Subsequent Events

1 Events after the reporting period

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Now we are going to look at the effect of events which occur after the end of the reporting period but before the auditor’s report has been signed. These events fall into two types.

• An adjusting event as its name might suggest, means that the accounts have to be adjusted in the light of what’s happened. The rule is that adjustments must be made if the event provides evidence of conditions that existed at the end of the reporting period (the reporting date).
  

An example would be a major customer going into liquidation, let’s say at the end of January, the year end was the end of December. That event tells us that the receivable at the end of December was probably bad and should have been written off or an allowance made. It’s very unlikely that the customer’s financial position worsened so remarkably during January. What the liquidation tells us is that the customer was in the bad situation at the end of December and if only we had known that then the receivable would have been written down.

• A non-adjusting event relates to conditions which arose after the reporting date.
  

A good example is the company’s factory burning down, let’s say in mid-January. At the end of December the company’s factory was perfectly fine, it was standing, it was operating, it was a non-current asset. It was only after the end of the year that it was destroyed. If the statement of financial position is telling us the position at the year end, then the factory would have to appear in non-current assets. It would be, of course, important to disclose in the notes that the factory was no more. This will be a good example of an emphasis of matter paragraph in the auditor’s report.

2 'Active' and 'passive' duty

Until the auditor’s report is signed auditors have an active duty to look out for events that might tell them more about the financial statements. After signing the auditor’s report, the auditors have a passive duty only. Occasionally events will occur after the accounts have been signed and issued and these come to the auditor’s attention. Exceptionally it may be important for the addressees of the auditor’s report to be made aware that something is wrong in the accounts. The auditor would then discuss with the directors the need to reissue amended financial statements.