## **Learning Outcomes**

After reading this article, you will be able to identify, classify, and account for subsequent events affecting financial statements, distinguishing between adjusting and non-adjusting events. You will understand management’s responsibility for going concern assessment, auditor procedures regarding going concern and subsequent events, relevant disclosure requirements, and the implications for the auditor’s report if issues are found.

## **ACCA Audit and Assurance (AA) Syllabus**

For ACCA Audit and Assurance (AA), you are required to understand the impact of subsequent events and going concern on the completion and reporting phases of an audit. Focus your revision on these key syllabus objectives:

- Explain the purpose of reviewing subsequent events and the responsibilities of both auditor and management.
- Identify, distinguish, and account for adjusting and non-adjusting events.
- Explain management’s and auditor’s responsibilities regarding going concern evaluation.
- Identify indicators of going concern problems and describe related audit procedures.
- Discuss disclosure implications for subsequent events and going concern issues.
- Describe how findings affect the auditor’s report, including types of opinion and reporting paragraphs.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. State the difference between an adjusting and a non-adjusting subsequent event. Give one example of each.
2. What audit procedures should be performed to identify subsequent events up to the date of the auditor’s report?
3. Who is responsible for assessing whether an entity is a going concern? Name two typical indicators that it may not be.
4. What are the reporting implications if the financial statements fail to disclose a material uncertainty relating to going concern?

## **Introduction**

Subsequent events and going concern evaluations are critical during the final stages of an audit. Management must assess whether events after the reporting date affect the financial statements and if the entity can continue to operate for the foreseeable future. The auditor must review management’s assessment, perform specific procedures, and consider required disclosures. Where issues arise, these may directly affect the auditor’s opinion or require additional communication in the auditor’s report.

> **Key Term: subsequent event**
> An event occurring between the date of the financial statements and the date the auditor’s report is signed, including facts discovered after the auditor’s report.
>
> **Key Term: adjusting event**
> An event after the reporting date that provides evidence of conditions existing at the period end, requiring amendment to figures in the financial statements.
>
> **Key Term: non-adjusting event**
> An event after the reporting date relating to new conditions arising after the period end—generally requiring disclosure only if material.
>
> **Key Term: going concern**
> The assumption that an entity will continue in business for at least twelve months after the period end, with no intention or need to liquidate or cease trading.

## Subsequent Events: Classification and Procedures

Subsequent events can significantly affect users’ understanding of the financial statements. Two types must be distinguished:

- **Adjusting events:** These provide evidence about conditions existing at the year end (e.g., settlement of a court case that confirms a liability; bankruptcy of a customer indicating year-end receivable was doubtful).
- **Non-adjusting events:** These concern conditions that arose after the year end (e.g., major fire after the reporting date; announcement of a restructuring; issue of new shares).

Financial statements must be amended for adjusting events. Non-adjusting events require note disclosure if material, outlining the nature of the event and an estimate of its financial impact.

### Auditor and Management Responsibilities

Management is responsible for identifying subsequent events up to the date the financial statements are authorized. The auditor must perform procedures to seek evidence of such events from period end until the date of the auditor’s report, including:

- Enquiry of management about events after the reporting date
- Reviewing minutes of meetings with those charged with governance
- Inspecting latest available management accounts, budgets, or forecasts
- Examining correspondence with legal advisors
- Inspecting accounting records for unusual entries or trends after period end

Where significant subsequent events are identified, the auditor must ensure appropriate adjustments or disclosures are made.

### **Worked Example 1.1**

A company’s year end is 31 March. After year end but before the auditor’s report date, a major customer who owed a large receivable at 31 March is declared bankrupt.

**Question:** Is this an adjusting or non-adjusting event? What action is required in the financial statements?

> **Answer:** The customer’s bankruptcy provides evidence regarding the recoverability of the receivable at year end. This is an adjusting event, so the receivable must be written down to its recoverable amount as at 31 March.

## Going Concern: Assessment and Indicators

Management must evaluate, and the auditor must review, whether the entity has the resources to operate for the next twelve months. This includes forecasting cash flows, assessing existing debt, anticipated liabilities, and the loss of key customers or suppliers.

Common indicators of going concern issues include:

- Net liabilities or an overdraft near its limit
- Defaults on loan agreements
- Loss of significant customers
- Delays in creditor payments
- Operating losses or negative cash flow trends
- Legal claims or regulatory sanctions with material financial effect

### Management’s and Auditor’s Roles

Management must assess and disclose any material uncertainties affecting going concern. If management identifies material uncertainty, adequate and clear disclosure is required in the financial statements.

The auditor must:

- Evaluate management’s assessment, challenge assumptions, and request supporting evidence
- Design additional procedures if indicators of going concern problems are present
- Consider if adequate disclosures have been made
- Report appropriately if material uncertainty exists or if disclosure is inadequate

### **Worked Example 1.2**

Following a year end, an entity’s main supplier collapses and the company has recurring operating losses. The directors prepare cash flow forecasts showing a funding shortfall in six months.

**Question:** What must management do, and how does the auditor respond?

> **Answer:** Management must assess whether the company can obtain alternative financing or suppliers and, if there is any material uncertainty, disclose it in the financial statements. The auditor will test the assumptions in the cash flow forecast, seek evidence on going concern factors, and determine if sufficient disclosure is made. Where material uncertainty remains, the auditor includes a ‘Material Uncertainty Related to Going Concern’ paragraph in the auditor’s report.
> **Exam Warning**
> Confusing adjusting and non-adjusting events is a frequent exam error. Always check: Did the event provide evidence about conditions at year end (adjusting), or did it arise after the period (non-adjusting)?

## Disclosure Requirements and Reporting Implications

If management fails to adjust for or disclose material subsequent events, or if the going concern assessment/disclosure is inadequate, this may result in the auditor modifying their opinion.

- Lack of required adjustment for an adjusting event: qualified or adverse opinion
- Missing material disclosure for a non-adjusting event: qualified or adverse opinion
- Inadequate disclosure of material uncertainty relating to going concern: qualified or adverse opinion
- Entity not a going concern but financial statements prepared on going concern basis: adverse opinion

If material uncertainty relating to going concern is disclosed appropriately, the auditor adds a separate ‘Material Uncertainty Related to Going Concern’ section without modifying the opinion.

### **Worked Example 1.3**

A fire destroys a warehouse two months after year end, with uninsured losses of £2 million (10% of total assets). No assets were impaired at year end.

**Question:** Is a financial statement adjustment needed? What should be disclosed?

> **Answer:** The fire is a non-adjusting event (arose after year end). If material, the nature of the event and its likely financial effect must be disclosed in the notes. No adjustment to carrying amounts is required.

## **Summary**

Subsequent events require careful consideration in the completion phase of an audit. Adjusting events require amendment of figures; non-adjusting events often demand note disclosure if material. Management is responsible for assessing and disclosing going concern uncertainties. The auditor must carry out specific procedures and, where necessary, modify their opinion if proper adjustment or disclosure is missing.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define and distinguish adjusting vs non-adjusting subsequent events; provide examples.
- Outline auditor and management responsibilities for identifying subsequent events.
- Describe required audit procedures to detect subsequent events.
- List typical indicators an entity is not a going concern.
- Explain the required disclosures for going concern uncertainties.
- State management’s and auditor’s roles in going concern assessment.
- Summarize auditor reporting implications for inadequate adjustment or disclosure of subsequent events or going concern issues.

## **Key Terms and Concepts**

- subsequent event
- adjusting event
- non-adjusting event
- going concern

Subsequent events and going concern - Disclosures and management assessment