Audit Procedures: Subsequent Events

The subject of subsequent events is always relevant both for accounting students and professionals. The risk is quite high due to broad definition of “adjusting event” category in IAS 10:

     “An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.”

The assessor of ACCA F8 paper, Steve Collings, wrote good article on this issue and I am going to highlight some moments and give examples in this post

Going Concern – No Conditions

Insolvent?
Going Concern issue!

As could be noticed from definition IFRS requires that some conditions should preexist for event to be adjusting. For the purpose of provision accruals IAS 37 specifies those conditions:

• Reliable estimation of obligation;
•  Obligation (conditions) whether constructive or legal existed at year end;
• Transfers of money are expected with regards to this event.

For example, the CEO of well-known oil company gave a promise to clean any mess caused by his company on the 31^st of December. The oil spill happened on 5^th of January and as a result all expenditures required to clean the oil should be undertaken by company no matter if there is any special legislation.

Quite another situation with going concern issue. No special conditions required to acknowledge that company is not going concern anymore. The roots of this in concept of IFRS which assumes that observation of standards gives true and fair results only if company is going concern.

Examples

In my practice I had some issues related with subsequent events. For example, warehouse full of food (inventory) was burned. The issue was that it happened someday around the year end, it happened near the Siberian forest so it was difficult to access the warehouse. Finally, after thorough investigation it was found out that it happened after the year end, the matter was material so I had to disclose this issue in the notes to inventory section.

The other issue was as follows. My client has signed the management representation letter where he confirmed that he had disclosed all information, including environmental matters. Meanwhile, after a week the representation letter was signed but before the audit report signature it got known that local authorities started the investigation regarding recent air pollution committed by company. Eventually, the pollution had immaterial implications, but there are several lessons to be learned from that. First, the management representation letter should be signed the date closest to audit report, but bear in mind that this could become an issue incase of multilocation audit. It requires additional coordination efforts to make management of subsidiary sign the representation letter the date nearest to the date of audit report. Second, the procedures requiring review of outside information (newspapers, journals, databases) about the client should not be ignored, to be done thoroughly and client should be questioned in case of material issues. Third, even if the news/management answers evidently show that conditions did not exist at the year end, there is still necessity to check reason of pollution (in my example), whether there was a concealment with management involvement.

Timeline

I provide you with timeline of dates relevant for auditor in detection of events affecting audit procedures and actions to be undertaken in accordance with ISA 560.