Question

An example of a Type I subsequent event is

a. A tornado that destroys a client's factory after the balance sheet date.
b. An event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the client's fiscal year) that a large portion of the client's inventory is obsolete.
c. Notification of an IRS audit after the balance sheet date.
d. The client's Board of Directors unexpectedly resigns after the balance sheet date.

Answer 1

Option b (An event that confirms auditors' previous beliefs about inventory obsolescence) is a Type I subsequent event because it confirms conditions that existed at the balance sheet date.

Step-by-step explanation:

In accounting, a Type I subsequent event refers to an event that provides additional information about conditions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements. Among the options provided:

• Option a (A tornado that destroys a client's factory after the balance sheet date) is not a Type I subsequent event because the tornado occurs after the balance sheet date and does not relate to a condition that existed at the balance sheet date.
• Option b (An event after the balance sheet date that confirms the auditor's belief that a large portion of the client's inventory is obsolete) is a Type I subsequent event because it provides additional evidence about a condition (inventory obsolescence) that existed at the balance sheet date.
• Option c (Notification of an IRS audit after the balance sheet date) does not necessarily reflect a condition that existed at the balance sheet date.
• Option d (The client's Board of Directors unexpectedly resigns after the balance sheet date) does not directly relate to the financial condition at the balance sheet date.

Therefore, the correct answer is Option b, which is an event providing further evidence about conditions existing at the balance sheet date.