Subsequent events - Auditor responsibilities up to report da...

Learning Outcomes

After studying this article, you will be able to explain the concept of subsequent events, identify auditor responsibilities in the period up to the date of the auditor’s report, distinguish between adjusting and non-adjusting events, and describe the audit procedures required to identify subsequent events. You will also be able to discuss the importance of written representations regarding subsequent events.

ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand the implications of subsequent events for the financial statements and auditor’s report. Focus your revision on:

• The definition and categories of subsequent events
• Auditor responsibilities for events occurring between the reporting date and the auditor’s report date
• Audit procedures for identifying subsequent events
• The distinction between adjusting and non-adjusting events after the reporting period
• The need for written representations in respect of subsequent events

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. Which period does the auditor have an active responsibility to consider subsequent events?
   1. Only up to the reporting date
   2. From the reporting date to the auditor’s report date
   3. After the financial statements are issued
   4. Only in the following financial year

2. State the difference between an adjusting event and a non-adjusting event after the reporting period.

3. List two audit procedures the auditor should perform to identify subsequent events up to the date of the auditor’s report.

4. True or False: The auditor is only required to consider events of which management notifies them regarding subsequent events.

Introduction

The financial statements present a company’s position at a specific date, but important events can occur after this date that may affect users’ understanding. Auditors must review and consider such events up to the date they sign the auditor’s report. Recognising and responding to subsequent events is a key part of audit completion, ensuring the financial statements reflect material facts before they are issued.

Definition and Categories of Subsequent Events

Subsequent events are facts or conditions that arise after the end of the reporting period but before the auditor’s report is signed. Auditors must be alert for such events, as they may require adjustments or disclosures in the financial statements.

Key Term: subsequent events
Events, both favourable and unfavourable, that occur between the reporting date and the date the auditor’s report is signed and that may require the financial statements to be amended or disclosed.

There are two main types:

1. Adjusting events: These provide additional evidence about conditions existing at the reporting date and usually require changes to the figures in the financial statements.
2. Non-adjusting events: These relate to conditions arising after the reporting date. While figures may not change, material non-adjusting events must be disclosed for users’ awareness.

Key Term: adjusting event after the reporting period
An event after the reporting period that provides evidence of conditions that existed at the reporting date, and thus requires adjustment in the financial statements.

Key Term: non-adjusting event after the reporting period
An event after the reporting period that relates to conditions arising after the reporting date. If material, such events require note disclosure in the financial statements but do not lead to adjustment of figures.

Auditor's Responsibilities Up to the Report Date

The auditor’s responsibility for subsequent events covers the period from the reporting date up to the date the auditor’s report is signed. During this interval, the auditor is required to obtain sufficient appropriate evidence about whether all material subsequent events that require adjustment or disclosure have been identified and properly reflected in the financial statements.

Key responsibilities include:

• Performing procedures to identify events that may require adjustment or disclosure
• Considering the impact of such events on the financial statements and the auditor’s report
• Requesting written representations that all relevant subsequent events have been considered

The auditor does not have a duty to monitor subsequent events after the date the auditor’s report is signed, except if the auditor becomes aware of facts that, had they been known, might have caused the auditor to amend the report.

Required Audit Procedures for Subsequent Events

To identify subsequent events, auditors perform targeted procedures up to the date of the auditor's report. These typically include:

• Enquiry of management and those charged with governance about procedures in place to identify subsequent events
• Reading minutes of meetings held after the reporting date
• Reviewing the latest available interim management accounts, budgets, forecasts, and other relevant financial information
• Enquiring concerning any significant transactions or events occurring after the reporting date
• Examining the accounting records for unusual entries or trends post year-end

If the auditor identifies events that may be material, they must assess whether the event is adjusting or non-adjusting, and evaluate whether appropriate adjustment or disclosure is made.

Worked Example 1.1

A company’s reporting date is 31 December 20X1. On 14 January 20X2, a major trade receivable who owed £80,000 at the year-end is declared bankrupt. The annual financial statements were not yet signed. Is this an adjusting or non-adjusting event, and what action should the auditor expect?

Answer:
This is an adjusting event. The bankruptcy provides evidence that the receivable was impaired at 31 December 20X1. The financial statements should be adjusted to write off or provide for the irrecoverable amount.

Worked Example 1.2

Shortly after the reporting date, a fire destroys a factory. The financial statements have not yet been issued. Should the accounts be adjusted, or is disclosure sufficient?

Answer:
If the fire occurred after the reporting date and was not linked to a prior condition (e.g., not due to a year-end defect), it is a non-adjusting event. No adjustment is needed, but if material, details must be disclosed in the notes.

Written Representations Related to Subsequent Events

Auditors should obtain written confirmation from management stating that all events up to the report date which require adjustment or disclosure have been identified and properly treated. This representation supports the auditor where limited external evidence is available.

Key Term: written representation
A written statement by management confirming certain matters or supporting other audit evidence, including the completeness of subsequent events identification.

Impact on the Auditor’s Report

If a material subsequent event is not adjusted or disclosed as required, and management refuses to make the necessary changes, the auditor must consider qualification or modification of the audit opinion.

Exam Warning

A common error is to focus only on events notified by management. The auditor has an active duty to perform their own procedures to identify subsequent events up to the report date.

Summary

Auditors are responsible for considering subsequent events between the reporting date and the date of the auditor’s report. Proper distinction between adjusting and non-adjusting events is essential. Appropriate procedures must be carried out and documented to provide audit evidence of the identification, evaluation, and treatment of such events in the financial statements.

Key Point Checklist

This article has covered the following key knowledge points:

• Define subsequent events and explain their categories (adjusting and non-adjusting)
• State the auditor’s responsibilities for subsequent events up to the date of the auditor’s report
• List the audit procedures required to identify subsequent events
• Explain the need for written representations covering subsequent events
• Describe the reporting implications if subsequent events are not properly adjusted or disclosed

Key Terms and Concepts

• subsequent events
• adjusting event after the reporting period
• non-adjusting event after the reporting period
• written representation