Summarize SA 560: Subsequent events in simple language
Events that occur after Balance Sheet date but before the date of auditors report are referred to as Subsequent Events, as per S.A. 560. Accounting standard 4, Contingencies and Events occurring after the balance sheet deals with events between balance sheet and the date of approval of accounting by the Board of Directors.
Type 1 Events Those events that provide additional evidence with respect to conditions that existed on the date of Balance Sheet and effect the estimation made in preparation of financial statements. The statement should be adjusted for any change in the estimates resulting from the use of evidence of subsequent events. For example,
1) Insolvency of debtors after balance sheet date,
2) Dishonour of cheques/ bills of exchange accepted, due after balance sheet date.
3) Subsequent fixation of purchase price or the proceeds of sale of assets purchased or sold before the year-end.
Type 2 Events Those subsequent events which involve conditions coming into existence after balance sheet date.
They require disclosure otherwise financial statements would be misleading. For example,
1) Mergers and Acquisitions after balance sheet
2) Closure of plant/ division due to labour problems
3) Changes in capital structure
Audit procedures:
1) Review the procedures that management followed to identify the subsequent events.
2) Read the minutes of the meeting of the Board of Directors, executive committee, shareholders held after the balance sheet date.
3) Read latest interim financial statements.
4) Inquire about latest position of legal cases pending.
5) Inquiring of the management as to whether any subsequent events have occurred after the Balance Sheet which might affect the financial statements.
Subsequent Events and Branch Auditors Report:
If branch auditor has already audited the branch and submitted the report to the principal auditor, the principal auditor would follow audit procedures as mentioned above in respect of events occurring after balance sheet date but before signing of his Company Audit Report.
> Auditors Report and Subsequent Events:
If subsequent events, which are material, are not properly adjusted or disclosed depending upon the type of subsequent events, the auditor should express a qualified report or adverse report.
