i) Subsequent events

The purpose of ISA 560 on auditing is to establish standards and provide guidance on the
auditor’s responsibility regarding subsequent events. In this ISA the term “subsequent event” 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 not of a major
restructuring.
Adjusting events
Adjusting events are events after the reporting period that result in adjustment to the financial
statements because they provide additional information related to condition that exist at the date
of financial statements. Under IFRS, IAS10 events after the reporting period prescribes
accounting for events after the balance sheet date.
Examples of adjusting events given in IAS 10 are
 the resolution of a court case, as the result of which a provision has to be recognised
instead of the disclosure by note of a contingent liability;
 evidence of impairment of assets;
 bankruptcy of a major customer;
 sale of inventories at prices suggesting the need to reduce the figure in the Statement of
Financial Position to the net value actually realized;
 discovery of fraud or errors that show the financial statements were incorrect

Non-adjusting events
An event after the reporting period that is suggestive of a condition that arose after the end of the
reporting period.
Examples of non-adjusting events given
 decline in market value of investments;
 announcement of a plan to discontinue part of the enterprise;
 major purchases and sales of assets;
 destruction of a major asset by fire etc;
 sale of a major subsidiary;
 major dealings in the company's ordinary shares;
Auditors have a responsibility to review subsequent events before they sign the auditor’s report,
and may have to take action if they become aware of subsequent events between the date, they
sign the auditor’s report and the date the financial statements are issued.
The two types of subsequent events are:
1. An event that provides additional information about circumstances in existence as of the
reporting date, including estimates used to prepare the financial statements for that
period.
2. An event provides new information about conditions that did not exist as of the reporting
date.

ii) Whether the following events were subsequent or non subsequent.

15 August 2015

The event is an adjusting event because at the reporting date the customer has already been
declared bankrupts hence the need for an adjustment. It provides additional information
concerning the recoverability of the debt at the reporting date and as it represents 11% of the
receivables is likely to be material to the financial statements reducing the receivables balances
and profits.

1 November 2015

The event is non adjusting event. It occurred after reporting date and does not provide further
information about conditions at the year end. On this bases the adjustments made is not
necessary. However, the impact of the leak is likely to be significant as the company may incur
penalties or fines due to the environmental damage. Disclosure of the event and an estimate of
the financial effect should be made.

30 November 2015

The event is non adjusting event. It occurred after the reporting date and does not relate to
conditions which existed at the year end. Although, there will be a loss of production and
reduction in profits there is no indication that this is significant enough to call into question
going concern. Disclosure should be made of the events surrounding the fire and an estimate of
the financial effect
iii) The auditor’s responsibility and the audit procedures that should be carried out at the
noted dates.

Auditor’s Responsibility

ISA 560 discusses auditor’s responsibilities for events that can occur under one of the following
three circumstances:
- Events that occurred between the financial statements date and auditor’s report date
- Events that become known after auditor’s report is issued but before financial statements
are issued
- Events that become known after financial statements are issued
Events that occurred between financial statements date and auditor’s report date
It is the responsibility of the management to identify all the subsequent events occurring during
this period. And on request of auditor, management or those charged with governance shall
provide a written representation that all the subsequent events requiring adjustment/disclosure
have been adjusted/disclosed. Auditor applies audit procedures to obtain evidence that all the
events that occurred during this period and required adjustments or disclosure has been
identified.
Events that become known after auditor’s report is issued but before financial statements
are issued
Auditor is not liable to perform audit procedures even after issuing auditor’s report. However,
after auditor’s report is issued but before issuing financial statements, auditor comes to know a
fact of such nature which if it was known at the date auditor’s report is issued then auditor might
have issued a different report then auditor shall:
 Discuss the matter with management and where appropriate to those charged with
governance
 Determine whether financial statements should be updated. If yes then inquire
management has planned to deal with it. In such case the following situations can arise:
a) Management agrees to amend
In this case auditor shall:
 Conduct audit procedures on the amendments
 In the absence of any special circumstances (discussed below) auditor shall:
 Extend the audit procedures for obtaining audit evidence towards subsequent events up to
the date of new audit report.
 Provide an amended audit report that shall not be dated before the date amended financial
statements are approved.

b) Management disagrees to amend

Generally when management disagrees to amend the financial statement where auditor consider
such amendments necessary than auditor issues a modified report where such modification can
either result in a qualified or adverse report.

Events that become known after financial statements are issued

Auditor is under no obligation to apply audit procedures even after financial statements are
issued. However, after financial statements are issued, auditor comes to know a fact of such
nature which if it was known at the date auditor’s report is issued then auditor might have issued
a different report then auditor shall:
Discuss the matter with management and where appropriate to those charged with governance to
determine whether financial statements should be updated. If yes then inquire if management has
planned to deal with it. The auditor will conduct audit procedures on amendments, review steps
taken by the managements and issue a new report on the amendments made.
If the management decide not to act on the new information provided steps to notify everyone in
receipt of previously issued financial statement and does not implement amendments which in
the opinion of auditor are necessary than auditor shall notify management or those charged with
governance that he will seek to prevent future reliance auditor’s report.

Audit Procedures on Events

15 August 2015- Bankruptcy of major customer representing 11% of the trade receivables on
the statement of financial statements

The bankruptcy of the major customer took place after the year end but before the audit report is
signed. In accordance with ISA, the auditor id required to perform audit procedures to obtain
appropriate evidence that all events up to the date of the auditor’s report that may require
adjustment of, or disclosure in, the financial statements have been identified. These procedures
would include the following:

Cost- Verify the amount owed by the customer who was declared bankruptcy. This done to
ascertain the truth in the value asserted.

Authority- the auditor need to confirm the signing-off by the management or anyone with
authority to declare the customer bankruptcy.
Existence- verification of the existence of the customer who was declared bankruptcy physically
and in the books of the client and the confirming letter of representation that there are no further
amounts due from this customer.

Valuation- enquire on the valuation of the owed balance by recalculation and verification of the
amount.

21 September 2015- Financial Statements approved by directors

Authority – verify the mutual agreement and authentication of the signatures of the directors who
approved the financial statements.

Presentation – confirm if the directors followed the company policies and procedures in
approving the financial statements

Inspection – verify whether the financial statements are prepared according to the Generally
Accepted Accounting Principles (GAAP)

22 September 2015- Audit work completed and auditor’s report signed.

Presentation- verify if the auditor’s report is presented to management

1 November 2015- Accidental release of toxic chemicals into the river from the company’s oil
refinery resulting in severe damage to the environment. Management had amended and made
adequate disclosure of the event in the financial statements.

This event took place after the audit report has been signed but before the financial statements
are issued. After the date of the audit report, the auditor does not have any responsibility to
perform audit procedures or make enquiries. Nevertheless, in this case as the auditor has been
made aware of the chemical spill, the situation should be discussed with management and
appropriate course of action decided. Audit procedures would be as follows

Cost- obtain any documentation on the event vis a vis board minutes, copies of environmental
legislation and if available interim reports from the environmental agents to determine the extent
of the damage.
Existence- ensure that the disclosure of the event appears appropriate.

Valuation- verify if the amount of costs or penalties match the extent of the damage caused.

Presentation – Confirm the details included in the disclosure notes to the accounts by discussing
the situation with management, looking at press reports and any other records which may be
available. Assess the adequacy of the disclosure in compliance with IAS 10.

Inspection – Check that no adjustments have been made in the financial statements in respect of
the spill. Review correspondence with legal experts regarding any liability for environmental
damage and obtain a revised version of the letter of representation confirming that there are no
other events which should be brought to the auditor’s attention.

A new audit report would need to be issued following the amendment of financial statements
after the signing of the initial audit report. This should be dated no earlier than the date of the
revised financial statements. The revised report should include an emphasis of matter paragrapg
highlighting the events which are disclosed in the notes to the accounts

23 November 2015- Financial Statements issued to members of Noczim

Occurrence- verify whether the disclosed events, transactions and other matters have occurred
and pertain to the entity

Completeness- to review whether all disclosures that should have been included in the financial
statements have been included.

Classification – verify whether the financial information is appropriately presented, described

and disclosures are clearly expressed in accordance to Generally Accepted Accounting Principles
(GAAP) .

30 November 2015- A fire at one of the company’s oil wells completely destroys the well.
Drilling a new well will take ten months with a consequent loss in oil production this time.

The fire at the oil well takes place after the financial statements have been issued. The auditor
has no obligation at all to make any inquiries regarding such financial statements by this date.
When, as in this case, the auditor becomes aware of a fact which would have had an impact on
the audit report, the auditor should consider whether the financial statements need revision,
should discuss the matter with the management and decide on the appropriate course of action.

Procedures would be as follows:

Clarify the facts by discussion with management, reading minutes of board meetings and any
reports submitted by experts on site.

Check insurance documents to confirm that the damage caused to the well and any consequential
damage for example, environmental, is covered. Assess the basis on which the ten -month time
period has been calculated for drilling the new well to determine whether it is reasonable. Both
of these factors may affect the viability of the business which should be assessed.

Determine how management intends to deal with the issue. If the accounts are to be revised
review the steps taken by management to ensure that anyone who had received the previously
issued financial statements is informed of the situation.

If management does not revise the financial statements and the auditor considers that revision is
necessary, consider the means by which recipients of the initial financial statements can be
contacted. Before any further action is taken legal advice should be sought.
 Question 17

You are the auditor of Noczim, a limited liability company which extracts, refines and sells oil
and petroleum related products. The audit of Noczim for the year ended 30 June 2015 had the
following events:
Date Event
15 August 2015 Bankruptcy of major customer representing 11% of the
trade receivables on the statement of financial position.
21 September 2015 Financial statements approved by directors.
22 September 2015 Audit work completed and auditors' report signed.
1 November 2015 Accidental release of toxic chemicals into the river from
the company's oil refinery resulting in severe damage to the
environment. Management had amended and made
adequate disclosure of the event in the financial statements.
23 November 2015 Financial statements issued to members of Noczim.
30 November 2015 A fire at one of the company's oil wells completely
destroys the well. Drilling a new well will take ten months
with a consequent loss in oil production during this time.
51
Required
(i) ISA 560 Subsequent Events explains the audit work required in connection with
subsequent events. Explain what you understand by the term subsequent events
(4 marks)
(ii) For, 15 August 2015,1 November 2015,and 30November 2015 dates state whether the
events occurring on those dates are adjusting or non-adjusting, giving reasons for
your decision. (6 marks)
(iii) Explain the auditor's responsibility and the audit procedures that should be carried out at the
noted dates. (10 marks)