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

Why should an auditor be aware of subsequent events post year-end?

1. To issue revised financial statements during the audit process.

2. They may require disclosure to prevent misleading financial statements.

3. To determine the overall fairness of the financial statements.

4. To assess compliance with international accounting standards.

The correct answer is: They may require disclosure to prevent misleading financial statements.

An auditor must be aware of subsequent events that occur after the reporting period because these events may significantly impact the understanding of an entity's financial position and results of operations if not properly disclosed. Such events can provide crucial insights into conditions that existed at the end of the reporting period or new developments that arise after it, potentially affecting the users’ perception of the risk involved in investing in or lending to the entity. Disclosure of subsequent events is essential to prevent misleading financial statements, as it provides additional context that can alter the financial narrative presented. If significant events occur—such as a natural disaster affecting operations, a major lawsuit outcome, or important financing arrangements—they could impact asset values, liabilities, or overall financial health. Without appropriate disclosures regarding these events, users might make decisions based on incomplete or outdated information, leading to possible financial misstatements. The importance of transparency and accuracy in financial reporting underscores why an auditor must be vigilant about subsequent events, ensuring the integrity of the financial statements provided to stakeholders. This awareness ultimately serves to enhance the reliability of the financial reporting process and uphold the auditor’s responsibility in safeguarding public interest.