COURSE MATERIAL 8

COMPLETING THE AUDIT – CONTINUATION

ISSUE THE AUDIT REPORT

The auditor should wait to decide the appropriate audit report to issue until all evidence
has been accumulated and evaluated, including all steps of completing the audit discussed so far.
Because the audit report is the only thing that most users see in the audit process, and the
consequences of issuing an inappropriate report can be severe, it is critical that the report be
correct.

In most audits, the auditor issues an unqualified report with standard wording. Firms
usually have an electronic template of this report and need to change only the name of the client,
title of the financial statements, and date. When a CPA firm decides that a standard unqualified
report is inappropriate, there will almost certainly be extensive discussions among technical
partners in the CPA firm and often with client personnel. Most CPA firms have comprehensive
audit reporting manuals to assist them in selecting the appropriate wording of the report they
decide to issue.

Standard Unmodified Audit Report

The reference to standard refers to the uniform wording typically used in audit reports,
while unmodified opinion refers to the fact that the auditor’s opinion about the financial statements
contains no material exceptions or qualifications. Different auditors may alter the wording or
presentation slightly, but the meaning will be the same. Relative to the previous standard
unmodified report, the proposed report presents the opinion first and provides additional
information related to the responsibilities of management for preparing the financial statements
and responsibilities of the auditor in conducting the audit. The auditor’s standard unmodified
opinion audit report contains eight distinct parts:

1. Report title. Auditing standards require that the report be titled and that the title include
the word independent. For example, appropriate titles include “independent auditor’s report,”
“report of independent auditor,” or “independent accountant’s opinion.” The requirement that
the title include the word independent conveys to users that the audit was unbiased in all aspects.

2. Audit report address. The report is usually addressed to those for whom the report is
prepared, including the company, its stockholders, or the board of directors. It has become
customary to address the report to the board of directors and stockholders to indicate that the
auditor is independent of the company.

3. Opinion section. The Opinion section, which states the auditor’s conclusions based on
the results of the audit, is presented first due to its importance and must include the heading
“Opinion.” The Opinion section is so important that often the entire audit report is referred to
simply as the auditor’s opinion. The first paragraph of the Opinion section indicates that the CPA
firm has performed an audit, which distinguishes the report from a compilation or review report.
The first paragraph also lists the financial statements that were audited, including the notes to
the financial statements as well as the balance sheet dates and the accounting periods covered in
the income statement and statement of cash flows. The wording of the financial statements in the
report should be identical to the titles used by management on the financial statements. The
opinion paragraph is stated as an opinion rather than as a statement of absolute fact or a
guarantee. The intent is to indicate that the conclusions are based on professional judgment. The
phrase in our opinion indicates that there may be some information risk associated with the
financial statements, even though the statements have been audited. The opinion paragraph also
refers to the relevant financial reporting framework.

4. Basis for opinion. The basis for opinion paragraph states the audit was conducted in
accordance with generally accepted auditing standards and references additional responsibilities
as detailed in the Auditor’s Responsibilities section of the report. The auditor also provides an
affirmative statement that they are independent of the company and that they have fulfilled their
professional ethical obligations. The final sentence indicates the auditor believes that sufficient
appropriate evidence has been obtained to support the auditor’s opinion.

5. Management’s responsibility. The report must include the heading “Responsibilities of

Management and Those Charged with Governance for the Financial Statements” and a paragraph
that describes management’s responsibility for the financial statements. Management’s
responsibility includes selecting the appropriate accounting principles and maintaining internal
control over financial reporting sufficient for preparation of financial statements that are free of
material misstatements due to fraud or error. This section references management’s responsibility
under accounting standards to assess the ability of the company to continue as a going concern
and also references the responsibility of those charged with governance (e.g., the board of
directors) to oversee the financial reporting process.

6. Auditor’s responsibility. This section must include the heading “Auditor’s

Responsibilities for the Audit of the Financial Statements” followed by three paragraphs that
describe the auditor’s responsibility.

The first paragraph notes that the audit is designed to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to fraud or error.
The inclusion of the word material conveys that auditors are only responsible to search for
significant misstatements, not minor misstatements that do not affect users’ decisions. The use of
the term reasonable assurance is intended to indicate that an audit cannot be expected to completely
eliminate the possibility that a material misstatement will exist in the financial statements. In
other words, an audit provides a high level of assurance, but it is not a guarantee.

The second paragraph describes the scope of the audit and the evidence accumulated
about the amounts and disclosures in the financial statements. This paragraph indicates that the
procedures depend on the auditor’s professional judgment and includes an assessment of the risk
of material misstatements in the financial statements. It also indicates that the auditor considers
internal control relevant to the preparation and fair presentation of the financial statements in
designing the audit procedures performed, but this assessment of internal control is not for the
purpose of and is not sufficient to express an opinion on the effectiveness of the entity’s internal
control. The last two bullet points of this paragraph (please refer to the sample audit report)
indicate that the audit includes evaluating the appropriateness of accounting policies selected,
the reasonableness of accounting estimates, the overall financial statement presentation, and the
ability of the company to continue as a going concern.
 Finally, the third paragraph indicates the auditor communicates to those charged with
governance the planned scope and timing of the audit as well as any significant findings,
including significant deficiencies and material weaknesses in internal control.

7. Signature and address of CPA firm. The signature identifies the CPA firm or practitioner
who performed the audit. Typically, the firm’s name is used because the entire CPA firm has the
legal and professional responsibility to ensure that the quality of the audit meets professional
standards. The city and state of the audit firm should also be indicated.

8. Audit report date. The appropriate date for the report is the one on which the auditor
completed the auditing procedures needed to obtain sufficient appropriate audit evidence. This
date is important to users because it indicates the last day of the auditor’s responsibility for the
review of significant events that occurred after the date of the financial statements. If in the audit
report, the balance sheet is dated December 31, 2024, and the audit report is dated February 15,
2025, this indicates that the auditor searched for material unrecorded transactions and events that
occurred up to February 15, 2025.

Conditions for Standard Unmodified Opinion Audit Report

The standard unmodified opinion audit report is issued when the following conditions
have been met:

1. All statements—balance sheet, income statement, statement of changes in stockholders’

equity, and statement of cash flows—as well as required disclosures, are included in the financial
statements.

2. Sufficient appropriate evidence has been accumulated, and the auditor has conducted
the engagement in a manner that enables him or her to conclude that the audit was performed in
accordance with the applicable auditing standards.

3. The financial statements are presented fairly in all material respects in accordance with
generally accepted accounting principles or other appropriate accounting framework. This also
means that adequate disclosures have been included in the footnotes and other parts of the
financial statements.

4. There are no circumstances requiring the addition of an emphasis-of-matter paragraph

or modification of the wording or auditor’s opinion in the report.

When these conditions are met, the standard unmodified opinion audit report for an audit
is issued. The standard unmodified opinion audit report is sometimes called a clean opinion
because there are no circumstances requiring a modification of the auditor’s opinion. The
standard unmodified opinion audit report is the most common audit opinion. Sometimes
circumstances beyond the client’s or auditor’s control prevent the issuance of an unmodified
(“clean”) opinion. However, in most cases, companies make the appropriate changes to their
accounting records to avoid a qualification or modification by the auditor.

Reporting Material Uncertainty for Going Concern

According to PAS 570, Going concern, if adequate disclosure is made in the financial statements
about material events or uncertainties that would cause doubt about the entity’s ability to
continue as a going concern, then the auditor shall issue an unmodified audit opinion and include
a section in the audit report titled “Material Uncertainty Related to Going Concern.” The section
should (1) draw the users’ attention to the note in the financial statements, and (2) state the events
or conditions that indicate a material uncertainty. The section immediately follows the basis of
opinion paragraph and is before the key matters section (if applicable).

If management does not have adequate disclosure about the material uncertainty, then
the auditor will either express a qualified or adverse audit opinion. If the use of the going-concern
basis of accounting is not appropriate, then the auditor will issue an adverse opinion.

Identify and Disclose Key Audit Matters

PAS 701, Communicating key audit matters in the independent auditor’s report, requires the reporting
of key audit matters (KAMs) for listed entities (as well as any other entities that are required by
regulation or legislation). For all other entities, key audit matters are included at the discretion of
the auditor.

Key audit matters are essentially those areas that the auditor considered to be of most
significance in the current audit. Significant matters are those that often involve difficult and
complex auditor judgments. Key audit matters include: (1) areas of higher assessed risk of
material misstatement and items that require significant judgment (such as estimates); (2) items
for which the auditor encountered significant difficulty (such as in obtaining sufficient evidence);
and (3) modifications to the planned approach due to control deficiencies.

KAMs are selected from matters communicated to those charged with governance
(TCWG). As the audit report highlights, the auditor has various reporting responsibilities to the
TCWG, including the audit plan, significant audit findings, and significant internal control
deficiencies. While PAS 701 provides some flexibility to enable auditors to include entity-specific
information, KAM is not a substitute for expressing a modified opinion.

Determine Whether Emphasis of Matter or Other Matter Paragraphs are Necessary

In PAS 706, there are some circumstances in which the auditor issues an unmodified
opinion but decides it is necessary to communicate certain matters in the audit report either in an
emphasis of matter or other matter explanatory paragraph.

Emphasis of Matter. The emphasis of matter paragraph does not affect the audit opinion;
however, there may be certain matters that, even if they are clearly disclosed in the financial
statement, are such that the auditor considers it necessary to draw the user’s attention to them.
In those instances, the auditor includes the paragraph immediately after the basis of opinion
section and uses the heading “Emphasis of Matter” with reference to the relevant note disclosure.
When a key audit matters section is presented in the auditor’s report, an Emphasis of Matter
paragraph may be presented either directly before or after the key audit matters. Examples of
such circumstances in which an emphasis of matter paragraph may be necessary include the
following:

• Significant uncertainty regarding the future outcome of exceptional litigation or regulatory

action (such as income taxes that may be collectible or payable)
• Early application of a new accounting standard that has a pervasive effect on the financial
statements
• Discontinued operations
• Threats of expropriation of assets
• Significant transactions with related parties
• Unusually important subsequent events

Other Matter. The auditor may consider it necessary to use the audit report to
communicate to users relevant information not in the financial statements. PAS 706, A11–A14
highlights possible circumstances in which the auditor may consider other matter(s) paragraph(s)
necessary:

• Law, regulations, or a common practice requires or permits the auditor to elaborate on certain
matters.
• The auditor has other reporting responsibilities that are in addition to the financial statements.
• The entity has prepared more than one set of financial statements; for example, one in
accordance with a national framework and one in accordance with IFRS.
• The financial statements were prepared for a special purpose and the auditor considers it
necessary to highlight that the distribution of the report is restricted to certain intended users.

In those instances, the auditor provides this information in an other matter(s) paragraph in
the auditor’s report. The other matter(s) paragraph can appear in various places. If there is a key
audit matters section in the report, the auditor may place other matter(s) after the KAM section,
and may consider adding further context to the heading, such as “Other Matter—Scope of the
Audit” to help users differentiate the other matter from the individual matters described in the
KAM section.

Key Audit Matters vs. Emphasis of Matter and Other Matter Paragraphs

As we have already learned, a key audit matter is one that is fundamental to the
understanding of the financial statements, the audit, the audit responsibilities, or the audit
reports. As such, it would meet the definition of what is included in the emphasis of matter or
other matter paragraphs. However, it is important to note that the emphasis of matter and other
matter paragraphs are not substitutes for KAM.

There may be instances when a matter is not a KAM (because it did not require significant
auditor attention), but is fundamental to users’ understanding of the financial statements, the
audit, the auditor’s responsibilities, or the auditor’s report (such as a subsequent event). If it is
considered necessary to draw users’ attention to such a matter, the matter is included in an
emphasis of matter or other matter paragraph as appropriate.

Decide Whether Modifications to the Audit Opinion Are Necessary

Whenever the auditor faces either a GAAP departure or a scope limitation, and it is
material, a report other than an unmodified audit opinion must be issued. By modifying the
opinion, the auditor brings to the readers’ attention any concerns auditors have about the quality
of the financial statements. The four main types of modified auditor’s reports issued under these
two conditions are (1) qualified opinion—GAAP departure; (2) qualified opinion—scope
limitation; (3) adverse opinion; and (4) disclaimer of opinion.
Conditions and Types of Modified Reports

The type of modification depends upon the condition, the materiality of the condition,
and the auditor’s judgment regarding the pervasiveness of the effects or possible effects of the
condition on the financial statements. An item is material if it could influence the economic
decisions of users. A condition that is considered material but not pervasive has a limited and
isolated effect on the financial statements. In contrast, a material and pervasive condition is such
that its effect(s) cannot be isolated to specific accounts or items, meaning that it has an extensive
effect on the financial statements and it impacts many assertions. Or, if the effect can be isolated,
it represents a substantial portion of the financial statements. In the case of disclosures, pervasive
disclosures are those considered fundamental to the users’ understanding of the financial
statements.

Going Concern. A going-concern disclosure could represent a pervasive disclosure. The

table below summarizes the various steps in the decision process that the auditor uses to decide
on what type of audit report to issue. The key factors that are taken into consideration are the
materiality and pervasiveness of the condition(s), and in the case of scope limitation, whether or
not the auditor was able to obtain sufficient appropriate evidence through alternative procedures.
Given that the auditor has specific reporting obligations regarding going concern, and the
pervasive nature of the risk, it is singled out from other misstatements. Note KAMs are only
required for public companies and are at the auditor’s discretion for all others.
The Auditor’s Decision Process: Determining the Type of Modification to the Audit Opinion

Qualified Audit Opinion

Whenever an auditor issues a qualified opinion, he or she must use the term except for or,
less frequently, except that or except as in the opinion paragraph. This implies that the auditor is
satisfied that the overall financial statements are fairly stated “except for” a particular part.
Details of the exception are provided in a separate section, “Basis for Qualified Opinion,” which
follows the qualified opinion section.

When the auditor knows that the financial statements may be misleading because of
material misstatements due to inappropriate accounting treatment or valuation of an item, the
auditor should issue a qualified or adverse opinion, depending upon the pervasiveness of its
effects. The opinion must clearly state the nature and the amount of the misstatement, if it is
known. The opinion paragraph is titled “Qualified Opinion.” The introductory paragraph of the
opinion section is not modified; however, the opinion paragraph is modified to include the
following statement: “except for the effects of the matter described in the Basis for Qualified
Opinion section of our report.” In the basis of opinion section, it is modified with the addition of
the first paragraph, which explains the effects of the matter. The last sentence of the second
paragraph is modified to refer to the qualified opinion.

In the case of inadequate disclosure, if management refuses to make the appropriate

disclosure(s), the auditor should issue a qualified or adverse opinion, depending upon the
pervasiveness of the omitted or uninformative disclosures. As in the case of misstatements, the
auditor should explain how these disclosures are misstated in a basis paragraph and provide the
omitted information in the audit report.

Qualified Audit Opinion: Scope Limitation That Is Material but Not Pervasive

A scope restriction refers to the auditor’s inability to obtain sufficient appropriate evidence.
These restrictions may occur due to conditions beyond the client’s control, or circumstances
related to the timing and nature of the auditor’s work, or may be imposed by client management.

Examples of conditions beyond the client’s control are often related to the accounting
records. For instance, the records may be lost, destroyed, or seized indefinitely by government
authorities. A common situation related to the timing and nature of the auditor’s work occurs
when the auditor is appointed after the client’s balance sheet date. Due to the timing of the
fieldwork, the auditor may not be able to collect sufficient appropriate evidence concerning
opening inventory because certain cutoff procedures, physical examination of inventory, or other
important procedures may not be possible. However, if the auditor is able to perform alternative
procedures, then the scope limitation no longer exists and an unqualified opinion is possible.

Clients occasionally impose restrictions related to the observation of physical inventory

count(s) and the confirmations of accounts receivable, but other restrictions may also occur. The
reasons for client-imposed scope restrictions may be to save audit fees or, as in the case of
receivable confirmations, to prevent possible conflicts between the client and customer when
amounts differ. Unfortunately, scope restrictions have also been used to hide fraud, so a client-
imposed scope restriction can be a huge warning sign with respect to potential fraud or financial
statement manipulation.

Given the heightened risk associated with a client-imposed scope restriction, PAS 705,
par. 11–13 provides an escalating set of actions that the auditor should take. First, the auditor
should request that the scope restriction be removed. If that is not done, then the auditor is
required to communicate with those charged with governance (such as the board of directors) to
ensure that they are aware of the scope restriction and to describe the impact on the audit. If the
scope limitation is both material and pervasive, the first choice is for the auditor to resign from
the engagement. If the auditor cannot resign or this is considered impractical, only then would
the auditor issue a disclaimer of opinion in the audit report.

Adverse Audit Opinion

Adverse audit opinions are rare and should cause concern for users of the financial
statements. An adverse opinion is used only when the auditor concludes that the financial
statements contain material and pervasive misstatement(s); this also includes lack of important
disclosures that are pervasive. This means that the auditor has concluded that the financial
statements, taken as a whole, are materially misstated or misleading. For example, if the financial
statements have been prepared on a going-concern basis but, after evaluating management’s
plans for future action, the auditor concludes that the going-concern basis is not appropriate, he
or she should issue an adverse opinion.

When the amounts are so material and pervasive that an adverse opinion is required, the
title of the opinion section is Adverse Opinion, and the opening paragraph is not modified;
however, the second paragraph explains that because of the significance of the matter discussed
in the Adverse Opinion section, the financial statements do not present fairly the financial
position of the entity. The Basis for Adverse opinion provides the explanation.

Disclaimer of Opinion

A disclaimer of opinion is issued whenever the auditor has been unable to satisfy him or
herself that the overall financial statements are fairly presented. The necessity for denying
(“disclaiming”) happens because of a severe limitation on the scope of the audit examination,
which would prevent the auditor from expressing an opinion on the financial statements as a
whole.

Like the adverse opinion, a disclaimer (or denial) of an opinion is a rare event. This is
especially true because in most circumstances, when the auditor is faced with a disclaimer of
opinion, the auditor withdraws from the engagement. Disclaimers are often considered to be a
signal of financial distress or fraud. In contrast to the adverse opinion, the disclaimer occurs due
to the auditor’s lack of knowledge. In order to issue an adverse opinion, the auditor must know
that the financial statements are not fairly stated. When an auditor decides to disclaim an opinion,
the auditor has concluded that the extent to which he or she is unable to obtain sufficient
appropriate audit evidence is so severe that it is not possible to form an opinion on the financial
statements.

When a disclaimer of opinion is required, the introductory paragraph is modified to

indicate that the auditors were engaged to audit (rather than that they conducted the audit). The
second paragraph indicates that the auditors do not express an opinion. The basis of disclaimer
section provides the necessary explanation. The auditor’s responsibility section is severely
truncated, reflecting the fact that an audit could not be conducted.

COMMUNICATE WITH THE AUDIT COMMITTEE AND MANAGEMENT

After the audit is completed, several potential communications from the auditor may be
sent to the audit committee or others charged with governance, including communication of
detected fraud and illegal acts, internal control deficiencies, other communications with the audit
committee, and management letters. The first three of these communications are required by
auditing standards to make certain that those charged with governance, which is often the audit
committee and senior management, are informed of audit findings and auditor
recommendations. The fourth item, management letters, is often communicated to operating
management.

Communicate Fraud and Illegal Acts. Auditing standards require the auditor to
communicate all fraud and illegal acts to the audit committee or similarly designated group,
regardless of materiality. The purpose is to assist the audit committee in performing its
supervisory role for reliable financial statements.

Communicate Internal Control Deficiencies. The auditor must also communicate in

writing significant internal control deficiencies and material weaknesses in the design or
operation of internal control to those charged with governance. In larger companies, this
communication is made to the audit committee and in smaller companies, it may be made to the
owners or senior management.
 Other Communications with Audit Committee. Auditing standards require the auditor
to communicate certain additional information obtained during the audit to those charged with
governance, which is generally the audit committee. The purpose of this required communication
is to keep the audit committee, or others charged with governance, informed about significant
and relevant information for the oversight of the financial reporting process and to provide an
opportunity for the audit committee to communicate important matters to the auditor. Thus, the
auditing standard requirements are designed to encourage two-way communications between
the auditor and those charged with governance. There are four principal purposes of this required
communication:

1. To communicate auditor responsibilities in the audit of financial statements. This

communication includes discussion by the auditor that the audit of financial statements is
designed to obtain reasonable, rather than absolute, assurance about material misstatements in
the financial statements. For audits of financial statements that do not include an audit of internal
control over financial reporting, the communication also indicates that the auditor is not
providing an opinion on the effectiveness of internal control, in addition to other limitations of
an audit of financial statements.

2. To provide an overview of the scope and timing of the audit. The purpose of this required
communication is to provide a high-level overview, such as the auditor’s approach to addressing
significant risks and consideration of internal control, and timing of the audit. Details of the
nature and timing of audit procedures is not appropriate to avoid compromising the effectiveness
and predictability of the audit.

3. To provide those charged with governance with significant findings arising during the audit.
These communications might include discussion of material, corrected misstatements detected
during the audit, the auditor’s view of qualitative aspects of significant accounting practices and
estimates, and significant difficulties encountered during the audit, including disagreements with
management, among other matters.

4. To obtain from those charged with governance information relevant to the audit. The audit
committee or others charged with governance, such as the full board of directors, may share
strategic decisions that may affect the nature and timing of the auditor’s procedures.

Communications about significant findings arising during the audit are normally made
in writing. Communications about other matters may be made orally or in writing, with all oral
communications documented in the audit files. Communications should be made timely to allow
those charged with governance to take appropriate actions. Generally, communications about the
auditor’s responsibilities and the audit scope and timing occur early in an audit, while
communications about significant findings usually occur throughout the entire engagement
period.

Management Letters. A management letter is intended to inform client personnel of the

CPA’s recommendations for improving any part of the client’s business. Most recommendations
focus on suggestions for more efficient operations. The combination of the auditor’s experience
in various businesses and a thorough understanding gained in conducting the audit places the
auditor in a unique position to provide assistance to management.
 Many CPA firms write a management letter for every audit to demonstrate to
management that the firm adds value to the business beyond the audit service provided. Their
intent is to encourage a better relationship with management and to suggest additional tax and
permitted management services that the CPA firm can provide.

A management letter differs from a letter reporting significant deficiencies in internal

control. The latter is required when there are significant deficiencies or material weaknesses in
internal control, and must follow a prescribed format and be sent in accordance with the
requirements of auditing standards. A management letter is optional and is intended to help the
client operate its business more effectively.

Each management letter should be developed to meet the style and preferences of the
CPA firm and the needs of the client. Some auditors combine the management letter with the
letter about significant deficiencies and material weaknesses. On smaller audits, it is common for
the auditor to communicate operational suggestions orally rather than by a management letter.

SUBSEQUENT DISCOVERY OF FACTS

After the auditor issues the audit report and completes all communications with
management and the audit committee, the audit is finished. Usually, the next major contact
between the auditor and client occurs when the planning process of the next year’s audit begins.

Although it rarely happens, auditors sometimes learn after the audited financial statements
have been issued that the financial statements are materially misstated. Examples are the inclusion
of material nonexistent sales, the failure to write off obsolete inventory, or the omission of an
essential footnote.

When this subsequent discovery of facts occurs, the auditor has an obligation to make
certain that users who are relying on the financial statements are informed about the
misstatements. (If the auditor had known about the misstatements before the audit report was
issued, the auditor would have insisted that management correct the misstatements or,
alternatively, a different audit report would have been issued.) It does not matter whether the
failure to discover the misstatement was the fault of the auditor or the client. In either case, the
auditor’s responsibility remains the same. Although subsequent discovery of facts is not part of
completing the audit, it is included in this chapter because it is easier to understand in this
context.

If the auditor discovers that the statements are misleading after they have been issued, the
most desirable action is to request that the client issue an immediate revision of the financial
statements that includes an explanation of the reasons for the revision. If a subsequent period’s
financial statements are completed before the revised statements would be issued, it is acceptable
to disclose the misstatements in the subsequent period’s statements. When pertinent, the client
should inform the SEC and other regulatory agencies of the misstated financial statements. The
auditor is responsible to make certain that the client has taken the appropriate steps to inform
users of the misstated statements.

If the client refuses to disclose the misstated statements, the auditor must inform the board
of directors. The auditor must also notify regulatory agencies having jurisdiction over the client
that the statements are no longer fairly stated and also, when practical, each person who relies on
the financial statements. If the stock is publicly held, it is acceptable to request the SEC and the
stock exchange to notify stockholders.

The subsequent discovery of facts requiring the recall or reissuance of financial statements
arises only from business events that existed before the date of the auditor’s report. For example, a revision
of the financial statements is not required if an account receivable is believed to be collectible after
an adequate review of the facts at the date of the audit report, but the customer subsequently files
bankruptcy. If the customer had filed for bankruptcy before the audit report date, however, there
is a subsequent discovery of facts.

The auditor’s responsibility for subsequent events review ends on the date of the
completion of the field work. Auditors have no responsibility to search for subsequent facts, but
if they discover that issued financial statements are incorrectly stated, they must take action to
correct them. In most cases, subsequent discovery of facts occurs when auditors discover a
material misstatement in issued financial statements during the subsequent year’s audit, or when
the client reports a misstatement to the auditor.