Question

An example of a Type I subsequent event is?

1) a tornado that destroys an entity's factory after the balance sheet date.
2) an event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the entity's fiscal year) that a large portion of the entity's inventory is obsolete.
3) notification of an IRS audit after the balance sheet date.
4) the entity's Board of Directors unexpectedly resigns after the balance sheet date.

Answer 1

A Type I subsequent event confirms conditions that existed at the balance sheet date, such as an event confirming an auditor's previous belief about inventory obsolescence. This requires adjustments in financial statements to reflect accurate estimates.

Step-by-step explanation:

An example of a Type I subsequent event is an event after the balance sheet date that confirms the auditor’s belief (documented prior to the end of the entity's fiscal year) that a large portion of the entity's inventory is obsolete. A Type I subsequent event provides additional information about conditions that existed at the balance sheet date and affects the estimates that are part of the financial statements.

For instance, if the auditor had concerns about inventory obsolescence before the year-end, and those concerns are subsequently confirmed after the balance sheet date but before the financial statements are issued, this event would require adjustment to the financial statements because it relates to a condition that existed at the balance sheet date. Other examples provided, such as a tornado destroying a factory, notification of an IRS audit, or the resignation of the Board of Directors, are all Type II subsequent events because they are indicative of conditions that arose after the balance sheet date.