# 20. SUBSEQUENT EVENTS AND CONTINGENCIES
(INCORPORATING ISA 560)
# 20.1 Definition of Subsequent Event
IAS 10 "Events after the Balance Sheet Date", defines subsequent events as "those events, favourable and unfavourable, that occur between the balance sheet date and the date when the financial statements are authorised for issue".
There are two types of events:
. Adjusting events (those that provide evidence of conditions that existed at the balance sheet date). Examples of adjusting subsequent events include:
The subsequent determination of the price of assets sold before the year-end.
Impairment of assets identified following an impairment review (under IAS 36, the need to write down following a valuation may not be necessary if the value in use supports the carrying value).
-The receipt of sale proceeds after the balance sheet date, or other evidence, concerning the net realisable value of inventories.
Evidence that a previous estimate of accrued profit on a long-term contract, was materially inaccurate.
The re-negotiation of amounts owing by customers, or the insolvency of a customer.
The effect of changes in taxation rates.
Amounts received or receivable in respect of insurance claims, which were in the course of negotiation at the balance sheet date.
The discovery of error or fraud, provided the error or fraud discovered occurred prior to the year-end.
. Non-adjusting events (those that are indicative of conditions that arose after the balance sheet date). Examples of non-adjusting subsequent events include:
Mergers and acquisitions.
Change of principal activities.
Issues of shares and loan stocks.
Purchases and sales of Property, plant and equipment, and investments.
The consequences of natural disaster such as flood or earthquake.
Opening new trading activities or extending existing trading activities.
A significant part of the trading activities becoming a discontinued operation, if it was not anticipated at the year-end.
Post year-end decline in the value of property or other investments.
Changes in foreign exchange rates.
-.Strikes and other labour disputes.
ISA 560 provides the following definitions:
(a) Date of the financial statements - the date of the end of the latest period covered by the financial statements, which is normally the date of the most recent balance sheet in the financial statements subject to audit.
(b) Date of approval of the financial statements - the date on which the directors assert that they have prepared the entity's complete set of financial statements, including the related notes, and that they have taken responsibility for them.
(c) Date of the auditor's report - the date selected by the auditor to date the report on the financial statements. The auditor's report is not 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.Sufficient appropriate audit evidence includes evidence that the entity's complete set of financial statements has been prepared and that the directors have asserted that they have taken responsibility for them.
(d) Date the financial statements are issued - the date that the auditor's report and audited financial statements are made available to third parties, which may be, in many circumstances, the date that they are filed with a regulatory authority.
# 20.2 Audit Procedures
ISA 560 requires that "The auditor should perform procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor's report that may require adjustment of, or disclosure in, the financial statements have been identified". These procedures are in addition to routine procedures, such as checking for subsequent receipts from customers, testing of inventory cut-off and payments to suppliers, which are applied after the date of the financial statements to obtain audit evidence on account balances at the date of the financial statements.
A subsequent events review is performed as near as practicable to the date of the auditor's report and would normally include the following procedures:
.Reviewing managements' procedures over identification of subsequent events.
.Reviewing minutes of the meetings of shareholders, the board of directors and audit and executive committees held after the date of the financial statements and inquiring about matters discussed at meetings for which minutes are not yet available.
.Reviewing the entity's latest available interim financial statements and, as considered necessary and appropriate, budgets, cash flow forecasts and other related management reports.
.Inquiring of the entity's lawyers concerning litigation and claims.
.Inquiring of management as to whether any subsequent events have occurred which might affect the financial statements. Examples of inquiries of management on specific matters are:
- .The current status of items that were accounted for on the basis of preliminary or inconclusive data.
- .Whether new commitments, borrowings or guarantees have been entered into.
- .Whether sales of assets have occurred or are planned.
- .Whether 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 risk areas and contingencies.
- .Whether any unusual accounting adjustments have been made or are contemplated.
- .Whether any events have occurred or are likely to occur which 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.
# 20.3 Recording and Conclusion
The engagement team will need to ensure that any identified subsequent events, which materially affect the financial statements, are properly accounted for and adequately disclosed in the financial statements.
All audit procedures undertaken and conclusions reached should be fully documented. Form 04.01 – Audit Programme Subsequent Events Review set out in Part E of the Manual provides guidance on the issues to consider when carrying out a subsequent events review. The working papers should include detailed notes of meetings, including who was present, the matters discussed and the outcome of the discussions.
# 20.4 Action After the Audit Report is Signed but Before the Financial Statements are Issued
As per ISA 560, it is not the auditor's responsibility to perform audit procedures or make inquiries regarding the financial statements after the date of the auditor's report. Should any matters, which materially affect the financial statements, arise after the financial statements have been issued, it is the responsibility of management to inform the auditor of these matters.
When, after the financial statements have been issued, the firm becomes aware of a fact which may materially affect the financial statements, the engagement partner should consider whether the financial statements need amendment and should discuss the matter with management. The engagement partner should take the action appropriate in the circumstances.
If management amends the financial statements, the engagement partner should carry out the audit procedures identified in Section 20.2 above and issue a new audit report, which should be signed after the date of approval of the amended financial statements.
If, even after the engagement partner has asked management to amend the financial statements and management refuses to do so, but the auditor's report has not been released to the entity, the engagement partner should express a qualified opinion or an adverse opinion. Where the audit report has already been sent to the entity, the engagement partner should ask management not to issue the financial statements and auditor's report to third parties. If the financial statements have already been released, the engagement partner should seek legal advice on how to prevent reliance being placed on the auditor's report.
# 20.5 Action after the Financial Statements are Adopted by the Members
When, after the financial statements have been issued, the firm becomes aware of a fact which existed at the date of the auditor's report and which, if known at that date, may have caused the firm to modify the auditor's report, the engagement partner should consider whether the financial statements need revision and should discuss the matter with management. The partner should take the action appropriate in the circumstances.
If management amends the financial statements, the engagement team should carry out the audit procedures identified in Section 20.2 above. In addition, the team will need to review the steps taken by management in informing all recipients of the previously issued financial statements and auditor's report of the situation.
The engagement partner will need to issue a new audit report on the revised financial statements, which should be signed after the date of approval of the amended financial statements. The new auditor's report should contain an emphasis of matter paragraph referring to a note to the financial statements that discusses the amendment to the previously issued financial statements and earlier auditor's report.
Where management does not amend the financial statements and does not take necessary steps to inform all recipients of the previously issued financial statements and auditor's report of the situation, the engagement partner may need to seek legal advice on the best course of action to take to prevent reliance being placed on the auditor's report.
# 20.6 Contingencies
IAS 37, "Provisions, Contingent Liabilities and Contingent Assets" provides the following definitions:
- (a)A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
- (b)A present obligation that arises from past events but is not recognised because:
-.it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
-.the amount of the obligation cannot be measured with sufficient reliability.
Contingent liabilities can arise as a result of:
-.Contractual or other legal disputes.
-.Defects in goods / products.
-.Warranties / insurance claims.
. Contingent asset - This is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
It is the responsibility of management to assess the probability of uncertain future events occurring, and then estimate the possible outcome. The auditor should review management's procedures in identifying contingencies existing at the balance sheet date and should ensure that all required disclosures are made in the financial statements in accordance with the entity's applicable financial reporting framework.