2. Legal proceedings At the year-end, the company had made disclosure of a contingent liability. However, subsequent to the year-end (), the court found the company liable for breach of contract. The legal proceedings were issued on (some 10 days before the year-end). This is, therefore, evidence of conditions that existed at the year-end. IAS 10 requires the result of a court case after the reporting date to be taken into consideration to determine whether a provision should be recognised in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets at the year-end. In this case, the financial statements will require adjusting because:
- the conditions existed at the year-end
- the recognition criteria for a provision in accordance with IAS 37 have been met.
3. Loss of customer A customer ceasing to trade so soon after the reporting period indicates non-recoverability HornyMatches search of a receivable at the reporting date and therefore represents an adjusting event under IAS 10, Events After the Reporting Period. Assets should not be carried in the statement of financial position at any more than their recoverable amount and, therefore, an allowance for receivables should be made.
So far we have considered the financial reporting aspects relating to events after the reporting period. The second part of this article will now consider the auditor’s responsibility in relation to ensuring all events occurring between the reporting date and the (expected) date of the auditor’s report have been adequately taken into consideration, and sufficient appropriate audit evidence has been gathered to achieve the objective. It is important that where students have studied Paper F3, Financial Accounting, knowledge of accounting standards such as IAS 10 is not set aside or forgotten when it comes to papers such as Paper F8, Audit and Assurance.
ISA 560, Subsequent Events outlines the auditor’s responsibility in relation to subsequent events. For the purposes of ISA 560, subsequent events are those events that occur between the reporting date and the date of approval of the financial statements and the signing of the auditor’s report.
The overall objective of ISA 560 is to ensure the auditor performs audit procedures that are designed to obtain sufficient appropriate audit evidence to give reasonable assurance that all events up to the (expected) date of the auditor’s report have been identified, properly accounted for/r disclosed in the financial statements.
ISA 560 also covers events that are discovered by the auditor after the date of the auditor’s report but before the financial statements are issued.
In Example 1 above, we identified that fraud and the legal proceedings were adjusting events that gave rise to an adjustment within the financial statements as at . We also identified that the loss of the customer was also an adjusting event, but as the value of the receivable was considered immaterial, no adjustment was made to the financial statements. Let us expand on the requirement in Example 1 as follows:
Required: (b) Describe the audit procedures that should be performed to obtain sufficient appropriate evidence that the subsequent events have been appropriately treated in the financial statements.
Answer: Candidates who are faced with scenarios such as those in Example 1 should think about the information needed that would prompt an accountant or finance director to go back to the year-end and retrospectively amend the financial statements. You could interpret the question as asking ‘what information would I need in real-life to justify a provision or disclosure within the financial statements before making such provision or disclosure?’ Where candidates have studied Paper F3 and have knowledge of IAS 10, thinking about the provisions contained in this IAS 10 will often lead you into thinking about the audit evidence you would need to satisfy yourself that the requirements in IAS 10 have been met, as well as offering ideas as to how you would go about obtaining this evidence for the audit file.