Estimates, events, and going concern
Type I or Type II
Existed at year-end means adjust, arose after year-end means disclose.
How the exam words it
- -The stem describes an event between year-end and the report date.
- -It asks whether to adjust the statements or only disclose.
- -The underlying condition either existed at the balance sheet date or arose afterward.
The playbook
- 1Type I: the condition existed at year-end, such as a lawsuit settled or a customer already failing, so adjust the statements.
- 2Type II: the condition arose after year-end, such as a fire or a new event, so disclose only.
- 3Ask when the underlying condition came into existence, not when the cash moved or the news broke.
The trap
Adjusting for a Type II event or only disclosing a Type I. The test is whether the condition existed at the balance sheet date.
How the exam varies it
The same pattern, re-skinned along these axes:
Condition existed at year-end versus arose afterAdjust versus disclose onlyThe kind of event: litigation, casualty, collection, or settlement
Drill this pattern
8 questions of Type I or Type II from across the AUD topics. Clear it by getting 5 right with a streak of 3.