Question

Which statement defines a Type 1 subsequent event?

A. An event that provides evidence of conditions that arose after the date of the financial statements
B. An event that provides evidence of unreported earnings that arose after the date of the financial statements.
C. An event that provides evidence of conditions that existed at the date of the financial statements. A Type I event requires an adjustment to the financial statements.
D. An event that provides evidence of conditions that did not exist at the date of the financial statements. A Type I event requires an adjustment to the financial statements.

Answer 1

A Type I subsequent event is an event that provides evidence of conditions that existed at the date of the financial statements and requires an adjustment. Committing a Type I error can lead to misleading financial statements, while committing a Type II error can result in undetected misstatements.

Step-by-step explanation:

A Type I subsequent event is defined as an event that provides evidence of conditions that existed at the date of the financial statements and requires an adjustment to the financial statements. This means that the event occurred before the financial statements were issued but was not initially recognized in the financial statements. An example of a Type I subsequent event could be the discovery of a previously undisclosed liability that originated before the financial statement date.

A consequence of committing a Type I error in the context of auditing financial statements is that the financial statements may no longer be accurate and reliable. This could result in misleading investors, creditors, and other stakeholders who rely on the financial statements to make informed decisions.