Annual Audit Manual

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9042 Events occurring between the date of the financial statements and the date of the audit report
Oct-2012

In This Section

Audit procedures to identify all events between the date of financial statements and the date of the audit report

Considerations for smaller entities

Overview

This topic explains:

  • Our audit procedures to identify all events between the date of financial statements and the date of the audit report.
  • How to determine whether subsequent events are appropriately reflected in the financial statements.
  • Requesting written representations.
  • Considerations for smaller entities.
Audit procedures to identify all events between the date of financial statements and the date of the audit report

CAS Requirement

The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all 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 have been identified. The auditor is not, however, expected to perform additional audit procedures on matters to which previously applied audit procedures have provided satisfactory conclusions (CAS 560.6).

The auditor shall perform the procedures required by paragraph 6 so that they cover the period from the date of the financial statements to the date of the auditor’s report, or as near as practicable thereto. The auditor shall take into account the auditor’s risk assessment in determining the nature and extent of such audit procedures, which shall include the following (CAS 560.7):

(a) Obtaining an understanding of any procedures management has established to ensure that subsequent events are identified;

(b) Inquiring of management and, where appropriate, those charged with governance as to whether any subsequent events have occurred which might affect the financial statements;

(c) Reading minutes, if any, of the meetings, of the entity’s owners, management and those charged with governance, that have been held after the date of the financial statements and inquiring about matters discussed at any such meetings for which minutes are not yet available; and

(d) Reading the entity’s latest subsequent interim financial statements, if any.

If, as a result of the procedures performed as required by paragraphs 6 and 7, the auditor identifies events that require adjustment of, or disclosure in, the financial statements, the auditor shall determine whether each such event is appropriately reflected in those financial statements in accordance with the applicable financial reporting framework (CAS 560.8).

CAS Guidance

Depending on the auditor’s risk assessment, the audit procedures required by paragraph 6 may include procedures, necessary to obtain sufficient appropriate audit evidence, involving the review or testing of accounting records or transactions occurring between the date of the financial statements and the date of the auditor’s report. The audit procedures required by paragraphs 6 and 7 are in addition to procedures that the auditor may perform for other purposes that, nevertheless, may provide evidence about subsequent events (for example, to obtain audit evidence for account balances as at the date of the financial statements, such as cut-off procedures or procedures in relation to subsequent receipts of accounts receivable). (CAS 560.A6)

Paragraph 7 stipulates certain audit procedures in this context that the auditor is required to perform pursuant to paragraph 6. The subsequent events procedures that the auditor performs may, however, depend on the information that is available and, in particular, the extent to which the accounting records have been prepared since the date of the financial statements. Where the accounting records are not up-to-date, and accordingly no interim financial statements (whether for internal or external purposes) have been prepared, or minutes of meetings of management or those charged with governance have not been prepared, relevant audit procedures may take the form of inspection of available books and records, including bank statements. Paragraph A8 gives examples of some of the additional matters that the auditor may consider in the course of these inquiries. (CAS 560.A7)

In addition to the audit procedures required by paragraph 7, the auditor may consider it necessary and appropriate to (CAS 560.A8):

  • Read the entity’s latest available budgets, cash flow forecasts and other related management reports for periods after the date of the financial statements;

  • Inquire, or extend previous oral or written inquiries, of the entity’s legal counsel concerning litigation and claims; or

  • Consider whether written representations covering particular subsequent events may be necessary to support other audit evidence and thereby obtain sufficient appropriate audit evidence.

Inquiry

In inquiring of management and, where appropriate, those charged with governance, as to whether any subsequent events have occurred that might affect the financial statements, the auditor may inquire as to the current status of items that were accounted for on the basis of preliminary or inconclusive data and may make specific inquiries about the following matters (CAS 560.A9):

  • Whether new commitments, borrowings or guarantees have been entered into.

  • Whether sales or acquisitions of assets have occurred or are planned.

  • Whether there have been increases in capital or issuance of debt instruments, such as the issue of new shares or debentures, or an agreement to merge or liquidate has been made or is planned.

  • Whether any assets have been appropriated by government or destroyed, for example, by fire or flood.

  • Whether there have been any developments regarding contingencies.

  • Whether any unusual accounting adjustments have been made or are contemplated.

  • Whether any events have occurred or are likely to occur that will bring into question the appropriateness of accounting policies used in the financial statements, as would be the case, for example, if such events call into question the validity of the going concern assumption.

  • Whether any events have occurred that are relevant to the measurement of estimates or provisions made in the financial statements.

  • Whether any events have occurred that are relevant to the recoverability of assets.

OAG Guidance

Additionally, consider the following:

  1. Identify subsequent events by reviewing the following:

    • Any externally reported information prepared by the company.

    • The outcome of known uncertainties and contingent liabilities as at the balance sheet date, such as those relating to litigation, provisions and the outcome of significant transactions affecting the annual report. Pay particular attention to the risk areas. This procedure includes inquiring, or extending previous oral or written inquiries, of the entity’s lawyers concerning litigation and claims.

    • The results of subsequent event procedures by supporting engagement teams as requested in the group audit instructions.

  2. Consider changes in the following areas which may affect the financial statements and other information in the annual report:

    • banking arrangements;
    • currency and interest rates;
    • key markets;
    • key products, customers or vendors;
    • key management or employees;
    • government regulation or policy;
    • the ratio of orders to sales and cash receipts and the position of the order book.

  3. Consider other significant knowledge gained, for example:

    • press comment,
    • internal audit reports,
    • changes in entity trading patterns,
    • changes in laws or regulations,
    • currency devaluations,
    • major fires or catastrophes,
    • security incidents.

  4. Where accounting estimates have been made in the financial statements, review subsequent events relevant to the amount of the estimate.

  5. Establish what management has done, or will do, to identify and respond to subsequent events potentially affecting the financial statements. Consider the risk that significant items may not be identified and tailor audit procedures accordingly.

  6. Discuss with management:

    • The reversal of any transactions entered into prior to the balance sheet date that might indicate window dressing.

    • The current status of items involving subjective judgment which were accounted for on the basis of preliminary data, e.g., litigation in progress.

  7. If an event might call into question the validity of the going concern presumption, see OAG Audit 7520.

  8. Consider whether latest available budgets, cash flow forecasts and other related management reports reveal any adverse trends or significant movements in balance sheet headings compared to the audited financial statements. Consider whether the management information is reliable.

  9. Consider whether there have been any significant policy decisions, such as changes in model or product lines and sales processes, plant closings, discontinuance of research projects, adoption of or changes in pension, stock option or other employee benefit plans, etc.

Considerations for smaller entities

OAG Guidance

It is often the case that more time elapses between the date of the financial statements and the approval or signature of the financial statements by the management in the case of small entities, than in the case of large entities. The period to be covered by our subsequent events procedures is therefore often longer in the audit of a small entity, allowing more opportunity for the occurrence of subsequent events that can affect the financial statements.

The subsequent events procedures that we perform will depend on the information that is available and, in particular, the extent to which the accounting records have been written up since the period end. When the accounting records are not up-to-date and minutes of meetings of the directors have not been prepared, relevant procedures can take the form of inquiry of the management, recording the owner-manager’s responses and inspection of bank statements.

We may, depending on the circumstances, consider that the written representation covers subsequent events. The written representation is ordinarily dated on the same day as our audit report, thus covering the entire period since the date of the financial statements.