Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

What procedure would an auditor most likely perform to gather evidence about subsequent events?

1. Review employee contracts signed after year-end.

2. Investigate changes in long-term debt that occurred after year-end.

3. Recompute interest expense on liabilities settled after year-end.

4. Analyze inventory write-offs that occurred after year-end.

The correct answer is: Investigate changes in long-term debt that occurred after year-end.

Gathering evidence about subsequent events is crucial for an auditor to determine the potential impact of events occurring after the balance sheet date on the financial statements being audited. The correct procedure to perform in this context involves investigating changes in long-term debt that occurred after year-end. This activity is significant because changes in long-term debt can have substantial implications for the company's financial position and its ability to meet future obligations. Such changes may affect the company’s leverage, liquidity ratios, and overall financial health. By reviewing these alterations, auditors can assess whether any additional disclosures or adjustments are necessary in the financial statements, enhancing their responsibility and reliability. Other procedures may also provide useful evidence, but they don't directly address significant financial changes that would likely require disclosure or adjustment. For example, reviewing employee contracts signed after year-end is more about operational changes rather than financial implications. Recomputing interest expense on liabilities settled after year-end offers insights into individual transactions rather than a broader perspective on financial condition. Analyzing inventory write-offs that occurred post year-end relates to asset management but may not carry the level of importance in terms of financial re-evaluation compared to investigating long-term debt changes. Thus, exploring changes in long-term debt directly provides essential insights into the entity's financial stability