Audit of subsequent events

 

Subsequent events are events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.

Financial statements may be affected by certain events that occur after the date of the financial statements.

Many financial reporting frameworks ordinarily identify two types of such events (for example, IAS 10):

(a)Those that provide evidence of conditions that existed at the date of the financial statements; and (adjusting events). For example, the sale of inventories after the reporting period may give evidence about their net realizable value at the end of the reporting period.

(b) Those that provide evidence of conditions that arose after the date of the financial statements (non-adjusting events). For example, changes in tax rates or tax laws enacted or announced after the reporting period that have a significant effect on current and deferred tax assets and liabilities.

Auditors shall consider the effect of such events on the financial statements and on their audit opinion. The objectives of the auditor regarding subsequent events are:

·       To obtain sufficient appropriate audit evidence about are whether subsequent events are appropriately reflected in the financial statements in accordance with the applicable financial reporting framework.

·       To respond appropriately to facts that become known to the auditor after the date of the auditor’s report.

The auditor responsibilities concerning subsequent events depend on the period of occurring and discovering such events and facts relating to these events. Three groups of events (facts) are distinguished in this connection:

(a)   Events occurring between the date of the financial statements and the date of the auditor’s report.

(b)   Facts which become known to the auditor after the date of the auditor’s report but before the date the financial statements are Issued.

(c)   Facts discovered after the financial statements have been issued.

Consider each of three situations.

Events occurring between the date of the financial statements and the date of the auditor’s report.

The auditor should perform procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor's report that may require adjustment of, or disclosure in, the financial statements have been identified.

If the auditor identifies events that require adjustment of, or disclosure in, the financial statements, the auditor shall determine whether each such event is appropriately reflected in the financial statements in accordance with the applicable financial reporting framework.

Procedures to identify subsequent events which may require adjustment or disclosure include:

· Obtaining an understanding of any procedures management has established to ensure that subsequent events are identified.

· Inquiring of management about any subsequent events have occurred which might affect the financial statements.

· Read minutes of general board/committee meetings and enquire about unusual items.

· Review latest available interim financial statements and budgets, cash flow forecasts and other management reports.

· Obtain evidence concerning any litigation or claims from the company's lawyers (with client permission).

· Obtain written representation that all events occurring subsequent to the period end which need adjustment or disclosure have been adjusted or disclosed.

Facts which become known to the auditor after the date of the auditor’s report but before the date the financial statements are Issued.

The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report. The financial statements are the management's responsibility. They should therefore inform the auditors of any material subsequent events between the date of the auditor's report and the date the financial statements are issued.

However, if the auditor becomes aware of a fact that may have caused the auditor to amend the auditor's report before the audit report has been issued, the auditor shall:

(a) Discuss the matter with management and, where appropriate, those charged with governance.

(b) Determine whether the financial statements need amendment and, if so,

(c) Inquire how management intends to address the matter in the financial statements.

If amendment is required and management makes changes

If amendment is required to the financial statements and management makes the necessary changes, the auditor must carry out the following procedures:

· Undertake any necessary audit procedures on the changes made.

· Extend audit procedures for identifying subsequent events that may require adjustment of or disclosure in the financial statements to the date of the new auditor's report.

· Provide a new auditor's report on the amended financial statements.

If management does not amend the financial statements

If management does not amend the financial statements in circumstances where the auditor believes they need to be amended, then:

(a) If the auditor's report has not yet been provided to the entity, the auditor shall modify the opinion and then provide the auditor's report.

(b) If the auditor's report has already been provided to the entity, the auditor shall notify management and those charged with governance not to issue the financial statements before the amendments are made; but if the financial statements are issued anyway, the auditor shall take action to seek to prevent reliance on the auditor's report. The auditor’s course of action to prevent reliance on the auditor’s report on the financial statements depends upon the auditor’s legal rights and obligations. The auditor may consider it appropriate to seek legal advice.

 Facts discovered after the financial statements have been issued.

Date the financial statements are issued is the date that the auditor’s report and audited financial statements are made available to third parties.

Auditors have no obligations to perform procedures or make enquiries regarding the financial statements after they have been issued. However, if the auditor becomes aware of a fact that, had it been known to the auditor at the date of the auditor's report, may have caused the auditor to amend the auditor's report, the auditor shall:

· Discuss the matter with management and those charged with governance.

· Determine whether the financial statements need amendment.

· If amendment is required, enquire how management intends to address the matter in the financial statements.

If management amends the financial statements

If amendment is required to the financial statements and management makes the necessary changes, the auditor shall perform the following procedures:

· Undertake any necessary audit procedures on the changes made to the financial statements.

· Review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements is informed.

· Extend the audit procedures the date of the new auditor’s report.

· Provide a new auditor’s report on the amended financial statements which will include an explanatory paragraph (known as an emphasis of matter paragraph or other matter paragraph that refers to a note in the financial statements that discusses the reason for the amendment.

If management does not amend the financial statements

If management does not amend the financial statements in circumstances where the auditor considers they need to be amended, the auditor shall notify management and those charged with governance that the auditor will seek to prevent future reliance on the report. If management still does not act, the auditor shall take appropriate action to seek to prevent reliance on the auditor's report.