What is the auditors responsibility for detecting subsequent events?
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: Show
The auditors' responsibilitiesISA 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 reportUntil 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 accountsDuring 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. ProceduresThe 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:
If, after the financial statements have been issued, management amends the financial statements, the auditor shall: rt ordinarily is issued in connection with historical financial statements that purport to present financial position at a stated date and results of operations and cash flows for a period ended on that date. However, events or transactions sometimes occur subsequent to the balance-sheet date, but prior to the issuance of the financial statements, that have a material effect on the financial statements and therefore require adjustment or disclosure in the statements. These occurrences hereinafter are referred to as "subsequent events."Note: When performing an integrated audit of financial statements and internal control over financial reporting, refer to paragraphs .93-.97 ofAS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, which provide direction with respect to subsequent events in an audit of internal control over financial reporting. .02 Two types of subsequent events require consideration by management and evaluation by the independent auditor. .03 The first type consists of those events that provide additional evidence with respect to conditions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements. All information that becomes available prior to the issuance of the financial statements should be used by management in its evaluation of the conditions on which the estimates were based. The financial statements should be adjusted for any changes in estimates resulting from the use of such evidence. .04 Identifying events that require adjustment of the financial statements under the criteria stated above calls for the exercise of judgment and knowledge of the facts and circumstances. For example, a loss on an uncollectible trade account receivable as a result of a customer's deteriorating financial condition leading to bankruptcy subsequent to the balance-sheet date would be indicative of conditions existing at the balance-sheet date, thereby calling for adjustment of the financial statements before their issuance. On the other hand, a similar loss resulting from a customer's major casualty such as a fire or flood subsequent to the balance-sheet date would not be indicative of conditions existing at the balance-sheet date and adjustment of the financial statements would not be appropriate. The settlement of litigation for an amount different from the liability recorded in the accounts would require adjustment of the financial statements if the events, such as personal injury or patent infringement, that gave rise to the litigation had taken place prior to the balance-sheet date. .05 The second type consists of those events that provide evidence with respect to conditions that did not exist at the date of the balance sheet being reported on but arose subsequent to that date. These events should not result in adjustment of the financial statements. Some of these events, however, may be of such a nature that disclosure of them is required to keep the financial statements from being misleading. Occasionally such an event may be so significant that disclosure can best be made by supplementing the historical financial statements with pro forma financial data giving effect to the event as if it had occurred on the date of the balance sheet. It may be desirable to present pro forma statements, usually a balance sheet only, in columnar form on the face of the historical statements. .06 Examples of events of the second type that require disclosure to the financial statements (but should not result in adjustment) are:
.07 Subsequent events affecting the realization of assets such as receivables and inventories or the settlement of estimated liabilities ordinarily will require adjustment of the financial statements (see paragraph .03) because such events typically represent the culmination of conditions that existed over a relatively long period of time. Subsequent events such as changes in the quoted market prices of securities ordinarily should not result in adjustment of the financial statements (see paragraph .05) because such changes typically reflect a concurrent evaluation of new conditions. .08 When financial statements are reissued, for example, in reports filed with the Securities and Exchange Commission or other regulatory agencies, events that require disclosure in the reissued financial statements to keep them from being misleading may have occurred subsequent to the original issuance of the financial statements. Events occurring between the time of original issuance and reissuance of financial statements should not result in adjustment of the financial statements unless the adjustment meets the criteria for the correction of an error or the criteria for prior period adjustments set forth in Opinions of the Accounting Principles Board. Similarly, financial statements reissued in comparative form with financial statements of subsequent periods should not be adjusted for events occurring subsequent to the original issuance unless the adjustment meets the criteria stated above. .09 Occasionally, a subsequent event of the second type has such a material impact on the entity that the auditor may wish to include in his report an emphasis paragraph directing the reader's attention to the event and its effects. (See paragraph .19 of AS 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.) Auditing Procedures in the Subsequent Period.10 There is a period after the balance-sheet date with which the auditor must be concerned in completing various phases of his audit. This period is known as the "subsequent period" and is considered to extend to the date of the auditor's report. Its duration will depend upon the practical requirements of each audit and may vary from a relatively short period to one of several months. Also, all auditing procedures are not carried out at the same time and some phases of an audit will be performed during the subsequent period, whereas other phases will be substantially completed on or before the balance-sheet date. As an audit approaches completion, the auditor will be concentrating on the unresolved auditing and reporting matters and he is not expected to be conducting a continuing review of those matters to which he has previously applied auditing procedures and reached satisfaction. .11 Certain specific procedures are applied to transactions occurring after the balance-sheet date such as (a) the examination of data to assure that proper cutoffs have been made and (b) the examination of data which provide information to aid the auditor in his evaluation of the assets and liabilities as of the balance-sheet date. .12 In addition, the independent auditor should perform other auditing procedures with respect to the period after the balance-sheet date for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with generally accepted accounting principles. These procedures should be performed at or near the date of the auditor's report. The auditor generally should:
Footnotes (AS 2801 - Subsequent Events):This paragraph is not intended to preclude giving effect in the balance sheet, with appropriate disclosure, to stock dividends or stock splits or reverse splits consummated after the balance-sheet date but before issuance of the financial statements. However, see paragraph .05 as to the desirability of presenting pro forma financial statements to supplement the historical financial statements in certain circumstances. Which of the following procedures should an auditor most likely perform regarding subsequent events?Answer and Explanation: Option (c) is the correct answer. An auditor most likely inquires about the entity's legal counsel concerning litigation, claims, and assessments arising after year-end because it may arise after year-end but before issuance of financial statements for the period.
How an auditor can be responsible for detecting frauds?WHAT IS THE INDEPENDENT AUDITOR'S RESPONSIBILITY FOR THE DETECTION OF FRAUD? AN AUDIT CANNOT GUARANTEE THE ABSENCE OF FRAUD, BUT IT SHOULD ESTABLISH THAT THE FINANCIAL STATEMENT ARE FREE FROM MISSTATEMENTS CAUSED BY MATERIAL FRAUD.
What is a subsequent event in audit process?In this ISA, the term “subsequent events” is used to refer to both events occurring between the date of the financial statements and the date of the auditor's report, and facts discovered after the date of the auditor's report.
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