Question

Question 3 [20 marks]

Subsequent events (ISA 560), is divided into three (3) parts. Under each part an auditor has a role that he should play. You are an audit senior in charge of an assignment. You are expected to explain the effect of subsequent events on the audit report and their nature.

a. What are subsequent events? (5)

b. Outline the three parts in which subsequent events are divided. (11)

c. What is the effect of subsequent events on the audit report? (4)

Answer 1

subsequent events

Financial statements  are effected by certain events that occur after the date of Financial statements. there are two types of events

i. The events that provide evidence of conditions that existed on the date of financial statements.

ii. The events that provide evidence of conditions that existed after the date of financial statements.

Parts of Subsequent Events

i. Events occurring between the date of Financial statements and date of the Audit Report

a. The auditor should perform audit procedures designed to obtain sufficient and appropriate audit evidence that all the events occurring after date of financial statements and auditors report date that require adjustment or disclosure in the financial statements have been identified.

b. However, auditor is not required to perform additional audit procedures with respect to matters covered in previously applied audit procedures which provided satisfactory conclusions.

c. The auditor shall take in to account the auditors risk assessment for determining the nature and extent of audit procedures which shall include

i. obtaining an understanding of procedures management has established to ensure subsequent events are identified.

ii. Inquiring management and where possible Those charged with governance with respect to subsequent events which have effect on the financial statements.

iii. Reading minutes if any and discussing the matters with the management for which minutes are not available.

iv. Reading entity's latest Interim Financial statements.

If as a result of audit procedures performed requires adjustment of Financial statements or disclosure, the auditor must ensure the reflection in financial statements.

ii.Facts which become known to the auditor after the date of the auditors report but before the date of financial statements are issued.

a. Auditor generally has no obligation to perform any audit procedures regarding the financial statements after the date of auditors report.

b. However, the auditor has an obligation to perform audit procedures when after the date of auditors report but before the date of financial statements are issued, a fact known to auditor that, had it been know to the auditor would have amend the auditors report on auditors report date.

c. Auditor shall discuss the mater with

i. management where appropriate with Those charged with Governance.

ii.determine whether financial statements require amendment

iii. Inquire how management intents to address the matter in Financial statements.

d. If not required by the applicable law, regulation, applicable financial reporting frame work, auditor need not provide an amended or new audit report.

e. If management amends the financial statements, audit shall carry out necessary audit procedures and provide new audit report.

f. If management does not amend

i. Modify audit report if audit report is not provided to entity.

ii. If audit report provided take appropriate action to prevent reliance on the auditors report.

iii. Facts which become known to the auditor after the date of financial statements are issued.

i. Auditor has no obligation to perform any audit procedures regarding the financial statements after the date of auditors report.

ii. Review the steps taken by the management to ensure that any one who received the previously issued financial statements together with auditors report has been informed the situation.

iii. carry out the audit procedures and provide a new audit report.

iv. If management does not amend the financial statements the auditor needs to take appropriate steps to prevent reliance on financial statements.