Annual Audit Manual
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9041 Introduction
Jul-2017
Overview
This topic explains:
- Our objectives in relation to subsequent events
- Definitions related to subsequent events
- Types of subsequent events
CAS Objective
The objectives of the auditor are (CAS 560.4):
(a) To obtain sufficient appropriate audit evidence about whether events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements are appropriately reflected in those financial statements in accordance with the applicable financial reporting framework; and
(b) To respond appropriately to facts that become known to the auditor after the date of the auditor’s report, that, had they been known to the auditor at that date, may have caused the auditor to amend the auditor’s report.
CAS Guidance
For purposes of the CASs, the following terms have the meanings attributed below (CAS 560.5):
(a) Date of the financial statements - The date of the end of the latest period covered by the financial statements.
(b) Date of approval of the financial statements - The date on which all the statements that comprise the financial statements, including the related notes, have been prepared and those with the recognized authority have asserted that they have taken responsibility for those financial statements.
(c) Date of the auditor’s report - The date the auditor dates the report on the financial statements in accordance with CAS 700.
(d) Date the financial statements are issued - The date that the auditor’s report and audited financial statements are made available to third parties.
(e) Subsequent events - Events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.
Date of approval of the financial statements
In some jurisdictions, law or regulation identifies the individuals or bodies (for example, management or those charged with governance) that are responsible for concluding that all the statements that comprise the financial statements, including the related notes, have been prepared, and specifies the necessary approval process. In other jurisdictions, the approval process is not prescribed in law or regulation and the entity follows its own procedures in preparing and finalizing its financial statements in view of its management and governance structures. In some jurisdictions, final approval of the financial statements by shareholders is required. In these jurisdictions, final approval by shareholders is not necessary for the auditor to conclude that sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements has been obtained. The date of approval of the financial statements for purposes of the CASs is the earlier date on which those with the recognized authority determine that all the statements that comprise the financial statements, including the related notes, have been prepared and that those with the recognized authority have asserted that they have taken responsibility for those financial statements. (CAS 560.A2)
Date of the auditor’s report
The auditor’s report cannot be dated earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statements, including evidence that all the statements that comprise the financial statements, including the related notes, have been prepared and that those with the recognized authority have asserted that they have taken responsibility for those financial statements. Consequently, the date of the auditor’s report cannot be earlier than the date of approval of the financial statements as defined in paragraph 5(b). A time period may elapse due to administrative issues between the date of the auditor’s report as defined in paragraph 5(c) and the date the auditor’s report is provided to the entity. (CAS 560.A3)
Date the financial statements are issued
The date the financial statements are issued generally depends on the regulatory environment of the entity. In some circumstances, the date the financial statements are issued may be the date that they are filed with a regulatory authority. Since audited financial statements cannot be issued without an auditor’s report, the date that the audited financial statements are issued must not only be at or later than the date of the auditor’s report, but must also be at or later than the date the auditor’s report is provided to the entity. (CAS 560.A4)
OAG Guidance
Before issuing the audit report, the auditor performs procedures to identify events that occurred after the year-end date and that may impact the financial statements. The auditor then concludes upon the need to amend the financial statements and if necessary, requests management to amend them.
Subsequent events impacting the financial statements may occur at various times, i.e. before or after the issuance of the financial statements and before or after the date of the audit report. The auditor has no obligation to perform procedures after the financial statements have been issued. However if he becomes aware of such events, and depending on whether he already issued the audit report or not, he needs to take appropriate actions that are described in CAS 560.
CAS Guidance
Financial statements may be affected by certain events that occur after the date of the financial statements. Many financial reporting frameworks specifically refer to such events. Such financial reporting frameworks ordinarily identify two types of events (CAS 560.2):
(a) Those that provide evidence of conditions that existed at the date of the financial statements.
(b) Those that provide evidence of conditions that arose after the date of the financial statements.
CAS 700 explains that the date of the auditor’s report informs the reader that the auditor has considered the effect of events and transactions of which the auditor becomes aware and that occurred up to that date.
International Accounting Standard (IAS) 10, Events after the Reporting Period, deals with the treatment in financial statements of events, both favorable and unfavorable, that occur between the date of the financial statements (referred to as the “balance sheet date” in the IAS) and the date when the financial statements are authorized for issue.
OAG Guidance
Examples for the two types of events are:
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We obtain new information on a pending litigation, which was accounted for as an estimated provision in the financial statements. If this information leads to a revised estimation, the financial statements need to be adjusted accordingly.
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A new legal action is commenced against the entity after the date of the financial statements.
Borderline Cases
In practice, the classification of subsequent events requires careful consideration and judgment. When there is no guidance in professional literature and the determination is not clear, it is generally prudent to treat a subsequent loss as a condition that existed at the date of the financial statements and a subsequent gain as a condition that arose after the date of the financial statements. Some events may not require either adjustment or disclosure. For example, a regular quarterly cash dividend declared subsequent to the balance sheet date at the same rate per share as dividends declared during the period being reported on might not be worthy of disclosure. But the reader of financial statements of a corporation that had paid dividends regularly for several years may probably be informed of a decision to eliminate cash dividends subsequent to the balance sheet date. As another example, cancellation of a sales contract subsequent to year-end need not ordinarily be disclosed unless it is reasonably certain that the financial effect will be significant. If the company reasonably anticipates replacement of the customer or additional sales to present customers, disclosure could imply adverse effects that may never occur. Disclosure of the cancellation may be appropriate, however, if reduced income appeared certain, a major factory were to be closed, or other significant changes in operations would result.
Refer to OAG Audit 1171, OAG Audit 1172, and OAG Audit 1173