In light of SA 560 “Subsequent Events”, certain standards are prescribed which reflect the auditor’s responsibility regarding subsequent events.

According to the standard, ‘subsequent events’ refer to those events which occur between the date of 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. 

It lays down the standard that the auditor should consider the effect of subsequent events on the financial statements and on the auditor’s report. The auditor should obtain sufficient appropriate evidence that all events upto the date of the auditor’s report requiring adjustment or disclosure have been identified and to identify such events. 

The auditor should-

(i) try to understand the procedures of management to ensure that subsequent events are properly identified.

(ii) make an inquiry with the people charged with governance of the entity and its managers to find out whether any subsequent events have occurred that might affect the financial statements.

Following are some examples of inquiries on the management:

• Whether new commitments, borrowings or guarantees have been entered into.
• Whether sales or acquisitions of assets have occurred or are planned.
• Whether there have been increases in capital or issuance of debt instruments, such as the issue of new shares or debentures, or an agreement to merge or liquidate has been made or is planned.
• Whether there have been any developments regarding contingencies.
• Whether there have been any developments regarding risk areas and contingencies.
• Whether any unusual accounting adjustments have been made or are contemplated.
• Whether any events have occurred or are likely to occur which will bring into question the appropriateness of accounting policies used in the financial statements as would be the case, for example, if such events call into question the validity of the going concern assumption. (whether the company will dissolve)
• Whether any events have occurred that are relevant to the measurement of estimates or provisions made in the financial statements.
• Whether any events have occurred that are relevant to the recoverability of assets.

(iii) Read the minutes of meetings of the owners of the entity, management and the people charged with governance that have been held after the date of the financial statements and inquiring about matters discussed at any such meetings for which minutes are not yet available.

(iv) Read the entity’s latest subsequent interim financial statements, if any.

(v) Read the entity’s latest available budgets, cash flow forecasts and other related management reports for periods after the date of the financial statements.

(vi) Inquire, or extend previous oral or written inquiries, of the entity’s legal counsel concerning litigation and claims.

(vii) Consider whether written representations covering particular subsequent events may be necessary to support other audit evidence and thereby obtain sufficient appropriate audit evidence.

When the auditor identifies events that require adjustment of, or disclosure in, the financial statements, the auditor shall determine whether each such event is appropriately reflected in those financial statements. If such events have not been considered by the management and which in the opinion of the auditor are material, the auditor shall modify his report accordingly.