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Hi Mike I wanted to ask that what if there is a subsequent event (post balance sheet date), and impadt of which is material to financial statements but the event is non adjusting, what will be implications for management and for auditor? I mean what is the auditor supposed to do and what about management?
ThanksWell as per my knowledge if an auditor cme to know about some subsequent event and which is material , it should be disclosed as per standard requirement , because the audit report is yet to be signed. And it will definately have an impact on audit report.
For example if an event occurs which can have a serious impact on the business , wont you share it with the user of financial statement ? Because you know about it and audit report is not signed yet.Let see what mike has to say.
Well ISA 705 Modifications to opinion in the independent auditor’s report applies here.
If the event was occurred after balance sheet date and there was no evidence on BS date on the occurrence of the event then it is non-adjusting, but if it is material then auditor should ask management to revise FS and disclose the matter, auditor, on the other hand shall add an emphasis of matter paragraph in audit report. And as per ISA 706 emphasis of matter paragraph, auditor only needs to give reference to the notes to the accounts for the specific event/ transaction. no calculation and financial effect needed to be calculate as matter was properly discloses.If management refuses to revise the FS because they think it is not of significant importance then auditor can include “Other matters paragraph” explaining the event and its financial impact in order to give better understanding of financial statements to its users.
If matter is material and pervasive and there are going concern issues aswell then auditor is required to ask management to revise FS and if the audit opinion has been given already then auditor might need to seek legal advice.
If management is agreed to amend financial statements then auditor will issue a revised audit report aswell.A non-adjusting subsequent event which is pervasive sounds very much like doubt is now cast about the company’s ability to continue as a going concern.
In that situation, even though the event which caused this doubt is non-adjusting, if the company is not a going concern, the event is treated as though it were an adjusting event.
Financial statements would be required to reflect the situation that the company is facing closure, assets would be written down to realisable value, long term debt becomes short term, the whole picture of the company obviously changes dramatically
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