Subsequent events two general types of subsequent events, auditor’s responsibilities, audit procedures

In the context of an audit of financial statements performed in accordance with the clarity ISAs, the auditor needs to consider those events occurring after the date of the financial st

THUONGMAI UNIVERSITY ACCOUNTING - AUDITING DEPARTMENT

000

DISCUSSION SUBJECT: PRINCIPLES OF AUDITING

Topic:

Subsequent events: Two general types of subsequent events, auditor’s

responsibilities, audit procedures

Hanoi, 2022

SOCIALIST REPUBLIC OF VIETNAM Independence — Freedom — Happiness

MEETING MINUTES

Dear: Ph.D Lai Thi Thu Thuy — Lecture of Principles of Auditing Class

Meeting minutes of Group 03, class 2246FAUD0811

Location: Messenger

Date: 22 September 2022

Duration: 1 hour

Attendance: 10/10

Agenda Topic:

The group leader gives a preliminary outline

Group members discussed and analyzed the topic then the group leader divided the work among team members The topic is divided into 4 parts:

+ Definition of subsequent events + Two general types of subsequent events + Auditor’s responsibilities

+ Audit procedures Make PowerPoint, edit reports, and presentations

End of meeting

Hanoi, 22 September 2022

Tran Thi Thuy Nguyễn Thiện Thành

LIST OF TASKS GROUP 03

Nguyễn Thiện Thành 20D155030 Leader PowerPoint

Tran Thi Thuy 20D155032 | Secretary Presentation |

Word

TABLE OF CONTENTS INTRODUCTION

PART 1: DEFINITION OF SUBSEQUENT EVENTS

1.1 Definition

1.2 Understanding Reporting Period, Cut-off, and Subsequent Events

1.3 Example

PART 2: TWO GENERAL TYPES OF SUBSEQUENT EVENTS

2.1 Those that have a direct effect on the financial statements and require adjustment

2.1.1 Definition

2.1.2 Example

2.1.3 Accounting treatment

2.2 Those that do not have a direct effect on the financial statements but for which disclosure may be required

2.2.1 Definition

2.2.2 Example

2.2.3 Accounting treatment

PART 3: AUDITOR’S RESPONSIBILITIES

3.1 The objectives of the auditor

3.2 The auditor’s responsibility

3.2.1 Events Occurring Up to the Date of the Auditor’s Report

3.2.2 Facts Discovered After the Date of the Auditor’s Report But Before the Financial Statements are Issued

3.2.3 Facts Discovered After the Financial Statements Have Been Issued

PART 4; AUDIT PROCEDURES

4.1 Procedures normally integrated as a part of the verification of year-end account balance

4.2 Procedures performed specifically for the purpose of discovering events or transactions that must be recognized as subsequent events

4.3 Case study

ACKNOWLEDGEMENTS

REFERENCES

INTRODUCTION

Financial statements present a company’s financial position as of a specific date, typically the end of the year or quarter But sometimes events happen shortly after the end of the period that has financial implications for the

prior period or for the future— commonly known as subsequent events In the

context of an audit of financial statements performed in accordance with the clarity ISAs, the auditor needs to consider those events occurring after the date

of the financial statements that require adjustment of, or disclosure in, the financial statements in accordance with the applicable financial reporting framework

This article describes what subsequent events are and two general types

of subsequent events It explains the distinction between recognized and non- recognized subsequent events and describes the disclosure requirements for subsequent events in financial statements and reissued financial statements It includes a number of common examples of each type of subsequent event, the examples are not all-inclusive but are intended to provide a framework for evaluating and categorizing subsequent events as recognized or non-recognized,

which can require significant judgment This article also seeks to provide

clarification as to the active and passive responsibilities of the auditor in relation

to such events, depending on the period during which any “subsequent” event becomes known to the auditor

This article focuses essentially on subsequent events as discussed in the context of Clarity ISA 560

PART 1; DEFINITION OF SUBSEQUENT EVENTS 1.1 Definition

The third part of completing the audit is the review for subsequent

events

According to International Standards on Auditing (ISAs) 560,

“Subsequent events are events that occur between the date of the financial statements and the date of the auditor’s report, and facts that become known

to the auditor after the date of the auditor’s report The auditor must review those transactions and events to determine whether any of these transactions

or events affect the fair presentation or disclosure of the current period statements.”

In other words, subsequent events are events that happen between the cut-off date and the date in which the company issues its financial statements

Depending on the situation, subsequent events may require disclosure in a company’s financial statements

Subsequent events period consists of three sub-periods, namely:

(1)The period between the date of the financial statements and the

date of the auditor's report, consisting of

e The period between the date of the financial statements

and the date of approval of those statements

® The period between the date of approval of the financial statements and the date of the auditor’s report

(2)The period between the date of the auditor’s report and the date the financial statements are issued, and

(3)The period subsequent to the date the financial statements are issued

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completion

1.2 Understanding Reporting Period, Cut-off, and Subsequent Events

The following terms have the meanings attributed below:

Reporting Period: The typical reporting period for a company 1s 12 months However, a reporting period does not need to match the calendar year from January 1 to December 31 Typically, companies will choose a year-end corresponding to a period of low activity For example, retailers usually follow a year-end at the end of January when inventory is low (post-holiday season)

Cut-off: The cut-off date refers to the end of the reporting period and

the start of the new reporting period It is important in accrual accounting because cash cycles may not be complete Therefore, it is necessary to

understand which events will be during the current reporting period and which

events will be recorded in the next reporting period Transactions and events are recognized up to the cut-off date

Subsequent Events: Between the period of the cut-off date and the authorization of financial statements issuance is the subsequent events period

Depending on the type of subsequent event, it may or may not require an adjustment to the financial statements Transactions and events that change

the measurement of transactions before the cut-off date are recognized

1.3 Example

After the cut-off period (after the company’s year-end) and before the issuance of financial statements, Company A’s major client unexpectedly goes bankrupt It is determined that the company will only get 10% of its

outstanding accounts receivable from the major client The event will require

an adjustment to the financial statements of Company A

PART 2: TWO GENERAL TYPES OF SUBSEQUENT EVENTS Under IFRS, there are two types of subsequent events that require consideration by management and evaluation by the auditor:

— Those that have a direct effect on the financial statements and

require adjustment

— Those that do not have a direct effect on the financial statements but for which disclosure may be required

2.1 Those that have a direct effect on the financial statements and require adjustment

2.1.1 Definition

Some events that occur after the balance sheet date provide additional information to management that helps them determine the fair presentation of

account balances as of the balance sheet date Information about those events

helps auditors in verifying the balances

2.1.2 Example

If the auditor is having difficulty determining the correct valuation of

inventory because of obsolescence, the sale of raw material inventory as scrap

in the subsequent period will indicate the correct value of the inventory as of

the balance sheet date

Subsequent period events, such as the following, require an

adjustment of account balances in the current year’s financial statements if the amounts are material:

@ Declaration of bankruptcy by a customer with an outstanding

deteriorating financial condition e@ Settlement of litigation at an amount different from the amount recorded on the books

® Disposal of equipment not being used in operations at a price

below the current book value

2.1.3 Accounting treatment

When subsequent events are used to evaluate the amounts included in

the year-end financial statements, auditors must distinguish between

conditions that existed at the balance sheet date and those that came into being after the end of the year The subsequent information should not be incorporated directly into the statements if the conditions causing the change

in valuation took place after year-end For example, assume one type of a client’s inventory suddenly becomes obsolete because of a technology change after the balance sheet date The sale of the inventory at a loss in the subsequent period is not relevant in the valuation of imventory for obsolescence in this case

Auditors of accelerated filer public companies must inquire about and consider any information about subsequent events that materially affect the effectiveness of internal control over financial reporting as of the end of the

fiscal period If auditors conclude that the events reflect a material weakness

that existed at year-end, they must give an adverse opinion on internal control over financial reporting If they are unable to determine the effect of the subsequent event on the effectiveness of internal control, they must disclaim their opinion on internal control

2.2 Those that do not have a direct effect on the financial statements but for which disclosure may be required

2.2.1 Definition

Subsequent events of this type are events that provide evidence about

conditions that did not exist at the date of the balance sheet being reported on but arose after the balance sheet date and may be significant enough to require

disclosure

2.2.2 Example

Examples of these types of non-recognized subsequent events include:

® A decline in the market value of securities held for temporary investment or resale

The issuance of bonds or equity securities

A decline in the market value of inventory as a consequence of government action barring further sale of a product

e@ The uninsured loss of inventories as a result of fire

e A merger or an acquisition

2.2.3 Accounting treatment

Non-recognized subsequent events may require disclosure if they are

significant and if the financial statements would be misleading without the

disclosure Ordinarily, these events can be adequately disclosed by the use of footnotes Occasionally, one may be so significant as to require disclosure in supplemental financial statements, which include the effect of the event as if it had occurred on the balance sheet date An example is an extremely material

merger

Auditors of accelerated filer public companies may also identify

events related to internal control over financial reporting that arose subsequent

to year-end If the auditor determines that these subsequent events have a material effect on the company’s internal control over financial reporting, the auditor’s report must include an explanatory paragraph either describing the event and its effect or directing the reader to a disclosure in management’s

report on internal control of the event and its effect

Example: A subsequent event that is a non-adjusting event would be

if the company acquires another business There would be no conditions on

the existing financial statements to indicates that a purchase was looming in the future, and thus no adjustment to the financial statements 1s necessary Instead, a disclosure of the subsequent event as a footnote in their financial

statements is used This ensures that such events with material impact on the financial position of the company are disclosed to investors

PART 3; AUDITOR’S RESPONSIBILITIES International Standard on Auditing (ISA) 560 provides guidance on the auditor’s responsibility regarding subsequent events

3.1 The objectives of the auditor

The objectives of the auditor are:

e@ To obtain sufficient appropriate audit evidence about whether subsequent events that need adjustment or disclosure in the

financial statement are properly reflected in the financial statement

auditor after the date of the auditor’s report which may have

caused the auditor to amend the auditor’s report if they were

known to the auditor at the date of the report

In short, the auditor should consider the effect of subsequent events on the financial statements and on the auditor’s report

3.2 The auditor’s responsibility

Auditors have a responsibility:

@ To review subsequent events before they sign the auditor’s report e@ That they make 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 following timeline is helpful when considering subsequent events

and the auditor’s responsibilities concerning them The auditor’s responsibility 1s expressed through different stages:

The auditor’s responsibility for reviewing subsequent events is normally limited to the period beginning on the balance sheet date and ending with the date of the auditor’s report

ACTIVE DUTY PASSIVE DUTY

: Auditor's Financial

approved by members