Legal proceedings
? Obtaining a copy of the court order or other correspondence confirming
the company has been found liable to pay compensation to its customer.
? Test checking after-date cash to confirm payment to the customer.
? Ensuring a provision has been recognised as opposed to disclosure as a
contingent liability to meet the requirements in IAS 37, Provisions,
Contingent Liabilities and Contingent Assets.
? Ensuring the provision is reasonable in relation to the outcome of the
court case.
? Obtaining written representation from management to confirm the
treatment of the provision.
Loss of customer
? Discuss with management the reason for not adjusting the irrecoverable
receivable.
? The auditors have already agreed this amount is immaterial to the
financial statements, so this amount would be put on an ‘audit error
schedule’. Provided this amount remains immaterial at the completion
stage, both individually and when aggregated with other misstatements,
the auditor can still express an unmodified opinion.
Financial statements amended after the date of the auditor’s report, but
before the financial statements are issued.
6
SUBSEQUENT EVENTS
APRIL 2011
Circumstances may arise when the auditor becomes aware of facts that may
materially affect the financial statements and, in such situations, the auditor
will consider whether the financial statements need amending. The auditor is
required to discuss with management how they intend to deal with events that
will require the financial statements to be amended after the auditors have
signed their report, but before the financial statements are issued.
Where the financial statements are amended, the auditor is required to carry
out necessary audit procedures in light of the circumstances giving rise to the
amendment. The auditor will also be required to issue a new auditor’s report
on the amended financial statements and, therefore, must extend their
subsequent events testing up to the (expected) date of the new auditor’s
report. The revised auditor’s report must not be dated any earlier than the date
of the amended financial statements. In situations where management refuses
to make amendments to the financial statements, the auditor must take all
steps required to avoid reliance by third parties on the auditor’s report. The
auditor should also consider the need to resign from the audit.
Conclusion
Subsequent events are a key examinable area in auditing papers and it is
crucial that students have an understanding of the types of audit evidence that
the auditor should obtain to confirm that the accounting and disclosure
requirements (particularly in IAS 10) have been applied correctly within the
financial statements.
Candidates who simply write ‘obtain a management representation’ cannot
expect to pass a question on subsequent events because written
representations, on their own, are not a substitute for alternative audit
evidence. Where candidates have knowledge of IAS 10 through studying Paper
F3, you should not be afraid to think about the accounting requirements in
order to help you consider how you will obtain sufficient appropriate audit
evidence to achieve the auditing objectives. However, sticking to the question
requirement is vital. If you are asked about the types of procedure(s) you
should perform in determining whether the accounting treatment has been
correctly applied, this is exactly what you must do.
Candidates should take care not to digress into irrelevant areas by writing
everything they know about IAS 10, and instead should just answer the
question set by the examiner.
Steve Collings is assessor for Paper F8
Reference
1. IAS 10, Events After the Reporting Date, Paragraph 3.
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