ISA 560 – Subsequent Events

4 Auditor’s responsibilities

ISA 560 discusses auditor’s responsibilities for events that can occur under one of the following three circumstances:

• Events that occurred between the financial statements date and auditor’s report date
• Events that become known after auditor’s report is issued but before financial statements are issued
• Events that become known after financial statements are issued

It is the responsibility of the management to identify all the subsequent events occurring during this period. And on request of auditor, management or those charged with governance shall provide a written representation that all the subsequent events requiring adjustment/disclosure have been adjusted/disclosed.

Auditor applies audit procedures to obtain evidence that all the events that occurred during this period and required adjustments or disclosure has been identified.

Nature, timing and extent of such audit procedures depends on auditor’s risk assessment which is done by:

1. Obtaining understanding of the procedures applied by management for identification of subsequent events.
2. Inquire management or those charged with governance about the occurrence of subsequent events that may affect financial statements. Inquiries include asking about:
   1. New contracts or commitments made
   2. Sale, purchase, destruction of asset
   3. Events that may affect provisions, contingencies, policies, estimates etc.
3. Reading minutes of meeting held after financial statements’ date or inquiring about matters discussed in the meetings for which minutes are not yet available
4. Reading latest interim financial statements issued subsequent to financial statement date

Procedures applied towards subsequent events are information dependant. If relevant information is not available then auditor might consider additional procedures. For example:

• Read latest information for management purposes e.g. budgets, forecasts related to the period after financial statement date
• Inquire entity’s legal advisor about the status of litigations and claims
• Determine if written representation is required for specific subsequent events to corroborate other evidence.

If auditor identifies events that require adjustments or disclosure then he shall verify whether they are appropriately reflected in the financial statements.

Auditor is not liable to perform audit procedures even after issuing auditor’s report.

However, after auditor’s report is issued but before issuing financial statements, auditor comes to know a fact of such nature which if it was known at the date auditor’s report is issued then auditor might have issued a different report then auditor shall:

• Discuss the matter with management and where appropriate to those charged with governance
• Determine whether financial statements should be updated. If yes then inquire management has planned to deal with it.

In such case the following situations can arise:

• Management agrees to amend the financial statement
• Management disagrees to amend the financial statement

In this case auditor shall:

• Conduct audit procedures on the amendments
• In the absence of any special circumstances (discussed below) auditor shall:
  • Extend the audit procedures for obtaining audit evidence towards subsequent events up to the date of new audit report.
  • Provide an amended audit report that shall not be dated before the date amended financial statements are approved.

Generally when management disagrees to amend the financial statement where auditor consider such amendments necessary than auditor issues a modified report where such modification can either result in a qualified or adverse report.

However, management may disagree due to the following two reasons:

• Case 1 – Management is not prohibited to restrict the amendment or approval to such amendment under law, regulation or financial reporting framework.
• Case 2 – Management is not required to issue amended by financial statements

Case 1

If management is not prohibited to restrict the amendment or approval of the same then auditor is permitted to restrict his additional procedures that he is to carry out under normal circumstances for additional period up to the date of new auditor’s report. In such case auditor can opt for any of the following options:

• Amendment to the auditor’s report will be made to the extent of adding additional date. Additional date indicates that only additional procedures on amendments are restricted.
• Issue a new or amended auditor’s report including an emphasis of matter paragraph or other matters paragraph with a statement that audit procedures on subsequent are restricted only to the amendments of financial statements

Case 2

In cases where management is not required to issue amended financial statements then auditor is also not needed to issue new or amended auditor’s report. However, if management disagrees on amendments which according to auditor are necessary then:

• Where auditor’s report has not yet been issued, auditor shall issue a new auditor’s report with modified opinion
• Where the auditor’s report has been issued, then auditor shall notify management not to issue financial statements without amendments.
  But if financial statements are still issued without amendments then auditor shall take necessary actions to prevent reliance on old auditor’s report.

Auditor is under no obligation to apply audit procedures even after financial statements are issued. However, after financial statements are issued, auditor comes to know a fact of such nature which if it was known at the date auditor’s report is issued then auditor might have issued a different report then auditor shall:

• Discuss the matter with management and where appropriate to those charged with governance
• Determine whether financial statements should be updated. If yes then inquire management has planned to deal with it.

If management amends the financial statement then auditor shall:

• Conduct audit procedures on amendments
• Review the steps taken by management that anyone who received old financial statement is notified
• Unless management is not prohibited to restrict the amendment or approval to such amendment auditor shall:
  • Extend the audit procedures up to the date of new auditor’s report which shall not be dated earlier then that date amended financial statements are approved.
  • Issue a new auditor’s report on amended financial statements

In case where management does not take necessary steps to notify everyone in receipt of previously issued financial statement and does not implement amendments which in the opinion of auditor are necessary than auditor shall notify management or those charged with governance that he will seek to prevent future reliance auditor’s report.

Even after notification no appropriate action is taken by management or those charged with governance then auditor shall take appropriate steps to prevent reliance on auditor’s report.

In case management is not prohibited to restrict the amendment or the approval of same then auditor can:

• Either issue an amended auditor’s report with additional date
• Or issue a new auditor’s report with emphasis of matter or other matter paragraph stating that audit procedures on subsequent events are restricted to amendments only.

An emphasis of matter or other matter paragraph shall be included in the new or amended auditor’s report that explains the reasons for amending previously issued financial statements and the auditor’s report.