REVIEW OF SUBSEQUENT EVENTS During the last part of January 2010, Carole Mitchell, senior auditor for the

CPA firm of Abernethy and Chapman, was in the process of finishing the substantive testing for the Lakeside Company audit engagement. She hoped to complete fieldwork by February 9 in order to have the final audit report delivered to the client by the February 22 deadline. The examination had moved into its final phases. Mitchell and the other members of the audit team were now accumulating evidence relating to the weeks subsequent to the end of the clients fiscal year. They had already performed the following testing procedures in the period since December 31, 2009 : 1. Confirmations were returned to the auditors by each of the banks that dealt with Lakeside during the year (see Exhibit 9-2). These documents disclosed year-end balances and the terms for all accounts and loans. The confirmations also requested the banks to furnish information on certain types of contingent liabilities such as discounted notes receivable. Upon receipt of each confirmation, Paul Rubens reconciled the reported balances to Lakesides December 31, 2009, records to ensure their agreement. In addition, Carole Mitchell verified that the terms of each loan were consistent with the accounting records of the company. She also made certain that all loans were being appropriately disclosed within the financial statements. 2. Cut off statements were received from each bank for all of Lakesides checking accounts. These statements covered the period from January 1, 2010, through January 10, 2010. Rubens verified that all canceled checks and deposits returned by the bank agreed with the year-end reconciliations prepared by Lakeside employees. 3. Another Abernethy and Chapman auditor, Art Heymn, established the validity of the year-end inventory and sales cut off. Using the bills of lading prepared between December 28, 2009, and January 2, 2010 (see Exhibit 8-3). Heyman located the corresponding sales invoice to determine the appropriate date for recognizing each sale. This information was then compared with the actual recording of the transaction in Lakesides sales journal. Heyman also traced the receiving reports for the same period to the purchase invoices to ascertain the date on which title changed hands for each incoming shipment. These dates

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were then reconciled to the inventory purchases journal to ensure that all purchases were recorded in the correct time period. Wallace Andrews, the audit manager for the Lakeside engagement, read the minutes of a board of directors meeting held on January 17, 2010. The directors had met primarily to discuss two matters : the expansion of the warehouse facility and damage to Store Two caused by an electrical fire on January 5, 2010. At this meeting, Rogers stated that the construction was progressing as expected and should be completed during March at a cost of approximately $220.000. He also reported that an electrical malfunction in Store Two had started a small fire on the evening of January 5. Actual fire damage was limited but water and heavy smoke had caused over $40.000 in inventory losses. Rogers indicated that the companys insurance would cover between 60% and 80% of this amount. As a final action, the board of directors declared a cash dividend of $8.000 to be paid to shareholders on January 31, 2010. Carole Mitchell began to review a portion of the invoices received by Lakeside during the month of January 2010. She also intended to analyze the companys cash disbursements for this same period. Both procedures were designed to detect any liabilities that were unrecorded by the client as of December 31, 2009 (see Cases 10 and 11). Mitchell performed an extensive search for contingent losses. She talked with Lakesides engagement abouth the possible existence of such losses, read correspondence as well as invoices received from the law firm of Benzinger and Dawkins (the outside legal counsel employed by Lakeside), and reviewed all bank confirmations along with the companys current contracts. None of these procedures indicted the presence of any type of contingent loss as of December 31, 2009. A letter was then mailed to Benzinger and Dawkins stating that the management of Lakeside did not believe any material contingencies existed. On February 2, 2010, Abernethy and Chapman received a response stating that the law firm did not offer with the evaluation of contingencies made by the Lakeside management. A related parties inquiry letter was sent to the Rogers Development Company owned by Mr. and Mrs. Rogers. This letter asked about the extent and nature of dealings with Lakeside, as well as all amounts due to or from that company. Rogerss reply described the lease agreement on Store Seven, but nothing more.

8. Mitchell performed a final analytical review. This review is in addition to the one done during the preliminary stages of the audit (see Case 3). The p