may consider adding a "absorber" to fourth dimension budgets for diverse high-risk areas to allow auditors to reflect on SE implications during the substantive testing phase, and also devote more fourth dimension to SE matters in the wrap-upwards stage, maybe even belongings live date squad discussions on SEs toward the end of the inspect. Finally, firms should emphasize the importance of edifice and maintaining strong relationships with clients through off-white handling and mutual commitment (de Ruyter and Wetzels 1999; Herda and Lavelle 2013). Strong auditor-client relationships characterized by mutual trust may assist auditors in identifying and evaluating SEs, and may besides be helpful in identifying and negotiating SE issues with clients.
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1
Janvrin and Jeffrey (2007) examined auditors' perceptions of SE evidence importance, how SE bear witness searches are implemented, how much time respondents spend searching for SEs, how often respondents perform recommended SE search procedures, and how effective the recommended procedures are in identifying SEs. Further, the authors explored the post-obit factors that may influence SE audits: routine versus non-routine accounts, amount of evidence supporting balance sheet date judgment, consistency with prior expectations regarding balance canvass date judgment, consistency of anticipated challenge with prior evidence, materiality of anticipated claiming prove, length of search menstruation, and time pressure. Challenge evidence refers to any additional evidence items, including SE testify, that may cause auditors to reconsider their current judgment. Likert-type scale survey items were used past the authors so that statistical analyses could be performed.
2
Under U.South. Generally Accepted Accounting Principles (GAAP), the Financial Accounting Standards Board's Accounting Standards Codified (ASC) refers to Type I SEs as ''recognized" subsequent events and refers to Type II SEs as ''nonrecognized" subsequent events (ASC 855-10-20, FASB 2010).
3
The program contained four parts. The first part listed detailed audit procedures that the accountant is to perform, such as reviewing journal entries from the financial argument date through the end of fieldwork, noting that, depending on the results of this review, the accountant is to consider the demand to expand testing through the report date. Another procedure is to read subsequent meeting minutes or to inquire as to actions taken at subsequent meetings that may impact the fiscal statements. The second part involved the review of interim fiscal statements, and the third part involved inquiries of management. The tertiary function included specific questions to ask of management. For case, "Were in that location whatever changes to the electric current status of items in the fiscal statements existence reported on that were accounted for on the footing of tentative, preliminary, or inconclusive data?" The final part of the program related to updating attorney letters.
4
For example, other SEs could relate to asset impairments, inventory valuation problems, deferred tax nugget valuation allowances, and acquirement recognition issues (meet Chung et al. 2013, Table 1).
5
Value-added audit service is defined as client-service activities resulting from an audit that are not directly related to verifying the financial statements (Herda and Lavelle 2013).
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Source: https://meridian.allenpress.com/cia/article/8/2/A10/67416/Auditing-Subsequent-Events-Perspectives-from-the
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