14.10 Subsequent events/Post balance sheet events review (adjusting and non – adjusting events, auditor’s responsibility and audit procedures)

Subsequent events, also known as post-balance sheet events, refer to events or transactions that occur after the balance sheet date but before the audit report’s issuance. The auditor has the responsibility to evaluate these subsequent events to determine their impact on the financial statements. Subsequent events can be classified into two categories: adjusting events and non-adjusting events.

1. Adjusting Events: Adjusting events are those that provide additional evidence of conditions that existed at the balance sheet date. They require adjustments to the financial statements to ensure that they are presented fairly. Examples of adjusting events include the settlement of a lawsuit related to a prior period, the receipt of new information about the collectability of receivables, or the identification of errors in the financial statements.

The auditor’s responsibility regarding adjusting events is to ensure that these events are appropriately recognized, measured, and disclosed in the financial statements. The auditor should perform audit procedures to identify any adjusting events that may require adjustments to the financial statements. This may involve reviewing subsequent transactions, obtaining management representations, and considering the implications of subsequent events on the financial statements.

2. Non-Adjusting Events: Non-adjusting events are those that provide evidence of conditions that arose after the balance sheet date and do not require adjustments to the financial statements. These events are disclosed in the financial statements’ notes to inform the users about their occurrence and potential impact. Examples of non-adjusting events include the acquisition or sale of a subsidiary, a natural disaster occurring after the balance sheet date, or significant changes in the financial markets.

The auditor’s responsibility regarding non-adjusting events is to evaluate the adequacy and appropriateness of the disclosure of these events in the financial statements. The auditor should review management’s assessment of the significance of non-adjusting events and determine if the disclosures are complete and in compliance with the applicable accounting standards.

Audit procedures related to subsequent events typically include the following:

1. Inquire with Management: The auditor should communicate with management to understand any subsequent events that may have occurred and their potential impact on the financial statements.
2. Review of Minutes and Correspondence: The auditor may review minutes of meetings and relevant correspondence to identify any subsequent events that may affect the financial statements.
3. Examination of Subsequent Transactions: The auditor may examine subsequent transactions, such as the receipt of significant customer orders, the repayment of significant loans, or the occurrence of significant litigation, to assess their impact on the financial statements.
4. Review of Subsequent Financial Information: The auditor may review subsequent financial information, such as interim financial statements or management accounts, to gather additional evidence regarding subsequent events.