Subsequent events are events or transactions that occur after the balance sheet date (statement of financial position), but prior to financial statement and auditor’s report.
Subsequent events that occur after the date of the statement of financial position but before the issuance of the Statement of financial statements are of two categories namely:
- Those that require the adjustment of the account balance (adjusting events) and
- Non-adjusting events
Auditor’s responsibilities for the subsequent events depend on whether they occurred before or after the date of the auditor’s report. Auditors have no responsibility to seek any additional evidence in the period between the date of auditor’s report and the date the financial statements are issued.
Nevertheless, many auditors believe that while they do not have the responsibility to seek additional evidence during that period, they do have the responsibility not to ignore information that comes to their attention.
The audit procedures to identify events that may require adjustments of or disclosure in, the financial Statements would be performed as near as practicable to the date of auditor’s report. Such audit procedures take into account the auditor’s risk assessment and ordinarily include:
- Reviewing the procedures that management has established to ensure that subsequent events are identified
- Reading minutes of the meeting of shareholders, those charged with governance, including established committees such as the relevant executive committee and the audit committee held after the period and inquiring about matters discussed at the meetings for which minutes are not yet available
- Inquiring, or extending previous oral and written inquiries, of the entity’s legal counsel concerning litigation and claims
- Read the entity’s latest available management financial statements and, as considered necessary and appropriate, budgets, cash flow forecasts, and other related management reports.
- Inquiring from management whether any subsequent events have occurred which might affect the financial statements.
Specific inquiries on management include:
- Whether sales or acquisition of assets here occurred or are planned
- The current status of items that were accounted for on the basis of preliminary or inconclusive data.
- Whether new commitments, borrowings or guarantees have been entered into.
- Whether the issue of new shares or debentures or an agreement to merge or liquidate has been made or is planned.
- Whether any asset has been expropriated by the government or destroyed, for example, by fire or floods.
- Whether there have been any developments regarding risk areas and contingencies.