What are subsequent events according to International Accounting Standards and International Auditing Standards? Is the meaning of subsequent events in accounting and auditing is same or different? Please elaborate the what is the difference between subsequent events according to accounting standards and subsequent events according to auditing standards
First things first there is no such term as Subsequent events defined under International Accounting Standards, however, many use this term for such events which in accounting standards has been described as Events after the reporting period.
On the other hand the term subsequent event has been defined specifically in International Auditing Standards. Many students get confuse most of the time in the following two areas:
- Time period enclosed under subsequent events according to accounting and auditing standards
- The extent of responsibilities of accountants (responsible for preparing financial statements) and auditors in respect of subsequent events
Subsequent events, or precisely said, Events after the reporting period (as in accounting) has been defined in IAS 10 as:
Those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue.
Two types of events can be identified:
- those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and
- those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period).
Subsequent events (as in auditing) has been defined in ISA 560 as:
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.
Lets breakdown the two definitions to understand the key features of each and then we will try to relate both definitions to understand the difference.
Subsequent events according to accounting are the events that occur between the END OF REPORTING PERIOD i.e. the date of financial statements and the DATE financial statements are AUTHORISED FOR ISSUE. But hold on, story isn’t finished here, events can be either adjusting i.e. require accounting treatments or non-adjusting i.e. that do not require accounting treatments.
Subsequent events according to auditing are the events that occur between the date of financial statements i.e. the END OF REPORTING PERIOD and the DATE OF AUDITOR’S REPORT and also the facts that are discovered AFTER THE AUDITOR’S REPORT has been issued. But in auditing subsequent events are of just one type i.e. adjusting events only.
Comparing the two definitions and their analysis together we can understand the two confusion areas i.e. subsequent events enclosed how much time period and what are the responsibilities of accountants and auditors in case of subsequent events and the extent of such responsibilities.
As per accounting standards the subsequent event relates to the period between the end of the reporting period until the financial statements are approved. And that’s all!
As per auditing standards, subsequent events encompass the time period that relates to the period after auditor’s report that includes the period not only up to date financial statements are issued but also the period after financial statements are issued.
Thus we can say that time span of subsequent events from auditing perspective is larger then the span of subsequent events as per accounting standards.
As per accounting standards the accountants (those who are responsible for preparing financial statements) are responsible to identify the events that require adjustment in the financial statements and their responsibility extends to the date financial statements are approved.
However, as per auditing standards, auditors are responsible for only obtaining sufficient appropriate audit evidence that all the events that are adjusting events and have occurred between the date of financial statements and the date of auditor’s report have been identified.
Auditors are not responsible to perform audit procedures after the auditor’s report has been issued.
However, if the fact is discovered after the auditor’s report is issued then auditor will ask himself one question:
- Would I had issued a different auditor’s report if this fact was discovered at the date of auditor’s report?
- If the answer is NO then he is not required to do anything
- If the answer is YES then he will proceed according the provisions of relevant auditing standards.
However, as said auditor is not “actively” responsible after auditor’s report has been issued unless the conditions are satisfied.
From this we can understand that accountants’ responsibility usually spans over a larger scale of time whereas, auditor’s responsibility usually ends well before financial statements are issued.