CA Inter Audit Notes – Chapter 7 (Part 1)

Completion and Review – SA 560 (Subsequent Events)

ICAI Exam-Oriented Notes | Detailed Revision | Important Points & Mnemonics

Chapter Overview

Before signing the audit report, the auditor must complete several important procedures, including:

• Subsequent Events (SA 560)
• Going Concern (SA 570)
• Evaluation of Misstatements (SA 450)
• Written Representations (SA 580)
• Communication with Those Charged with Governance (SA 260)

1. Subsequent Events (SA 560)

Meaning

Subsequent Events are:

Events occurring between the date of the financial statements and the date of the auditor’s report, and facts becoming known after the auditor’s report.

Three Time Periods

Date of Financial Statements
            │
            │
            ▼
Date of Auditor's Report
            │
            │
            ▼
Date Financial Statements are Issued
            │
            │
            ▼
After Issue of Financial Statements

SA 560 deals with the auditor’s responsibilities during all these periods.

2. Types of Subsequent Events

There are two types of subsequent events.

Type 1 – Adjusting Events

These provide evidence of conditions existing on the balance sheet date.

Financial statements require adjustment.

Examples

• Insolvency of debtor after year-end confirming receivable was impaired.
• Settlement of court case proving provision required adjustment.
• Discovery of fraud existing before year-end.

Remember

Existing condition → Adjustment required.

Type 2 – Non-adjusting Events

These provide evidence of conditions arising after the balance sheet date.

Usually only disclosure is required if material.

Examples

• Issue of new shares.
• Planned merger.
• Fire destroying inventory after year-end.
• Earthquake occurring after reporting date.

Remember

New condition → Disclosure required.

Quick Comparison

3. SA 560 – Objectives of Auditor

The auditor has two main objectives.

Objective 1

Obtain sufficient appropriate audit evidence that all subsequent events requiring:

• Adjustment
• Disclosure

have been properly reflected in financial statements.

Objective 2

Respond appropriately when facts become known after the audit report which could have affected the auditor’s opinion.

Mnemonic

AR

• A → Adjustment/Disclosure
• R → Respond to later facts

4. Audit Procedures Between Financial Statement Date and Audit Report Date

The auditor performs procedures covering the entire period up to the audit report date.

Procedures

(1) Understand Management’s Process

Understand procedures established by management to identify subsequent events.

(2) Inquiry

Ask management and Those Charged with Governance:

• Any important events?
• Litigation?
• Major losses?
• New borrowings?
• Business restructuring?

(3) Read Minutes

Read minutes of:

• Board Meetings
• Shareholders’ Meetings
• Audit Committee Meetings

held after year-end.

(4) Read Interim Financial Statements

Review:

• Interim financial statements
• Latest management accounts
• Budgets
• Cash flow statements
• Accounting records after year-end

If Auditor Finds a Subsequent Event

The auditor should determine whether:

• Adjustment is necessary
  OR
• Disclosure is necessary

and ensure financial statements are appropriately amended.

5. Written Representation

The auditor shall obtain written representation (SA 580) confirming:

• All subsequent events requiring adjustment have been adjusted.
• All subsequent events requiring disclosure have been disclosed.

6. Meaning of “Date Financial Statements are Issued”

It means the date when:

• Auditor’s report
  and
• Audited financial statements

are made available to third parties.

Important point:

The financial statements cannot be issued before the auditor’s report.

7. Facts Becoming Known After Auditor’s Report but Before Financial Statements are Issued

Normally:

The auditor has no obligation to perform further audit procedures.

However, if a material fact becomes known:

The auditor should:

Step 1

Discuss with management.

Step 2

Determine whether financial statements require amendment.

Step 3

Ask management how it proposes to deal with the matter.

If Management Amends Financial Statements

The auditor should:

• Perform audit procedures on amendment.
• Extend audit procedures up to the date of the new report.
• Issue a new auditor’s report.

Important:

New audit report date cannot be earlier than approval of amended financial statements.

If Management Refuses to Amend

Situation 1

Auditor’s report not yet issued

→ Modify opinion under SA 705.

Situation 2

Auditor’s report already issued

→ Tell management not to issue financial statements.

If management still issues them,

→ Auditor should take steps to prevent reliance on the report.

8. Facts Becoming Known After Financial Statements are Issued

Again,

The auditor has no obligation to continue audit procedures.

If new material facts emerge:

Auditor should

• Discuss with management.
• Decide whether amendment is necessary.
• Ask management to amend financial statements.

If Management Amends

Auditor should:

• Perform audit procedures.
• Review whether previous users are informed.
• Extend procedures up to new report date.
• Issue new auditor’s report.

Additional Requirement

The new report should contain:

• Emphasis of Matter Paragraph
  OR
• Other Matter Paragraph

referring to:

• Amendment made
• Earlier auditor’s report

If Management Does Not Amend

The auditor should:

• Notify management.
• Inform Those Charged with Governance.
• Take steps to prevent future reliance on auditor’s report.

Auditor’s Responsibilities – Summary

Between Financial Statements & Audit Report

✔ Perform audit procedures.

✔ Identify subsequent events.

✔ Ensure adjustment/disclosure.

✔ Obtain written representation.

After Audit Report but Before Issue

✔ No routine audit work.

✔ If material fact discovered:

• Discuss
• Amend if required
• Issue new report

After Financial Statements are Issued

✔ No routine audit work.

✔ If material fact discovered:

• Discuss
• Amend
• Issue new report
• Include Emphasis of Matter/Other Matter paragraph
• Prevent reliance if management refuses

Important Dates

Exam Tips

Remember:

SA 560 = Three Time Periods

1. Before audit report.
2. After audit report but before issue.
3. After issue of financial statements.

Questions frequently test the auditor’s responsibilities in each period.

Mnemonics

Audit Procedures

UMIR

• U – Understand management procedures
• M – Minutes
• I – Inquiry
• R – Read interim financial statements

Auditor’s Action

DAM

• D – Discuss with management
• A – Amend financial statements (if needed)
• M – Modify/New report if required

One-Page Revision Sheet

• SA Applicable: SA 560 – Subsequent Events
• Types: Adjusting Events & Non-adjusting Events
• Adjusting Events: Existing conditions → Adjustment
• Non-adjusting Events: New conditions → Disclosure
• Audit Procedures: Understand management process, Inquiry, Minutes, Interim FS
• Written Representation: Obtain under SA 580
• After Audit Report: No routine procedures; act if material facts arise
• If FS Amended: Perform additional procedures and issue a new auditor’s report
• If Management Refuses: Modify opinion (if report not issued) or prevent reliance (if report already issued)

Next Part: SA 570 – Going Concern (highly important for CA examinations).