Subsequent events may not be reflected in an entity`s balance sheet or income statement. However, when in doubt, companies usually disclose subsequent events in order to promote transparency of financial reporting. Contact us for more information on reporting and disclosing subsequent events. Process. If events occur before the balance sheet date and trigger litigation and the resolution of a dispute is a subsequent event, you should consider adjusting the amount of any potential loss already recognised to the actual settlement amount. In addition, the independent statutory auditor should conduct other audit procedures after the balance sheet date to determine the occurrence of subsequent events that may require adjustment or disclosure that is essential to ensure that the financial statements are presented fairly in accordance with generally accepted accounting principles. These procedures should be performed on or in close proximity to the auditor`s report. In general, the auditor must: After the end of the cut-off period (after the end of the company`s year) and before the preparation of the annual accounts, company A`s main customer goes bankrupt unexpectedly. It is stipulated that the company receives only 10% of its outstanding receivables from the large customer. The event requires an adjustment to Company A`s financial statements. Answer: When presenting such scenarios, it is important to observe the timing of events in relation to the balance sheet date and check whether or not the events existed at the end of the year. If the conditions were met by the end of the year, the event becomes an adaptation event.
If the event occurred after the end of the fiscal year, it becomes a non-corrective event and may require only disclosures in the financial statements. The second type includes events that provide evidence of conditions that did not exist at the time of the balance sheet reporting but occurred after that date. These events are not expected to result in an adjustment to the financial statements. fn1 However, some of these events may be such that their disclosure is necessary to prevent the financial statements from being misleading. On occasion, such an event may be so significant that the best way to provide information may be made by supplementing the historical financial statements with pro forma financial information that makes the event as effective as if it had occurred on the balance sheet date. It may be desirable to present pro forma financial statements, usually only a balance sheet, as a column on the front of historical statements. Certain events that occurred between the date of completion and the date of publication must be disclosed. Subsequent events can affect the financial statements in two ways: (1) captured events – they require an adjustment to the financial statements; and (2) unrecorded events – these may require disclosure in notes. After the balance sheet date, there is a deadline that the statutory auditor must respect when carrying out the different stages of his audit. This period is referred to as the “subsequent period” and extends to the date of the audit opinion.
The duration depends on the practical requirements of each audit and can vary from a relatively short period to several months. In addition, not all audit procedures are performed simultaneously, and some phases of an audit are performed in the next period, while other phases are substantially completed on or before the end date. As the closure of an audit approaches, the statutory auditor will focus on unresolved audit and reporting issues and will not be required to conduct an ongoing review of matters with which he or she has already applied audit procedures and with which he or she is satisfied. Required: (b) Describe the audit procedures that should be followed to obtain sufficient and appropriate audit evidence that subsequent events have been properly reflected in the financial statements. Circumstances may arise if the statutory auditor becomes aware of facts that may have a material effect on the financial statements and, in such situations, the statutory auditor will consider whether the financial statements need to be amended. The auditor is required to discuss with senior management how he or she intends to deal with events that require changes to the financial statements after the auditor has signed his or her report but before the financial statements are issued. The period of subsequent events falls between the period of the balance sheet date and the approval of the issuance of the financial statements. Depending on the nature of the subsequent event, an adjustment to the financial statements may or may not be necessary. Transactions and events that change the measurement of transactions before the balance sheet date are recorded. Accounting for subsequent events in financial statements can be highly subjective in many cases. Given the time required to revise the financial statements at the last minute, it is worth carefully considering whether the circumstances of a subsequent event can be interpreted in such a way as not to require an amendment to the financial statements.
In example 1 above, we found that fraud and litigation were adjustment events that resulted in an adjustment to the financial statements as at 30 September 2010. We also noted that the loss of the customer was also an adjustment event, but because the value of the receivable was considered negligible, no adjustment was made to the financial statements. Let`s extend the requirement in Example 1 as follows: ISA 560 also includes events discovered by the auditor after the date of the audit report but before the preparation of the financial statements. The overall objective of ISA 560 is to ensure that the statutory auditor applies procedures to obtain sufficient audit evidence to provide reasonable assurance that all events have been identified and properly recognised/disclosed in the financial statements at the (scheduled) date of the final report. Students of financial reporting and audit papers should understand how subsequent events (also known as “post-period events”) affect a company`s financial statements. This article examines aspects of financial reporting related to subsequent events using a case study scenario and then discusses the audit requirements that candidates for Paper F8, Audit and Assurance, must consider. In almost all cases, the financial statements are not completed until a period between the year-end date and the financial statement date has (expected). Therefore, it is necessary to take into account events occurring between the balance sheet date and the date on which the financial statements are (expected to be approved) for publication. Recognized follow-up events require adjustments to financial statements, according to the Advisory Council of Federal Accounting Standards.