I already wrote about subsequent-events analysis during audits in my post Ignorantly Insolent Bosses. Payments received from customers in January and February prove the validity of sales invoices outstanding as of 12/31. On the other hand, if you made a payment to a vendor on 01/07/13 for an invoice dated 12/08/12, which wasn't included into your accounts payable schedule - that's an error: both the liability and the related expense should've been recognized in 2012. There are subsequent events tests for all accounting cycles - really useful, powerful, mandatory for any audit. If done thoroughly, they can uncover all those overstated revenues and hidden costs that result in public companies' going out of business and their executives going to jail.
"If" is an operative word. Here is an actual story that happened during the week of 02/25/2013. An audit field work was under way at ABC International, Inc. A mid-size NYC CPA firm has been servicing this company for a few years, covering all corporate taxation needs as well as providing their independent opinion on the annual financial statements, which the company submits to their lenders, insurance underwriters, major suppliers, and other users. ABC has a very strong CFO and the auditors never find anything out of order in the company's books, records, and statements.
That's great, except that the audit quality should not be affected by the previous experience. Yet, this time around the CFO noticed that the audit manager seemed a bit lax - the test selections were smaller, there were less questions and supporting documentation requests. She was pleased: it shortened the exam time and also signified the auditors' confidence in her own work. Of course, there is confidence and there is negligence.
As soon as the audit started, the CFO asked her staff accountant to generate January and February schedules of sales, receipts, vouchers, and payments (the subsequent events), which were provided to the auditors with a copy to her. When the CFO reviewed the information to make sure that everything was in order, she has realized that the payment journal was drawn for the beginning of 2012 instead of 2013 (people do have a tendency of clicking keys without thinking).
The CFO immediately generated correct schedules and was about to email them to the audit manager, when she stopped herself. Why the hell didn't he notice it? Did he even looked at it? She decided not to do anything for the moment and see what would happen.
A couple of days later, the field work was completed. Two weeks later the CPA firm prepared the draft of their independent opinion and the footnotes, which were sent to the CFO for review (she told me she's received it today). Nobody ever mentioned the year old supporting data. Nobody caught it: not the auditing staff, or the manager, or the firm's quality control department. What quality? Please, don't make me laugh!