Subsequent Event Part 2

Question 1

Monday

Answer 1

Alright, let’s dive into this!

1. No Obligations Post-Audit Report: Auditors have no obligation to perform further audit procedures after the audit report date.
2. Becoming Aware of New Facts:
   
   • Discuss with Management: The auditor must discuss the new fact with management.
   • Determine Need for Amendments: Assess if the financial statements require amendments.
   • Management’s Plan: Inquire how management plans to address the new fact in the financial statements.
3. If Amendments are Needed:
   
   • Audit Procedures on Amendments: Perform necessary audit procedures on the amendments.
   • Extend Review: Extend the review of subsequent events up to the new audit report date.
4. If Management Refuses to Amend:
   
   • Modify Opinion: Modify the audit opinion if the report hasn’t been provided to the entity.
   • Prevent Reliance: Notify management to not issue financial statements before amendments and take action to prevent reliance on the audit report if they do.

1. Becoming Aware of New Facts:
   
   • Discuss with Management: The auditor must discuss the new fact with management.
   • Determine Need for Amendments: Assess if the financial statements require amendments.
   • Management’s Plan: Inquire how management plans to address the new fact in the financial statements.
2. If Amendments are Needed:
   
   • Audit Procedures on Amendments: Perform necessary audit procedures on the amendments.
   • Informing Original Recipients: Review steps taken by management to inform those who received the original financial statements.
   • Extend Review: Extend the review of subsequent events up to the new audit report date.
   • Issue New Audit Report: Issue a new audit report with an emphasis of matter or other matter paragraph referring to the reason for re-issue.

Let’s say the auditor completed the audit report for XYZ Corp. on January 15th. Financial statements are issued on January 20th. On January 18th, the auditor learns of a substantial liability that was not included in the financial statements.

1. Between Audit Report and Financial Statements:
   
   • Discuss: The auditor talks to XYZ Corp.’s management about the new liability.
   • Determine & Inquire: Realizes the financial statements need amendments and asks how management will address it.
   • Amendment Procedures: If amendments are made, the auditor conducts additional audit procedures and extends their review to January 18th.
   • Prevent Reliance: If management refuses to amend, the auditor modifies their opinion if not yet provided or notifies management to not issue the statements before amendments.
2. After Financial Statements Are Issued:
   
   • Discuss: Talks to management about the new liability.
   • Determine & Inquire: Confirms amendments are needed and how management will address it.
   • Amendment Procedures: Conducts additional procedures on the amendments, reviews steps to inform recipients of original statements, extends review, and issues a new audit report explaining the reason for re-issue.

Suppose XYZ Corp. originally reported net income of $1,000,000, but the newly discovered liability amounts to $300,000.

• Original Financial Statement:
  
  • Net Income: $1,000,000
• Amendment:
  
  • Additional Liability: $300,000
  • Adjusted Net Income: $1,000,000 - $300,000 = $700,000

The auditor must ensure this adjustment is accurately reflected in the financial statements and issue a revised audit report.

Does this help clarify the concept? Feel free to ask more questions!

Sure, let me elaborate on the note you provided.

• Concept: If allowed by law, regulation, or the financial reporting framework, management can restrict the amendment of financial statements to the effects of subsequent events. In such cases, the auditor can also restrict audit procedures to those amendments.
• Example: Suppose a company identifies a material error after the audit report date but before issuing the financial statements. If regulations allow, the company can amend the financial statements only for this error, and the auditor restricts audit procedures to this specific amendment.

• Option (a): Include an Additional Date:
  
  • Concept: Amend the auditor’s report to include an additional date specific to the amendment, indicating that audit procedures on subsequent events are restricted solely to that amendment.
  • Example: Original audit report dated August 14, 2021, with an additional date for the amendment as September 6, 2021. Statement: “August 14, 2021, except as to Note 37.1, which is as of September 6, 2021.”
• Option (b): Provide a New or Amended Report:
  
  • Concept: Issue a new or amended auditor’s report including an Emphasis of Matter or Other Matter paragraph highlighting that audit procedures are restricted to the amendment described in the relevant note.
  • Example: A new report issued with an Emphasis of Matter paragraph explaining that the procedures are restricted to the amendment due to the subsequent event.

• Concept: Dual dating is used when the auditor applies audit procedures to an amendment caused by a subsequent event. The audit report includes both the original date and an additional date specific to the amendment.
• Criteria:
  
  1. Law, regulation, or financial reporting framework allows management to amend financial statements for subsequent events.
  2. Those responsible for approving the financial statements can approve the amendment.

Original Audit Report Date: August 14, 2021
Additional Date for Amendment: September 6, 2021
Dual Dating Statement: “August 14, 2021, except as to Note 37.1, which is as of September 6, 2021.”

1. Law and Regulation Compliance: Management must comply with relevant laws and regulations that allow such amendments.
2. Approval: Those responsible for approving financial statements must also be permitted to approve the amendments.

Scenario: ABC Corp. originally issued financial statements on August 14, 2021. On September 6, 2021, a significant event occurred that affects the financial statements.

Steps:
1. Amend Report: Auditor includes the new date for the amendment.
2. Restrict Procedures: Audit procedures on subsequent events are limited solely to the amendment mentioned in the relevant note.
3. New Report: Issue a new audit report with an Emphasis of Matter paragraph.

ABC Corp. originally reported net income of $1,000,000. A subsequent event revealed an additional liability of $300,000.

• Original Financial Statement:
  
  • Net Income: $1,000,000
• Amendment Due to Subsequent Event:
  
  • Additional Liability: $300,000
  • Adjusted Net Income: $1,000,000 - $300,000 = $700,000

The auditor must ensure this adjustment is accurately reflected and issue a revised audit report with dual dating or an Emphasis of Matter paragraph.

I hope this elaboration helps! If you need more details, feel free to ask.