Question 4 - Notes

Subsequent Events

Overview

This note covers subsequent events in auditing, focusing on their definition, the auditor's responsibilities, and the differentiation between adjusting and non-adjusting events.

Definition of Subsequent Events

According to ISA (NZ) 560.5, subsequent events are events occurring between the date of the financial statements and the date of the auditor’s report, as well as facts that become known to the auditor after the date of the auditor’s report.

Auditor's Responsibility

The auditor’s responsibility for identifying subsequent events ends when the auditor’s report has been signed. However, knowledge of events with a material impact after the report is signed should prompt discussion with management.

• Before Issuance of Financial Report: If the financial report hasn't been issued, the auditor and management should consider amending it.
• After Issuance of Financial Report: If the financial report has been issued, consider withdrawing and revising it. A revised report requires a new date and an emphasis of matter paragraph explaining the revision (ISA [NZ] 560.16).
  Management must inform users of the situation. If management doesn't take necessary steps, the auditor will notify management and those charged with governance and may take action to prevent reliance on the auditor’s report (ISA [NZ] 560.17).

Adjusting vs. Non-Adjusting Events

ISA (NZ) 560.2 differentiates between two types of subsequent events:

Adjusting Events

Adjusting events provide evidence of conditions that existed at the date of the financial report.

Examples:

• Settlement of a court case after the reporting period confirming a present obligation at the end of the reporting period.
• Receipt of information indicating an asset was impaired at the end of the reporting period, such as:
  • Bankruptcy of a customer after the reporting period, confirming they were credit-impaired at the end of the reporting period.
  • Sale of inventories after the reporting period, providing evidence about their net realisable value at the end of the reporting period.
• Discovery of fraud or errors showing incorrect financial statements.

Non-Adjusting Events

Non-adjusting events provide evidence of conditions arising after the date of the financial report.

Examples:

• Decline in the fair value of investments between the end of the reporting period and the date when the financial statements are authorised for issue.
• Destruction of a major production plant by fire after the reporting period.
• Abnormally large changes in asset prices or foreign exchange rates after the reporting period.

Disclosure Note: While the destruction of a major production plant by fire and abnormally large changes are non-adjusting events, their materiality usually results in disclosure of the event's nature and an estimate of its financial effect, or a statement that such an estimate cannot be made (NZ IAS 10.21).

Auditor's Procedures for Subsequent Events Review

Auditors perform specific procedures to detect subsequent events that may affect the financial report. These include:

• Enquiring about subsequent events to management.
• Reviewing accounting records, including budgets and forecasts.
• Communicating with the entity’s solicitor about subsequent events of which they are aware.
• Obtaining a letter of representation from management confirming that all subsequent events have been considered.
• Examining minutes of meetings held subsequent to the date of the statement of financial position.
• Performing analytical procedures to assess whether the financial statements align with the auditor’s overall understanding of the entity and to examine the entity’s ability to remain a going concern.