Scope and objectives
The Auditing standards that deal with the auditor’s responsibilities related to subsequent events in an audit of financial statements. Subsequent events are events that occur between the date of the financial statements and the date of the auditor’s report that may require adjustments or disclosures in the financial statements.
The SA 560 explains that financial statements may be affected by events that occur after the date of the financial statements. There are two types of subsequent events: those that provide evidence of conditions that existed at the date of the financial statements, and those that provide evidence of conditions that arose after the date of the financial statements. The SA 560 requires the auditor to obtain sufficient appropriate audit evidence about whether subsequent events that require adjustment or disclosure in the financial statements are appropriately reflected in those financial statements.
The SA 560 also requires the auditor to respond appropriately to facts that become known to the auditor after the date of the auditor’s report, which, if known at the time, may have caused the auditor to amend the auditor’s report.
The SA 560 defines several terms used in the standard, including the date of the financial statements, the date of approval of the financial statements, the date of the auditor’s report, and the date the financial statements are issued. The date of the financial statements is the date at the end of the latest period covered by the financial statements. The date of approval of the financial statements is the date on which all the statements that comprise the financial statements, including the related notes, have been prepared and those with the recognized authority have asserted that they have taken responsibility for those financial statements.
The auditor’s report cannot be dated earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statements. The date of the auditor’s report cannot be earlier than the date of approval of the financial statements. The date the financial statements are issued depends on the regulatory environment of the entity. In some circumstances, the date the financial statements are issued may be the date that they are filed with a regulatory authority.
Overall, this SA 560 sets out the responsibilities of auditors in relation to subsequent events that may affect financial statements, and the procedures they should follow to ensure that such events are appropriately reflected in the financial statements.
Events Occurring Between the Date of the Financial Statements and the Date of the Auditor’s Report
The auditor’s responsibility to perform procedures to obtain sufficient and appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment or disclosure in the financial statements have been identified. These events are referred to as subsequent events.
The auditor is required to perform audit procedures to identify subsequent events that may require adjustment or disclosure in the financial statements. These procedures may involve reviewing or testing accounting records or transactions occurring between the date of the financial statements and the date of the auditor’s report. The nature and extent of the audit procedures will depend on the auditor’s risk assessment.
The auditor is not expected to perform additional audit procedures on matters to which previously applied audit procedures have provided satisfactory conclusions. The procedures must cover the period from the date of the financial statements to the date of the auditor’s report, or as near as practicable thereto.
If the accounting records are not up-to-date, the auditor may need to inspect available books and records, including bank statements, to obtain relevant audit evidence.
In order to identify subsequent events, the auditor may need to obtain an understanding of any procedures management has established to ensure that subsequent events are identified. The auditor may also inquire of management and, where appropriate, those charged with governance, as to whether any subsequent events have occurred which might affect the financial statements. The auditor may inquire as to the current status of items that were accounted for on the basis of preliminary or inconclusive data.
The auditor may read minutes of the meetings of the entity’s owners, management and those charged with governance that have been held after the date of the financial statements and inquire about matters discussed at any such meetings for which minutes are not yet available. The auditor may also read the entity’s latest subsequent interim financial statements, if any.
When the auditor identifies subsequent events that require adjustment of, or disclosure in, the financial statements, the auditor must determine whether each such event is appropriately reflected in those financial statements.
Finally, the auditor shall request management and, where appropriate, those charged with governance, to provide a written representation that all events occurring subsequent to the date of the financial statements and for which the applicable financial reporting framework requires 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 obligations and responsibilities of an auditor when they become aware of facts after the date of their report but before the financial statements are issued.
The first part states that the auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report. However, if a fact becomes known to the auditor after their report but before the financial statements are issued, and that fact may have caused the auditor to amend their report had they known about it earlier, then the auditor has certain obligations.
The auditor should discuss the matter with management and those charged with governance, determine whether the financial statements need to be amended, and inquire how management intends to address the matter in the financial statements. If management decides to amend the financial statements, the auditor must carry out the necessary audit procedures and provide a new auditor’s report on the amended financial statements.
However, if management does not amend the financial statements in circumstances where the auditor believes they need to be amended, then the auditor has several options. They may modify their opinion as required by the applicable auditing standards and provide the auditor’s report, or if the auditor’s report has already been provided to the entity, they should notify management and those charged with governance not to issue the financial statements to third parties before the necessary amendments have been made.
If the financial statements are still issued without the necessary amendments, the auditor should take appropriate action to prevent reliance on their report, and they may need to fulfil additional legal obligations. In some cases, such as for certain government entities, the auditor may need to report separately on the implications of the subsequent event for the financial statements and the auditor’s report.
The importance of an auditor on-going responsibility is to ensure the accuracy and completeness of financial statements, even after their initial report has been issued.
Facts Which Become Known to the Auditor After the Financial Statements have been Issued
The auditor’s obligations when a fact becomes known to them after the financial statements have been issued, which, if known at the time of the auditor’s report, could have caused the auditor to amend their report
The auditor has no obligation to perform any audit procedures regarding the financial statements after they have been issued. However, if a fact comes to their attention after the issuance of the financial statements that could have affected their report, the auditor must discuss the matter with management and, where appropriate, those charged with governance.
If the auditor determines that the financial statements need to be amended, they should inquire about how management intends to address the matter in the financial statements. If management amends the financial statements, the auditor must carry out the audit procedures necessary on the amendment and review the steps taken by management to inform anyone who received the previously issued financial statements about the situation. The auditor should also provide a new auditor’s report on the amended financial statements, including an Emphasis of Matter paragraph or Other Matter(s) paragraph referring to a note to the financial statements that more extensively discusses the reason for the amendment of the previously issued financial statements.
If management does not take the necessary steps to ensure that anyone who received the previously issued financial statements is informed of the situation and does not amend the financial statements when the auditor believes they need to be amended, the auditor must notify management and, unless all those charged with governance are involved in managing the entity, those charged with governance that the auditor will seek to prevent future reliance on the auditor’s report. If management or those charged with governance do not take necessary steps despite such notification, the auditor shall take appropriate action to seek to prevent reliance on the auditor’s report. In such cases, the auditor may consider it appropriate to seek legal advice.
Subsequent Events
The International Standard on Auditing (ISA) 560, which is a standard that sets out the requirements and guidance for auditors when dealing with subsequent events. Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are issued or available to be issued. These events may affect the financial statements and may require the financial statements to be adjusted or disclosed.
That the original ISA 560 provided guidance specifically for public sector entities. It stated that in the case of public sector entities, the date the financial statements are issued may be the date the audited financial statements and the auditor’s report are presented to the legislature or otherwise made public. The auditor may read the official records of relevant proceedings of the legislature and inquire about matters addressed in proceedings for which official records are not yet available.
Additionally, the original ISA 560 provided guidance on what auditors should do in situations where management does not amend the financial statements in response to subsequent events. In such situations, the auditor may report separately to the legislature or other relevant body on the implications of the subsequent event for the financial statements and the auditor’s report.
However, in some circumstances, public sector entities may be prevented from issuing amended financial statements by law or regulation. In such cases, the appropriate course of action for the auditor may be to report to the appropriate statutory body.
That specific reference to public sector entities has been deleted from the ISA 560. This is because the standards issued by the Auditing and Assurance Standards Board apply equally to all entities, irrespective of their form, nature, and size. However, the spirit of the standard remains, as it is possible for certain entities to be prevented from issuing amended financial statements pursuant to a requirement under the statute or regulation under which they operate.
It discussing a change in the ISA 560 with regards to subsequent events for public sector entities. While the specific reference to public sector entities has been deleted, the spirit of the standard remains and applies equally to all entities. The standard provides guidance on how auditors should deal with subsequent events and what actions they should take in situations where management does not amend the financial statements
Quiz: Subsequent Events
1. Which auditing standard deals with the auditor’s responsibilities related to subsequent events in an audit of financial statements?
a) SA 560
b) SA 570
c) SA 580
d) SA 590
Answer: a)
2. What are the two types of subsequent events defined by SA 560?
a) Primary and secondary events
b) Internal and external events
c) Pre-existing and post-existing events
d) Conditions and transactions events
Answer: c)
3. The date of the financial statements is the date at the end of:
a) The fiscal year
b) The audit engagement
c) The latest period covered by the financial statements
d) The date of approval by management
Answer: c)
4. Can the auditor’s report be dated earlier than the date of approval of the financial statements?
a) Yes
b) No
Answer: b)
5. Which of the following actions should the auditor take if they become aware of facts after the date of their report but before the financial statements are issued?
a) Amend the auditor’s report immediately
b) Discuss the matter with management and inquire about their plans to address the situation
c) Request management to issue a public statement regarding the facts
d) Seek legal advice before taking any action
Answer: b)
6. If management decides to amend the financial statements, what should the auditor do?
a) Provide a new auditor’s report on the amended financial statements
b) Notify regulatory authorities about the amendment
c) Inform the shareholders about the amendment
d) Request management to prepare a revised audit engagement letter
Answer: a)
7. What steps should the auditor follow if management does not amend the financial statements despite the auditor’s belief that they need to be amended?
a) Modify the audit opinion to reflect the required amendments
b) Notify management and those charged with governance to prevent future reliance on the auditor’s report
c) Publish a public statement criticizing management’s decision
d) Take legal action against management for non-compliance
Answer: b)
8. Subsequent events are events that occur between:
a) The audit engagement and the financial statement date
b) The date of approval of the financial statements and the auditor’s report
c) The date of the auditor’s report and the date the financial statements are issued
d) The date of the financial statements and the date of the auditor’s report
Answer: c)
9. What is the purpose of obtaining sufficient appropriate audit evidence regarding subsequent events?
a) To determine the accuracy of the financial statements
b) To identify potential fraud or misstatements
c) To ensure subsequent events are appropriately reflected in the financial statements
d) To meet regulatory requirements for audit evidence
Answer: c)
10. Which of the following changes were made to the International Standard on Auditing (ISA) 560 regarding subsequent events for public sector entities?
a) The standard no longer applies to public sector entities
b) Public sector entities are required to issue amended financial statements by law
c) The specific reference to public sector entities has been deleted, but the spirit of the standard remains
d) Public sector entities are exempt from subsequent event reporting requirements
Answer: c)
Additional questions:
11. What is the purpose of reviewing or testing accounting records or transactions occurring between the date of the financial statements and the date of the auditor’s report?
a) To identify subsequent events that require adjustment or disclosure in the financial statements
b) To assess the competence of the accounting staff
c) To verify the accuracy of previous audit procedures
d) To identify potential fraud within the organization
Answer: a)
12. When the auditor identifies subsequent events that require adjustment or disclosure, what should the auditor do?
a) Inform management and request their approval for the adjustments or disclosures
b) Carry out the necessary audit procedures on the adjustments or disclosures
c) Provide a separate report on the subsequent events
d) Recommend legal action against the individuals responsible for the events
Answer: b)
13. Which of the following is a responsibility of the auditor regarding subsequent events?
a) To predict future events that may impact the financial statements
b) To prepare the financial statements based on the subsequent events
c) To communicate subsequent events to the shareholders
d) To obtain sufficient appropriate audit evidence about the subsequent events
Answer: d)
14. In order to identify subsequent events, the auditor may read minutes of meetings held after the date of the financial statements. What is the purpose of this activity?
a) To ensure compliance with corporate governance regulations
b) To identify any illegal activities conducted by management
c) To inquire about matters discussed at the meetings that may affect the financial statements
d) To evaluate the performance of the auditor during the meetings
Answer: c)
15. What action should the auditor take if management decides not to amend the financial statements despite the auditor’s belief that they need to be amended?
a) File a lawsuit against management for non-compliance
b) Provide a revised audit report reflecting the necessary amendments
c) Notify regulatory authorities about management’s decision
d) Seek legal advice and guidance on the appropriate course of action
Answer: d)
16. Which of the following is true regarding subsequent events?
a) Subsequent events only include external events that affect the financial statements.
b) All subsequent events require adjustment or disclosure in the financial statements.
c) Subsequent events are events that occur after the date of the auditor’s report.
d) The auditor is responsible for predicting subsequent events accurately.
Answer: c)
17. If a fact comes to the auditor’s attention after the financial statements have been issued, what should the auditor do?
a) Amend the financial statements immediately
b) Inform regulatory authorities about the situation
c) Discuss the matter with management and those charged with governance
d) Prepare a separate report on the subsequent fact
Answer: c)
18. Which term refers to the date on which all the statements comprising the financial statements, including the related notes, have been prepared and those with the recognized authority have asserted responsibility for them?
a) Date of approval of the financial statements
b) Date of the auditor’s report
c) Date of the financial statements
d) Date the financial statements are issued
Answer: a)
19. The auditor’s responsibility to obtain sufficient appropriate audit evidence for subsequent events extends up to which date?
a) The date of the financial statements
b) The date of the auditor’s report
c) The date of approval of the financial statements
d) The date the financial statements are issued
Answer: b)
20. Which of the following actions should the auditor take if management amends the financial statements in response to subsequent events?
a) Provide a new auditor’s report on the amended financial statements
b) File a lawsuit against management for the initial non-disclosure
c) Request additional fees from management for the amendments
d) Notify shareholders about the amendments through a public statement
Answer: a)
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