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

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Which procedure would best help an auditor obtain evidence concerning subsequent events?

  1. Confirming new bank accounts established after year-end.

  2. Recomputing arithmetic accuracy in transactions post year-end.

  3. Inquiring the entity's legal counsel about litigation post year-end.

  4. Investigating changes in stockholders' equity occurring after year-end.

The correct answer is: Inquiring the entity's legal counsel about litigation post year-end.

The procedure of inquiring the entity's legal counsel about litigation post year-end is the most effective method for obtaining evidence concerning subsequent events. This approach provides insight into any legal issues or litigation that may have arisen after the reporting period, which can significantly impact the financial statements and the entity's financial condition. Legal counsel often possesses information that is not readily available to the auditor, including the nature of claims, the likelihood of any unfavorable outcomes, and any potential financial implications for the entity. This inquiry helps ensure that any events that could affect the financial statements have been appropriately addressed, facilitating a more accurate assessment of the entity's financial position as of the reporting date. While the other procedures may provide useful information, they do not directly assess the impact of subsequent events as effectively as consulting legal counsel does. For example, confirming new bank accounts established after year-end may provide insight into the entity's cash management or liquidity but does not directly indicate any events that might suggest material adjustments to the financial statements. Recomputing arithmetic accuracy in transactions post year-end focuses on correctness in financial reporting but does not capture events affecting older balances or overall financial health. Investigating changes in stockholders' equity occurring after year-end can provide some context but is less comprehensive compared to the insights

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