Subsequent Events (Part 2)



So far we have considered the financial reporting aspects relating to events after the reporting period. The second part of this article will now consider the auditor’s responsibility in relation to ensuring all events occurring between the reporting date and the (expected) date of the auditor’s report have been adequately taken into consideration, and sufficient appropriate audit evidence has been gathered to achieve the objective. It is important that where students have studied Paper F3, Financial Accounting, knowledge of accounting standards such as IAS 10 is not set aside or forgotten when it comes to papers such as Paper F8, Audit and Assurance. There is a very close relationship between accounting standards and auditing standards.

ISA 560, Subsequent Events outlines the auditor’s responsibility in relation to subsequent events. For the purposes of ISA 560, subsequent events are those events that occur between the reporting date and the date of approval of the financial statements and the signing of the auditor’s report.

The overall objective of ISA 560 is to ensure the auditor performs audit procedures that are designed to obtain sufficient appropriate audit evidence to give reasonable assurance that all events up to the (expected) date of the auditor’s report have been identified, properly accounted for/r disclosed in the financial statements.

ISA 560 also covers events that are discovered by the auditor after the date of the auditor’s report but before the financial statements are issued.


In Example 1 above, we identified that fraud and the legal proceedings were adjusting events that gave rise to an adjustment within the financial statements as at 30 September 2010. We also identified that the loss of the customer was also an adjusting event, but as the value of the receivable was considered immaterial, no adjustment was made to the financial statements. Let us expand on the requirement in Example 1 as follows:


(b) Describe the audit procedures that should be performed to obtain sufficient appropriate evidence that the subsequent events have been appropriately treated in the financial statements.


Candidates who are faced with scenarios such as those in Example 1 should think about the information needed that would prompt an accountant or finance director to go back to the year-end and retrospectively amend the financial statements. You could interpret the question as asking ‘what information would I need in real-life to justify a provision or disclosure within the financial statements before making such provision or disclosure?’ Where candidates have studied Paper F3 and have knowledge of IAS 10, thinking about the provisions contained in this IAS 10 will often lead you into thinking about the audit evidence you would need to satisfy yourself that the requirements in IAS 10 have been met, as well as offering ideas as to how you would go about obtaining this evidence for the audit file.


Fraud risk factors are covered in ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. The fact that fraud has occurred at Gabriella Enterprises Co will increase the risk of material misstatement due to fraud.

The audit procedures to be performed to ensure the fraud has been correctly accounted for in the financial statements may include:

• Recalculation of the amounts involved.

• Discussions with management as to how such a fraud occurred and why it took six months’ to discover the fraud (controls should prevent, detect and correct material misstatements on a timely basis).

• Establishing how the bookkeeper discovered the fraud and what controls (if any) contain weaknesses to allow the employee to commit the fraud. Note that employee fraud usually involves the manipulation of controls, whereas management fraud often involves the overriding of controls.

• Performing substantive procedures on journal entries (particularly those close to, or at, the year-end).

• Confirming directly with suppliers the account activity for the period under audit.

• Reviewing the purchase invoices and being on alert for any ‘doctored’ or ‘copy’ invoices and making enquiries as to their authenticity.

• A review of human resources files for evidence of disciplinary proceedings taken against the employee. This will also confirm compliance with laws and regulations, particularly in relation to employment legislation and the withholding of monies.

• Testing of other controls to identify other weaknesses that may indicate employee or management fraud.

• Obtaining written representations from management concerning the fraud.

• Test checking after-date cash for evidence of reimbursements by the employee, such as the withheld wages/salaries by the entity.

• Discussions with the entity’s legal advisers as to the possibility of reimbursement of the balance of the misappropriated funds.