Management are responsible for preparing the financial statements in accordance with the relevant financial reporting framework. IAS 10 Events After the Reporting Period requires management to consider the impact of events that occur after the year-end on the financial statements. It categorises those events as either:
adjusting events, which provide evidence of conditions that existed at the year-end, and therefore should be considered in the transactions, balances and disclosures of the financial statements, and
non-adjusting events, which concern conditions that arose after the year-end and are therefore relevant to the following period's financial statements. If serious though (i.e. they could have a material impact on the business) these may need to be disclosed in the financial statements.
The auditors' responsibilities
ISA 560 Subsequent Events details the responsibilities of the auditors with respect to subsequent events and the procedures they can use. It identifies two periods of relevance:
Up to the date of the audit report
Until this point the auditor must perform procedures to identify events that need to be either adjusted or disclosed in the financial statements.
Between the date of the audit report and publishing the accounts
During this period the auditor need not perform procedures but, if they identify any adjustments or disclosures that need to be made in the financial statements they must take appropriate action.
This will normally be in the form of requesting that the directors amend the financial statements and then reissuing the audit report.
If the directors refuse then the auditor has the right to communicate the known misstatements to the shareholders at the annual general meeting. The auditor may also consider resigning and issuing a statement of circumstance.
The nature of procedures performed in a subsequent events review depends on many variables, such as the nature of transactions and events and the availability of data and reports. However the following procedures are typical of a subsequent events review:
- Enquiring into management's procedures/systems for the identification of subsequent events;
- Inspection of minutes of members' and directors' meetings;
- Reviewing accounting records including budgets, forecasts and interim information.
- Enquiring of directors if they are aware of any subsequent events that require reflection in the year-end account;
- Obtaining, from management, a letter of representation that all subsequent events have been considered in the preparation of the financial statements;
- Inspection of correspondence with legal advisors;
- Enquiring of the progress with regards to reported provisions and contingencies; and
- 'Normal' post reporting period work performed in order to verify year-end balances:
- checking after date receipts from receivables;
- inspecting the cash book for payments/receipts that were not accrued for at the year-end; and
- checking the sales price of inventories.
If, after the financial statements have been issued, management amends the financial statements, the auditor shall:
- Provide a new auditor's report on the amended financial statements; and
- Extend the audit procedures described above to the date of the new auditor's report.