Last month’s article in our series aimed at enlightening clients on the different aspects of the audit process, focussed on what the different types of audit reports really mean. This month we take a look at how financial statements may be affected by certain events that occur subsequent to the date of the statements.
Adjustment and disclosure relating to so-called subsequent events is a requirement of the International Financial Reporting Standards (IFRS) as well as the International Financial Reporting Standards for Small and Medium Entities (IFRS for SMEs). It is of the utmost importance that these events are identified and correctly interpreted, as this provides up to date and relevant information to the users of the financial statements.
Subsequent events can be divided into two main types:
It should be noted that these events need to be disclosed regardless of whether they have a positive or a negative effect on the entity. For example: A major new asset purchase can have a positive effect and should be disclosed, while the loss of a major asset due to a natural disaster can have a negative effect and should be disclosed as well.
As auditors we need to perform certain procedures to satisfy ourselves that all such events are identified and that the necessary adjustments and disclosures are made in the financial statements. It is for this reason that we might inquire about transactions and other events that took place after the date of the financial statements. Should such events come to our attention even after we have signed the audit report, we will have to evaluate the effect thereof on the financial statements.
As part of the procedures performed in identifying such events, we require management to complete a questionnaire that serves as management’s consideration of any subsequent events that might impact the financial statements. In this questionnaire we cover the most common events that might have an effect on the financial statements and give management the opportunity to disclose any other events they may be aware of.
If you need any further information about this matter or generally about the auditing services we offer, please contact your relationship director, or Cecil Mulligan at email@example.com, tel. 021 840 1600.