Introduction
SA 560 – Subsequent Events is the events which explains the auditor’s responsibility for events that occur after the balance sheet date but before the auditor signs the audit report.
but in reality, the auditor must evaluate whether any significant event occurring after the reporting date affects the financial statements and whether the entity must adjust the accounts or disclose the event. Therefore, the auditor performs specific procedures to identify such events before issuing the audit report.
What Are Subsequent Events?
Subsequent events are events that occur between the date of the financial statements and the date of the auditor’s report.
In other words, these events may either provide additional evidence about conditions that existed at the balance sheet date or indicate conditions that arose after that date. Consequently, the auditor must assess their impact on the financial statements.
Types of Subsequent Events
1. Adjusting Events
First, adjusting events provide evidence of conditions that existed on the balance sheet date. Therefore, the entity must adjust the financial statements to reflect the correct financial position.
Examples:
- Bankruptcy of a debtor confirms the loss on receivables.
- Settlement of a legal case confirms the existence of a liability.
- Discovery of fraud or accounting errors affects previously recorded balances.
Thus, these events require necessary adjustments in the financial statements.
2. Non-Adjusting Events
On the other hand, non-adjusting events relate to conditions that arise after the balance sheet date. Accordingly, the entity does not adjust the financial statements. However, the entity should disclose the event in the notes to accounts if it is material.
Examples:
- Fire or natural disaster occurring after year-end.
- Issue of shares after the reporting date.
- Major business acquisition completed after year-end.
Therefore, although these events do not change the financial statements, they may still require proper disclosure for users of financial statements.
Auditor’s Responsibilities
1. Perform Audit Procedures
First, the auditor performs procedures to identify subsequent events. For instance, the auditor may:
- Review minutes of meetings held after the balance sheet date.
- Inquire with management and those charged with governance.
- Review interim financial statements.
- Examine significant transactions occurring after year-end.
Through these procedures, the auditor ensures that the financial statements properly reflect relevant subsequent events.
2. Obtain Written Representation
Next, the auditor obtains a written representation from management. In this representation, management confirms that it has identified and appropriately accounted for all subsequent events requiring adjustment or disclosure.
3. Facts Discovered After the Auditor’s Report
Sometimes, the auditor may discover new facts after signing the audit report but before the financial statements are issued. In such situations, the auditor should discuss the matter with management and determine whether the financial statements require revision. If necessary, the auditor may need to perform additional audit procedures on the revised financial statements.
4. Facts Discovered After Financial Statements Are Issued
Finally, if the auditor discovers important facts after the financial statements have been issued, the auditor should inform management and those charged with governance. Subsequently, the entity may need to revise the financial statements and inform users accordingly.
Conclusion
In conclusion, SA 560 requires auditors to carefully consider events occurring after the reporting date. Therefore, auditors must actively identify, evaluate, and address such events before issuing the audit report. As a result, proper adjustment or disclosure improves the accuracy, reliability, and transparency of financial reporting.