ISA 560

Subsequent Events

1Objective and scope

ISA 560 deals with the auditor's responsibilities relating to subsequent events in an audit of financial statements. Financial statements may be affected by events that occur after the reporting date; IAS 10 distinguishes adjusting events (providing evidence of conditions that existed at the reporting date) from non-adjusting events (indicative of conditions that arose after it, disclosed if material). The auditor's responsibility divides into three periods: between the date of the financial statements and the date of the auditor's report, when the auditor actively searches; between the date of the report and the date the statements are issued, when the auditor has no obligation to search but must act on facts that come to the auditor's attention; and after the statements are issued, with the same act-on-facts obligation.

The objectives are to obtain sufficient appropriate 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; and to respond appropriately to facts that become known to the auditor after the date of the auditor's report that, had they been known at that date, may have caused the auditor to amend the report.

2Key definitions

3Requirements

Events up to the date of the auditor's report

The auditor performs procedures designed to obtain sufficient appropriate 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 procedures are performed as near as practicable to the date of the report and take into account the auditor's risk assessment; they are not required to re-examine matters already audited satisfactorily. They include:

• Obtaining an understanding of any procedures management has established to ensure that subsequent events are identified.
• Inquiring of management and, where appropriate, those charged with governance as to whether any subsequent events have occurred which might affect the financial statements: new commitments, borrowings or guarantees; sales or acquisitions of assets; increases in capital or debt issues; assets destroyed or expropriated; developments regarding contingencies; unusual accounting adjustments; events that call the going concern basis or other accounting policies into question; events relevant to the measurement of estimates or provisions; and events relevant to the recoverability of assets.
• Reading minutes of meetings of owners, management and those charged with governance held after the date of the financial statements, and inquiring about matters discussed at meetings for which minutes are not yet available.
• Reading the entity's latest subsequent interim financial statements, budgets and cash flow forecasts, if any.
• In practice also: reviewing after-date cash receipts and payments, sales returns and credit notes, post-year-end inventory sales for NRV, the legal letter and correspondence for litigation developments, and the press for events affecting the entity.

If the auditor identifies events that require adjustment or disclosure, the auditor determines whether each is appropriately reflected in the financial statements in accordance with the framework. Written representations under ISA 580 confirm that all events subsequent to the reporting date that require adjustment or disclosure have been adjusted or disclosed.

Facts known after the report date but before issue

• The auditor has no obligation to perform procedures regarding the financial statements after the date of the auditor's report. But if a fact becomes known that, had it been known at the report date, may have caused the auditor to amend the report, the auditor discusses the matter with management and, where appropriate, those charged with governance; determines whether the financial statements need amendment; and if so, inquires how management intends to address the matter.
• If management amends the financial statements, the auditor carries out the audit procedures necessary on the amendment, extends the subsequent events procedures to the date of the new report, and provides a new auditor's report on the amended statements, dated no earlier than the date of approval of the amended statements. Where law or the framework permits the amendment to be restricted to the effects of the subsequent event, the auditor may instead dual-date the report or include an Emphasis of Matter or Other Matter paragraph referring to the note that describes the amendment.
• If management does not amend the financial statements when the auditor believes they need to be amended, and the report has not yet been provided to the entity, the auditor modifies the opinion under ISA 705. If the report has already been provided, the auditor notifies management and those charged with governance not to issue the statements to third parties before the amendments are made; if they are issued regardless, the auditor takes appropriate action to seek to prevent reliance on the report, which may include legal advice, speaking at the general meeting, or resigning and exercising the statutory right to make representations.

Facts known after the financial statements are issued

Again the auditor has no obligation to perform procedures after issue. If a fact becomes known that, had it been known at the report date, may have caused the auditor to amend the report, the auditor discusses it with management and those charged with governance, determines whether the statements need amendment and, if so, inquires how management will address it. If management amends, the auditor audits the amendment, reviews the steps management takes to ensure that anyone in receipt of the previously issued statements and report is informed of the situation, extends subsequent events procedures to the date of the new report, and issues a new report including an Emphasis of Matter or Other Matter paragraph referring to the note that describes the reason for the amendment and to the earlier report. If management does not take the necessary steps to inform recipients and does not amend the statements, the auditor notifies management and those charged with governance that the auditor will seek to prevent future reliance on the report, and, if they still do not act, takes appropriate action to do so.

4Documentation and reporting

The subsequent events working paper records the procedures performed and the date up to which they were performed (which fixes the earliest possible date of the report), the events identified, their classification as adjusting or non-adjusting, the evaluation of the entity's treatment, and the management representation obtained. Where facts become known after the report date, the documentation records the discussion with management and those charged with governance, the decision on amendment, the additional procedures, the new report and its dating (a new date, or dual dating where permitted), and any actions taken to prevent reliance. In the report itself, an amendment after issue is signposted by an Emphasis of Matter or Other Matter paragraph; a refusal to adjust or disclose a material event is reflected in a qualified or adverse opinion; and a going concern issue triggered by a subsequent event is handled under ISA 570.

5Examinable focus