Subsequent events: ISA 560

Financial statements describe a year that has already ended, but they are signed some weeks or months later. Things happen in that gap. A customer collapses, a court case settles, a warehouse burns down. The auditor must decide whether the statements still give a true and fair view in the light of what happened, and what to do if something comes to light after the report is signed.

This topic covers International Accounting Standard (IAS) 10, which tells the directors how to treat these events, and International Standard on Auditing (ISA) 560, which tells the auditor what to do about them in three separate periods. Exam questions give you a short scenario and ask what the auditor should do. The answer depends on one thing: where the event falls on the timeline.

The timeline: three dates and three periods

Four dates matter in this topic.

• Reporting date. The end of the period covered by the financial statements, for example 31 December 2025.
• Date of the audit report. The date the auditor signs the report, once sufficient appropriate evidence has been obtained.
• Date the financial statements are issued. The date the audited statements and report are made available to third parties, for example to shareholders or the regulator.
• Date authorised for issue. The date the directors approve the statements. IAS 10 requires the entity to disclose this date.

The auditor’s duty changes at each date.

IAS 10: adjusting and non-adjusting events

IAS 10 Events after the reporting period defines these events as those, favourable and unfavourable, that occur between the end of the reporting period and the date the financial statements are authorised for issue. It has two objectives: to say when the statements should be adjusted, and to say what must be disclosed.

Adjusting events

An adjusting event provides evidence of a condition that already existed at the reporting date. The entity must adjust the amounts in the financial statements. The syllabus gives these examples:

• the settlement of a court case after the reporting date, confirming that a present obligation existed at the reporting date;
• information received after the reporting date showing that an asset was impaired at the reporting date;
• the final agreement of the price of an asset that was bought before the reporting date;
• the finding of fraud or errors showing that the financial statements are incorrect.

Other typical examples are the bankruptcy of a customer who owed money at the reporting date, and the sale of inventory after the reporting date at a price below cost, which gives evidence of net realisable value at the reporting date.

Non-adjusting events

A non-adjusting event arises from conditions that did not exist at the reporting date. The entity must not adjust the amounts. If the event is material, the entity must disclose in a note the nature of the event and an estimate of its financial effect, or a statement that no estimate can be made. The syllabus gives these examples:

• a large fall in the market value of investments after the reporting date;
• the acquisition or disposal of a major subsidiary;
• the formal announcement of a plan to discontinue a major operation;
• a major restructuring announced or started;
• destruction of a major plant by fire after the reporting date.

Background: IAS 10 also says that dividends declared after the reporting date are not recognised as a liability at the reporting date, because no obligation existed then. They are disclosed in the notes. IAS 10 further says that if management decides after the reporting date to liquidate the entity or stop trading, or has no realistic alternative, the statements must not be prepared on the going concern basis. That links this topic to the next one.

The test to apply

Ask one question: did the event provide evidence about a condition at the reporting date? A customer’s insolvency usually shows that the customer’s finances were already weak at the reporting date, so the receivable is adjusted. A fire after the reporting date did not damage the plant at the reporting date, so the plant is not adjusted and the fire is disclosed.

Period 1: up to the date of the audit report

ISA 560 has two objectives. The first is to obtain sufficient appropriate evidence about whether events between the reporting date and the date of the audit report are properly reflected in the statements. The second is to respond properly to facts that become known after the date of the report and that might have caused the auditor to change it.

In the first period the auditor must actively look for significant events. This work has two parts.

Normal audit work that finds events

Much of the evidence comes from ordinary testing, so no extra procedures are needed. Examples from the syllabus:

• Receivables. Cash received after the year end shows whether balances are collectable. A failure to pay may show that a debt should be written off.
• Inventory. Sales after the year end show whether net realisable value was below cost at the reporting date.
• Unrecorded liabilities. Invoices received after the year end may relate to the year under audit.
• Cash. A customer’s cheque included in the bank balance may have been dishonoured after the year end.

Procedures aimed at subsequent events

The auditor must also carry out procedures designed to find events, taking account of the risk assessment. These are:

1. understand the procedures management has set up to identify subsequent events;
2. enquire of management whether any events have occurred that might affect the statements;
3. read the entity’s latest financial statements after the reporting date, such as interim or management accounts;
4. read the minutes of meetings of shareholders, the board and senior management held after the reporting date, and enquire about matters discussed at meetings where minutes are not yet available;
5. obtain written representations about subsequent events.

Background: ISA 560 also expects the auditor to enquire of those charged with governance, and ISA 501 expects the auditor to ask the entity’s lawyers about litigation and claims. A letter from the lawyers is a common source of evidence about an event such as a court settlement.

Period 2: after the report date, before the statements are issued

The auditor does not have to look for events in this period. Management has the duty to tell the auditor of facts that come to light. If the auditor learns of a fact that might have changed the report had it been known at the report date, the auditor must:

1. discuss the matter with management;
2. decide whether the statements need to be amended; and
3. ask how management intends to deal with the matter in the statements.

If management amends the statements, the auditor must audit the amendment, extend the subsequent events review to the date of the new audit report, and issue a new report. The new report includes an emphasis of matter or other matter paragraph that refers to a note explaining the reason for the amendment and to the earlier report.

If management does not amend the statements but the auditor believes they should be amended:

• if the report has not yet been given to the entity, the auditor modifies the opinion and then gives the report;
• if the report has already been given to the entity, the auditor tells management and those charged with governance not to issue the statements until they are amended. If they are issued anyway, the auditor takes action to prevent reliance on the report, after taking legal advice.

Background: ISA 560 allows management to limit the amendment to the effects of the subsequent event. In that case the auditor may limit the extended review to that amendment, and either dual dates the report (for example, “1 March 20X6, except for Note 9, which is dated 15 March 20X6”) or gives a new report that carries only the later date, and states the limitation in a paragraph of the report.

Period 3: after the statements are issued

The auditor has no duty to make any enquiries about the statements after they are issued. If the auditor becomes aware of a fact that might have changed the report, the same three steps apply: discuss with management, decide whether the statements need amending, and ask how management will deal with it.

If management amends the statements, the auditor must:

1. carry out the procedures needed on the amendment;
2. extend the review of subsequent events to the date of the new report;
3. review the steps management has taken to tell anyone who received the original statements and report; and
4. issue a new report with an emphasis of matter or other matter paragraph referring to the note and to the earlier report.

Background: If management neither amends the statements nor takes steps to tell the people who have the original statements, ISA 560 requires the auditor to notify management and those charged with governance that the auditor will take action to prevent future reliance on the report. If management still does nothing, the auditor takes appropriate action after taking legal advice.

In practice that can mean a notice to the regulator or the shareholders.

The rules in more depth

Why the three periods carry different duties

Before the report is signed, the auditor controls the timing of the opinion and can wait for evidence. Once the report is signed, the opinion belongs to the shareholders as well. Management is then in control of the statements. That is why the auditor must look actively in period 1 but only react in periods 2 and 3.

Adjusting or non-adjusting: the borderline cases

Some events can be either, and the exam rewards a reasoned decision. A fall in the price of investments after the year end is non-adjusting, because it reflects market movement after the reporting date. A customer’s insolvency is adjusting if the customer was already in difficulty at the reporting date. A fire is non-adjusting.

If an event is non-adjusting but so large that it threatens the entity’s survival, the going concern assumption comes into question.

Consequences for the audit report

If management adjusts or discloses correctly, the report is unmodified. If management refuses to adjust a material adjusting event, the statements are materially misstated and the auditor gives a qualified or adverse opinion under ISA 705. If management refuses to disclose a material non-adjusting event, the auditor also modifies the opinion, because the disclosure is inadequate.

An emphasis of matter paragraph can be used to draw attention to a properly disclosed event that is fundamental to users’ understanding.

Group audits

The review of subsequent events in a group audit covers events at the components between the dates of the components’ financial information and the date of the group audit report. The group auditor or the component auditors can carry out the procedures.

Worked example: a customer failure and a late fire

Scenario. Okoro Foods Ltd has a 31 December 2025 year end. Materiality is ₦30 million. The audit report is dated 10 April 2026, and the statements are due to be issued on 20 April 2026. On 25 March 2026 the auditor reads the board minutes and finds that Brighton Stores, a customer, has been placed in receivership. At 31 December 2025 Brighton owed ₦45 million. Cash received from Brighton after the year end is ₦5 million.

On 14 April 2026, after the report is signed, a fire destroys a warehouse with a carrying amount of ₦60 million, fully insured except for ₦18 million.

Step 1: classify the receivership. Brighton’s weak finances existed at the reporting date, so this is an adjusting event. The balance outstanding is ₦45 million − ₦5 million received = ₦40 million. The auditor asks management how much of the ₦40 million is recoverable. If the receiver’s letter shows that 25% is likely to be recovered, the provision should be ₦40 million × 75% = ₦30 million. That equals materiality, so it must be adjusted. If management refuses, the opinion is modified.

Step 2: classify the fire. It happened after the reporting date and did not affect the warehouse at the reporting date, so it is non-adjusting. The statements are not changed. The uninsured loss of ₦18 million is below materiality, but the fire destroyed a major asset. The auditor considers whether disclosure is needed, because users might be influenced by a loss of a major facility.

A note should give the nature of the event and the estimated financial effect.

Step 3: apply ISA 560 to the fire. The report is dated 10 April and the fire was on 14 April, so the event is in period 2. The auditor does not have to look for it. Management must tell the auditor. The auditor discusses it with management and asks how it will be handled.

If management adds a note, the auditor audits the note, extends the review to the date of the new report and issues a new report with an other matter paragraph referring to the amended note.

How to score full marks

• Find the period first. Say whether the event falls before the report, between the report and issue, or after issue. The marks follow from the answer.
• Classify the event and give a reason. Write “adjusting, because the customer was already in difficulty at the reporting date”. A label with no reason earns half marks.
• Give the accounting treatment and the audit action. Questions often ask for both.
• List the procedures with a link to the case. Name the minutes, the latest management accounts, the lawyers’ letter and the post year-end cash receipts.
• State the effect on the report. Unmodified if handled correctly, modified if management refuses, new report with an emphasis of matter or other matter paragraph if amended.

Common mistakes in the exam

• Saying the auditor must actively look for events after the report date. Active searching stops at the report date.
• Calling a fire or a fall in market prices an adjusting event.
• Forgetting that non-adjusting events still need a note when they are material.
• Forgetting to audit the amendment and extend the review when the statements are re-issued.
• Forgetting that a new report refers to a note and to the earlier report.
• Ignoring the written representation about subsequent events.

Quick revision

• Subsequent events fall between the reporting date and the date authorised for issue (IAS 10).
• Adjusting: evidence of a condition at the reporting date, figures changed. Non-adjusting: new conditions, note with nature and financial effect.
• Period 1: look actively. Normal work plus enquiry, latest accounts, minutes, representations.
• Periods 2 and 3: do not look, but act on facts that become known: discuss, decide, enquire.
• If amended: audit the amendment, extend the review, new report with emphasis of matter or other matter paragraph.
• If not amended and not yet issued: modify the opinion, or stop issue and prevent reliance on the report.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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