Question

The audit procedures for the subsequent events review can be divided into two categories: (1) procedures integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the first category?

A) Inquire of client regarding contingent liabilities.
B) Obtain a letter of representation written by client.
C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.
D) Review journals and ledgers of year 2 to determine the existence of any transactions related to year 1.

Answer 1

The procedure that is part of the first category of subsequent events review involving the verification of year-end account balances is examining subsequent period sales and purchases transactions to ensure accurate cutoff. This supports accurate year-end account balances by seeing that transactions are recorded in the proper accounting period.

Step-by-step explanation:

The audit procedures for the subsequent events review in the first category, which are integrated as part of the verification of year-end account balances, would include examining subsequent period sales and purchases transactions to determine whether the cutoff is accurate. This procedure ensures that transactions are recorded in the correct accounting period and supports the accuracy of the year-end account balances. This form of testing can reveal whether transactions have been recorded in the proper period or if additional adjustments are needed to reflect events occurring after the balance sheet date that pertain to the period under audit.

It does not involve inquiring about contingent liabilities or obtaining a letter of representation from the client, as those are designed specifically to identify subsequent events that could affect the financial statements and thus are procedures more aligned with the second category.