ISA 560 Subsequent Events deals with this issue.
1. Auditors should perform procedures designed to obtain sufficient appropriate audit evidence that all material subsequent events up to the date of the audit report which require adjustment or disclosure in the financial statements have been properly made.
2. If matters requiring adjustment or disclosure are discovered after the date of the audit report but before the financial statements are issued, or even after they have been presented, auditors should ascertain whether and how any necessary changes are to be made to the financial statements.
3. The decision as to whether financial statements should be changed is that of the directors. Auditors cannot ‗change their minds‘ once the audit report has been signed but if new
financial statements are issued they can issue a new audit report which should make reference to the previous financial statements and audit report.
4. If auditors consider that the financial statements contain material errors or are misleading, they may exercise an right to speak at general meetings and to make written representations to members.
5. If matters are discovered long after the financial statements have been issued, it is common to deal with the matter as a prior period adjustment in the subsequent financial statements. 14
(ii) Subsequent events review procedures
1. These include making enquiries of management as to how they have ensured that subsequent events have been identified, although it is likely that in this case the company will rely on the audit firm to help them with this.
2. Auditors will read the minutes of management, shareholders and other meetings and review relevant accounting records. In this case, they are likely to review any budgets or cash flow forecasts. It is likely that these will have been prepared as a result of the negotiations with the bank.
3. In the case of Sunrise, the auditors are likely to enquire as to the possibility of any new share or loan issue to fund the expansion which may require disclosure. They may also enquire as to any significant changes in the property market that might (if the supermarket properties are carried at valuation) require either disclosure or adjustment in the accounts.
4. Auditors will also consider the need for disclosure of significant leasing transactions occurring early in the following year.