Tutor‟s hint: What your answer should demonstrate is that the date the detailed audit work is finished is irrelevant from the viewpoint of the auditor‘s responsibilities. What matters is the date the audit report is signed. The position after the audit report is signed may appear to be complicated, but you do need to be aware of the various possibilities and what the auditor should do in each set of circumstances. In (c) your answer should list various ways in which auditors can actively obtain evidence; they should not just rely on the representations of the directors.
Examiners comment: Candidates lost marks through discussing accounting for subsequent events rather than audit. Few candidates understood that auditors only have responsibilities after the audit report is signed if they become aware of any further subsequent events. Answers to (c) were poor.
(i) Between the year-end and the end of the performance of detailed audit work, auditors should identify and detect all material subsequent events which take place in that period. Such events which are non-adjusting should be disclosed in the notes to the accounts of the company, whereas all adjusting events should be incorporated in the accounts.
(ii) As the auditors‘ responsibility extends to the date on which they sign their report (which should be the same day as the directors signed the accounts), it follows that they must obtain reasonable assurance up to than date in respect of all significant
events. Auditors should ensure that any such significant events are appropriately
accounted for or disclosed in the financial statements. If not, a qualification of their report may be necessary. In other words, the auditors‘ responsibility is the same as it was during the detailed audit work.
(iii) Auditors‘ responsibilities after the date of the audit report are not as clear cut as they are in the period prior to the date of the audit report. After the date of the audit report auditors do not have a duty to search for evidence of subsequent events. However, auditors should ask the directors to let them know if any material post balance sheet events occur during this period. If, before the AGM
they become aware of information which might have made them give a different audit opinion had they known of it at the time, they should act as follows:
1. They should discuss the matter with the directors, carry out further procedures to obtain sufficient audit evidence and then consider whether the financial statements should be amended by the directors.
2. If the directors are unwilling to take action which the auditors consider necessary to inform the members of the changed situation, auditors should consider exercising their statutory rights to make a statement at the general meeting. They should also consider taking legal advice on their position.
3. If the directors wish to amend after the auditors have signed their report, the auditors will need to consider whether the proposed amendments affect their report. The audit report should not be dated before the date on which the amended financial statements are approved by the directors. Auditors should follow the procedures for auditing events after the balance sheet date before making their report on the amended financial statements.
(iv) If auditors become aware of subsequent events during this period that may affect the accounts, they should consider whether to withdraw their audit report. Legal advice may be required. As in (iii) the auditors should consider making a statement at the annual general meeting.
If the directors do decide to change the accounts, further post balance sheet work will be necessary to cover events up to the revised date of the audit report. In the later audit report, the auditors should refer to their original audit report, and to the note in the accounts which should give details of the changes.
(v) Auditors have no responsibility for identifying subsequent events during this period. If however the directors find material errors in the accounts and inform the auditors, similar procedures to those used in (iv) will be needed.