Omar Bennett
Subsequent events, also known as 'events after the reporting period', are events that occur after a company's year-end period but before the release of its financial statements. These events can have a material impact on a company's financial statements and may require adjustment or disclosure. Auditors play a crucial role in evaluating subsequent events and ensuring they are adequately considered and reflected in the financial statements. The threshold of a subsequent event is determined by its potential impact on the financial statements and whether it provides additional evidence or information about pre-existing conditions. Auditors must exercise judgment and consider the relevance and materiality of these events to make necessary adjustments or disclosures in the financial statements.
| Characteristics | Values |
|---|---|
| Definition | Events that occur after a company’s year-end period but before the release of the financial statements |
| Other names | Events after the reporting period |
| Reporting period | Typically 12 months, but does not need to match the calendar year |
| Types | Recognized events, Non-recognized events |
| Recognized events | Events that arise from conditions that existed as of the balance sheet date |
| Non-recognized events | Events that are new and do not provide additional information about pre-existing conditions |
| Auditor's responsibility | Ensure all events occurring between the reporting date and the date of the auditor’s report have been considered and sufficient appropriate audit evidence has been gathered |
| Auditor's report | May include an emphasis paragraph directing the reader's attention to the event and its effects |
| Auditor's actions | Read the latest available interim financial statements, compare them with the financial statements being reported upon, make other comparisons, discuss with management |
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What You'll Learn
Auditor's responsibility and independence
Auditors have a responsibility to ensure that all events occurring between the reporting date and the date of their report have been adequately considered and that sufficient appropriate audit evidence has been gathered. This is to ensure that the financial statements are free from material misstatement, whether due to fraud or error, and to issue a report that includes the auditor's opinion. Auditors must exercise professional judgement and maintain professional scepticism throughout the audit process. They must identify and assess the risks of material misstatement, design and perform audit procedures in response to those risks, and obtain sufficient evidence to support their opinion.
The auditor's role is to provide reasonable assurance, which is a high level of assurance, but it does not guarantee that an audit conducted in accordance with International Standards on Auditing (UK) will always detect a material misstatement. The risk of not detecting a material misstatement resulting from fraud is higher than from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.
Auditors must also be independent, both internally and externally, from parties that may have a financial interest in the business being audited. This means that auditors cannot have any financial interest in the firms they are auditing and are not allowed to advocate for their client. They must carry out their work with integrity and an objective approach, freely selecting and implementing the most appropriate strategies and techniques. Investigative independence protects the auditor's ability to implement strategies in whatever manner they consider necessary, and they must have unlimited access to all company information.
In practice, auditors are often not entirely independent, as they are hired and paid by the company they are auditing. This can create a conflict of interest, as auditors may be incentivised to manipulate figures and exploit accounting standards to please their clients and maintain good relationships. To mitigate this, auditors should be protected from the director's board so they can challenge statements and figures without risking their job security.
Overall, auditors have a responsibility to conduct their work with independence and objectivity, ensuring that their audits are thorough, accurate, and in compliance with relevant standards.
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Adjusting events and financial statements
Subsequent events, or events after the reporting period, can have a material effect on the financial statements of an entity and may require adjustment or disclosure in the statements. These events occur between the reporting date and the date of approval of the financial statement.
Adjusting events refer to those events that existed at the year-end and require amendment of the financial statements. For example, fraud and legal proceedings are adjusting events that can give rise to adjustments within the financial statements. Another example is the impairment of assets, such as the need to create an allowance for inventories due to their sale below cost.
On the other hand, non-adjusting events occur after the year-end and may simply require disclosure within the financial statements. For instance, if a customer ceases trading due to financial difficulties, and the amount owed is considered immaterial, no adjustment is required, and it becomes a non-adjusting event.
Auditors play a crucial role in evaluating subsequent events and determining whether adjustments are necessary. They must consider the impact of these events on the financial statements and discuss any required amendments with the entity's management. Auditors may also include an emphasis paragraph in their report to highlight a subsequent event's material impact on the entity.
To ensure accurate financial reporting, it is essential to record transactions and events in real time. This proactive approach helps reduce the need for audit adjustments and enhances the reliability of financial statements for internal and external users.
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Events after the reporting period
Subsequent events, or events after the reporting period, are events that occur after a company's year-end period but before the release of the financial statements. This period is known as the "subsequent period" and extends from the balance sheet date to the date of the auditor's report. The duration of this period depends on the practical requirements of each audit and may vary from a short period to several months.
Auditing standards define subsequent events as events or transactions that occur after the balance sheet date but before the issuance of the financial statements, and that have a material effect on the financial statements, requiring adjustment or disclosure. These events can provide additional evidence or information about conditions that existed at the date of the balance sheet, affecting the estimates and preparation of financial statements.
There are two types of subsequent events. The first type, recognised events, arises from conditions that existed as of the balance sheet date. This includes the resolution of litigation or settlement of a lawsuit that occurred before the balance sheet date. The second type of subsequent event has a material impact on the entity, and the auditor may include an emphasis paragraph in their report to direct readers' attention to the event and its effects.
When identifying subsequent events, it is essential to summarise the significant events that occurred between the fiscal year-end date and the date of the financial statements. This can include reviewing meeting minutes, consulting legal representation, and analysing the capital budget. The auditor plays a crucial role in ensuring that all events occurring between the reporting date and the expected date of their report have been adequately considered and that sufficient appropriate audit evidence has been gathered.
In some cases, the auditor may become aware of facts that materially affect the financial statements and will consider whether amendments are necessary. The auditor must discuss with management how to address events that require amendments after the auditors have signed their report but before the financial statements are issued. The auditor will also need to issue a new report on the amended financial statements and extend their subsequent events testing up to the expected date of the new report.
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Material impact and disclosure requirements
Subsequent events, also known as 'events after the reporting period', are those that occur after a company's year-end period but before the release of the financial statements. They can have a material impact on the financial statements and may require adjustment or disclosure. Auditing standards define subsequent events as events or transactions that occur after the balance sheet date but before the issuance of the financial statements, and that have a material effect on the financial statements, necessitating adjustment or disclosure.
The material impact of subsequent events can vary depending on the nature and significance of the event. For example, a company's major client going bankrupt after the company's year-end period but before the issuance of financial statements would typically require an adjustment to the financial statements. On the other hand, a subsequent event such as a labour strike that could threaten the company's financial stability might not be recognised in the financial statements, but disclosure would be required to ensure investors are aware of the potential risk.
The auditor plays a crucial role in evaluating the impact of subsequent events. They are responsible for ensuring that all events occurring between the reporting date and the expected date of their report have been adequately considered and that sufficient appropriate audit evidence has been gathered. The auditor will also consider whether the financial statements need amending to reflect subsequent events and will discuss this with management. In some cases, the auditor may include an emphasis paragraph in their report to direct the reader's attention to a subsequent event and its effects.
To determine whether a subsequent event requires adjustment or disclosure in the financial statements, it is essential to summarise and evaluate significant events that have occurred between the fiscal year-end date and the date of the financial statements. This can include reviewing meeting minutes, consulting legal representation, and analysing the capital budget. The auditor can then help determine the significance of each event and whether it warrants adjustment or disclosure.
In conclusion, subsequent events can have a material impact on the financial statements, and auditors play a vital role in ensuring that these events are appropriately addressed. By evaluating and disclosing significant events that occur after the reporting period, companies can provide investors with transparent and accurate financial information.
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Auditing procedures and evidence gathering
Auditing standards define subsequent events as events or transactions that occur after the balance sheet date but before the issuance of financial statements. These events have a material impact on the financial statements and may require adjustment or disclosure.
Auditors play a crucial role in evaluating subsequent events and ensuring they are adequately considered and reflected in the financial statements. They must gather sufficient appropriate audit evidence to support their findings. This evidence includes reviewing relevant documentation, such as meeting minutes, legal documents, and financial reports. For example, if a company faced a lawsuit before the balance sheet date, and the lawsuit was settled during the subsequent events period, the auditor would need to adjust the contingent loss amount in the financial statements to match the actual settlement amount.
The auditor's responsibility extends beyond simply identifying the occurrence of subsequent events. They are also tasked with assessing their impact on the financial statements. This involves a thorough understanding of the company's financial position and the potential consequences of the subsequent events. Auditors must exercise judgment and consider the relevance and materiality of the subsequent events in relation to the financial statements.
In some cases, a subsequent event may have such a significant impact on the entity that the auditor includes an emphasis paragraph in their report. This paragraph directs the reader's attention to the event and its effects, ensuring transparency and a comprehensive understanding of the financial statements.
To summarise, auditing procedures for evidence gathering in the context of subsequent events involve the following key steps:
- Identify and review relevant documentation: This includes meeting minutes, legal proceedings, financial reports, and other records that can provide evidence of subsequent events.
- Analyse the impact of subsequent events: Assess how the subsequent events affect the financial statements, including any adjustments or disclosures that may be necessary.
- Evaluate the materiality of subsequent events: Determine the significance of each event and whether it warrants adjustment or disclosure in the financial statements.
- Compare with interim financial statements: Compare the latest available interim financial statements with the financial statements being reported upon to identify any discrepancies or adjustments required due to subsequent events.
- Collaborate with management: Discuss subsequent events and their potential impact with the company's management team to gain insights into their perspective and intended actions.
- Make appropriate adjustments: If necessary, adjust the financial statements to reflect the additional information or changes in estimates resulting from the subsequent events.
- Ensure timely reporting: Complete the auditing procedures and issue the auditor's report within the subsequent period, which may vary in duration depending on the practical requirements of each audit.
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Frequently asked questions
Subsequent events are events that occur after a company’s year-end period but before the release of the financial statements. They are also referred to as 'events after the reporting period'.
An auditor is responsible for ensuring that all events occurring between the reporting date and the date of their report have been adequately considered and that sufficient appropriate audit evidence has been gathered. The auditor will also consider whether the financial statements need amending based on the facts that may materially affect them.
There are two types of subsequent events. The first type, known as recognised events, arises from conditions that existed as of the balance sheet date. The second type provides additional information about pre-existing conditions that existed on the balance sheet date.
Subsequent events that have a material effect on the financial statements require adjustment or disclosure. A disclosure is also required when the conditions did not exist prior to the balance sheet date, for example, a fire in the company's warehouse that destroys inventory and assets.
