Subsequent Events and Auditor Responsibilities

Subsequent Events

Overview

This note covers subsequent events in auditing, focusing on their definition, the auditor's responsibilities, and the distinction between adjusting and non-adjusting events. It refers to ISA (NZ) 560 and NZ IAS 10.

Definition of Subsequent Events

ISA (NZ) 560.5 defines subsequent events as:

• Events occurring between the date of the financial statements and the date of the auditor’s report.

• 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 is signed. However, if the auditor becomes aware of events that could materially impact the financial statements after the report is signed, they must discuss it with management.

Actions Based on Timing

• Financial Report Not Yet Issued: The auditor and management should consider amending the financial report.

• Financial Report Already Issued: They should consider withdrawing the report and issuing a revised one. The revised report must have a new date and include an emphasis of matter or other matter paragraph explaining the revision (ISA [NZ] 560.16).

Management's Responsibility

Management must inform users of the financial report about the situation. If management doesn't take necessary steps, the auditor must notify management and those charged with governance. If they still don't act, the auditor must take action to prevent reliance on the auditor’s report (ISA [NZ] 560.17).

Adjusting vs. Non-Adjusting Events

ISA (NZ) 560.2 identifies two types of events:

• Adjusting Events: Provide evidence of conditions that existed at the date of the financial report.

• Non-Adjusting Events: Provide evidence of conditions that arose after the date of the financial report.

Examples of Adjusting Events (NZ IAS 10.9)

• Settlement of a court case after the reporting period confirming a present obligation at the reporting period's end.

• Receipt of information indicating an asset was impaired at the end of the reporting period (or adjustment needed for a previously recognized impairment loss). For example:

  • 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 realizable value at the end of the reporting period.

• Discovery of fraud or errors indicating incorrect financial statements.

Examples of Non-Adjusting Events (NZ IAS 10.9)

• Decline in the fair value of investments between the end of the reporting period and when the financial statements are authorized for issue. This usually reflects circumstances arising after the reporting period.

• 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.

Note: While the last two are non-adjusting events, their materiality usually requires 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

To detect subsequent events, auditors typically:

• Enquire with management.

• Review accounting records, including budgets and forecasts.

• Communicate with the entity’s solicitor.

• Obtain a letter of representation from management.

• Examine minutes of meetings held subsequent to the date of the statement of financial position.

Analytical Procedures

ISA (NZ) 520 requires auditors to perform analytical procedures near the audit's end to assess whether the financial statements align with their overall understanding of the entity. These procedures also help examine the entity’s ability to remain a going concern.