Clarified Auditing Standards: Subsequent Events and Subsequently Discovered Factsby
The objectives of the auditor under AU-C Section 560 are, first, to obtain sufficient appropriate audit evidence about events occurring between the date of the financial statements and the date of the auditor's report. Such events that require adjustment of, or disclosure in, the financial statements must be appropriately reflected in those financial statements considering the applicable financial reporting framework.
Secondly, the auditor must respond appropriately to events that become known after the date of the auditor's report that may have caused the auditor to revise the previously issued auditor's report.
When a predecessor auditor is requested to reissue a previously issued auditor's report on financial statements that is to be presented on a comparative basis with current-period financial statements, the auditor must perform specified procedures to determine whether the previously issued report is still appropriate.
Definitions Under AU-C Section 560
This standard contains the following terms:
Date of the financial statements. The date of the end of the latest period covered by the financial statements.
Date of the auditor's report. The date of the auditor's report in accordance with AU-C Section 700, Forming an Opinion and Reporting on Financial Statements. For nonpublic entities, this is the date financial statements are available to be issued; for public entities, the date financial statements are issued should be used. Financial statements are available to be issued or issued when all the auditor's quality-control procedures have been completed and when management of the reporting entity has given final approval to the financial statements and footnotes.
Subsequent events. Events occurring between the date of the financial statements and the date of the auditor's report.
Subsequently discovered facts. Facts that become known to the auditor after the date of the auditor's report that, had they been known to the auditor at that date, may have caused the auditor to revise the auditor's report.
Practical Subsequent Events: Auditing Procedures
1. Read the client's general ledger activity for unusual items greater than the lower limit for individually significant items, any transactions affecting valuation of assets or liabilities, related party transactions, commitments or contingencies, and payments to regulatory authorities. Cover the period from the reporting date to the date of the auditor's report.
2. Discuss with client management and document any of the following matters occurring after the reporting date, up to the date of the auditor's report:
a. Changes in client operations or market conditions.
b. Revenues and profit trends compared to budgets and/or industry trends.
c. Subsequent recording of cancellation of sales orders.
d. Commitments for major purchases of inventory or capital additions that could result in possible losses due to price trends.
e. Assessments or refunds of federal, state, and local taxes; changes in laws; agent examination reports; or deficiency assessments.
f. Litigation, claims, and assessments.
g. Liabilities in dispute or being contested, such as customer's claims, creditor's invoices, or claims, warranties, guarantees, and state and local tax assessments.
h. Dividends declared or paid.
i. Losses of important customers or vendors, exceptional bad debt losses, or pledging of receivables.
j. Changes in accounting and financial policies.
k. New pension plans.
l. New borrowings, issues of capital stock, or other financings.
m. Potential losses on securities and impairment losses on long-lived tangible and intangible assets.
n. Significant matters in lawyer's letters.
o. Unusual or material adjustments made.
p. Expiration or cancellation of insurance.
3. Read and excerpt minutes of meetings of stockholders, directors, and other executive committees.
4. Consider and discuss with management possible effects on financial statements from any matters causing substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are available for issue or are issued.
These eBook resources, without CPE credit, can be obtained from my website:
- Small Audits Made Easy and Profitable
- Performing Auditing Tests of Balances Procedures
- Staff Training Series for Entry-Level Accountants, New In-Charge Accountants and Engagement Leaders
- Key Accounting Issues for Non-Profit Organizations
- A Practical Potpourri of Time Savings on Audits
- The Financial Reporting Framework for Small- and Medium-Sized Entities
My exclusive presentation of webcasts on CPEcredit.com and self-study courses covering various applications of auditing standards can be accessed by clicking the appropriate box on the left side of my home page, www.cpafirmsupport.com. Registered users on my website receive a 20 percent discount on CPE materials presented by myself and numerous other authors on a variety of professional topics.
My assistance in CPA firm quality-control consulting, audit planning, and peer-review preparation can be obtained by sending an email using the â€œContact Usâ€ tab on my home page.