Subsequent events and going concern: formula sheet

Key formulas

Period 1: up to the report date

Perform procedures to identify all events up to the date of the auditor's report that may require adjustment or disclosure

This is an active duty. Procedures must be designed to cover the period from the period end to the report date, and updated as close to the report date as practicable.

Adjusting event

Evidence of conditions that existed at the reporting date → adjust the amounts

Examples: a customer bankruptcy confirming a receivable was impaired at year end, inventory sold below cost after year end, settlement of a court case that was ongoing at year end.

Non-adjusting event

Conditions arising after the reporting date → disclose if material, do not adjust

Examples: a fire after year end, a major acquisition, a share issue, a fall in the market value of investments after year end. Disclose nature and estimated financial effect.

Period 2: after report date, before issue

No duty to perform procedures. If a fact becomes known that might have caused a modified report, discuss with management and those charged with governance, and decide if the statements need amending

If management amends, extend procedures to the new date and give a new or amended report. That report must not be dated earlier than the date the amended financial statements are approved. If management does not amend and the auditor's report has not been released, the auditor modifies the opinion (qualified or adverse) in the report. If the report has already been provided to the entity, the auditor first notifies management and those charged with governance not to issue the statements to third parties before the amendments are made. If they are issued anyway, the auditor then takes action to prevent reliance on the report, and considers legal advice, as in Period 3.

Period 3: after the financial statements are issued

No duty to perform procedures. If a fact becomes known that would have caused a modified report, discuss with management and those charged with governance, and decide if the statements need amending. If management amends, extend procedures to the new report date, review the steps management has taken to inform recipients of the earlier statements, and issue a new report

Only if management does not take the necessary steps to inform recipients of the earlier statements does the auditor notify management and those charged with governance that they will seek to prevent future reliance on the report. If management still does not act, the auditor takes appropriate action to prevent reliance, and considers legal advice.

Written representations

Obtain a representation that all events after the period end requiring adjustment or disclosure have been dealt with

The representation date should be as close as possible to, but not after, the date of the auditor's report.

Core auditor conclusion (ISA 570 (Revised))

Conclude on: (1) is management's use of the going concern basis appropriate? (2) does a material uncertainty exist?

Both questions must be answered with sufficient appropriate evidence.

Reporting outcomes

Basis appropriate + no material uncertainty = no separate going concern section, although the standard report still describes management's and the auditor's going concern responsibilities; Basis appropriate + material uncertainty adequately disclosed = unmodified opinion with a 'Material Uncertainty Related to Going Concern' section; Uncertainty not adequately disclosed = qualified or adverse opinion (ISA 705), and the Basis for Opinion section states that a material uncertainty exists and that the financial statements do not adequately disclose it; Financial statements prepared on the going concern basis, but that basis is inappropriate = adverse opinion; Management has instead adopted an acceptable alternative basis and discloses it adequately = unmodified opinion may be given, with an emphasis of matter if appropriate

The auditor requests management to make or extend its assessment. If management is unwilling, the auditor considers the effect on the report. A limitation of scope may lead to a qualified opinion or a disclaimer of opinion. The adverse opinion applies only where the going concern basis has been used and is inappropriate. The conclusion depends on whether an acceptable alternative basis has been adopted and disclosed.

Period covered

Management's assessment period is whatever the applicable framework requires. Under IAS 1 it is at least, but not limited to, twelve months from the end of the reporting period, taking into account all available information about the future. Auditor (ISA 570 (Revised)): evaluate the same period as management's assessment and enquire whether management is aware of events or conditions beyond it.

If management's period is shorter than the framework requires, ask management to extend it.

Responsibility split

Management: assess and disclose. Auditor: evaluate, conclude, report.

The auditor's responsibility does not replace management's.

Basis appropriate, material uncertainty adequately disclosed

Unmodified opinion + Material Uncertainty Related to Going Concern section

The section refers to the disclosure note. It says the opinion is not modified for this matter.

Basis appropriate, material uncertainty not adequately disclosed

Qualified ('except for') or adverse opinion under ISA 705 (Revised)

Choose adverse where the omission is material and pervasive. Explain the inadequacy in the Basis for Opinion section.

Going concern basis inappropriate

Adverse opinion

This applies where management has still prepared the statements on a going concern basis.

Basis appropriate, no material uncertainty

Unmodified opinion, no going concern section

Even so, the report explains management's and the auditor's going concern responsibilities.

Management refuses to assess or extend the assessment period

Consider qualified opinion or disclaimer (ISA 705)

Judge by the effect of the limitation on scope. Ask management to extend first.

Test for material uncertainty

Magnitude of potential impact + Likelihood of occurrence → disclosure needed for fair presentation

Applies where events or conditions may cast significant doubt on continuing as a going concern.

Status of representations

Written representations = supporting evidence only; they do not replace other sufficient appropriate evidence

Say this whenever a scenario relies on management's word alone.

Timing of the letter

Date of representation letter ≈ date of auditor's report, and not after it

It should cover all periods referred to in the report. Update if the signing date is delayed.

Required responsibility representations

Management confirms: (1) preparation and fair presentation of the financial statements in line with the framework, (2) provision of all relevant information and access, with all transactions recorded and reflected in the financial statements

If management does not provide these, the auditor disclaims an opinion.

Unreliable representations

Doubt over integrity or inconsistency with evidence ⇒ reconsider reliability of all representations and other evidence. Serious doubt over integrity ⇒ disclaim an opinion. A requested representation refused and not resolved ⇒ take appropriate action, including modifying the opinion under ISA 705

Serious integrity doubts lead to a disclaimer.

Final decision test

Uncorrected misstatements (individually and in aggregate) vs materiality, plus qualitative factors

Also consider the effect on prior periods and the risk of further undetected error.

Quick revision

• ISA 560 deals with events after the reporting date up to the date of the auditor's report, and facts found later.
• Adjusting events give evidence of conditions at the reporting date; non-adjusting events relate to conditions that arose afterwards.
• The auditor must perform procedures to identify events up to the date of the report that need adjustment or disclosure.
• If a fact found after the report date would have changed the report, discuss it with management and act as the circumstances require.
• Management is responsible for assessing going concern; the auditor evaluates that assessment.
• Indicators include net current liabilities, loan defaults, loss of key customers, negative operating cash flows and legal claims.
• Key procedures: review forecasts and their assumptions, check covenants and facilities, read post year-end management accounts and board minutes.
• If a material uncertainty exists and is adequately disclosed, the opinion is unmodified with a separate section on material uncertainty related to going concern.
• If disclosure of a material uncertainty is inadequate, follow ISA 705 (Revised) and give a qualified (except for) or adverse opinion, depending on pervasiveness. In the Basis for Opinion section, state that a material uncertainty exists and that the financial statements do not adequately disclose this matter.
• If the statements are prepared on a going concern basis that is inappropriate, give an adverse opinion under ISA 705 (Revised). If management uses an acceptable alternative basis with adequate disclosure, the opinion is unmodified, and the auditor may consider an Emphasis of Matter paragraph (ISA 706 (Revised)) to draw attention to the disclosure.
• Written representations support other evidence but cannot replace it.
• Always link the conclusion to the scenario facts and state what the auditor should do next.

Common mistakes

• Classifying an event by when it happened rather than by what it tells you. Fix: Ask whether the event confirms a condition that existed at the year end. A customer going bankrupt after year end usually confirms an earlier problem, so it is adjusting.
• Saying the auditor must search for facts after the report date. Fix: State that the active duty ends at the date of the auditor's report. After that, the auditor responds to facts that become known but has no duty to look for them.
• Saying the auditor is responsible for assessing going concern. Fix: Write that management prepares the assessment and discloses. The auditor evaluates it and concludes.
• Listing indicators without applying them to the scenario. Fix: Quote the scenario fact, name the indicator, and say why it matters for this entity.
• Calling the material uncertainty section a modified opinion. Fix: Remember that the opinion is modified for inadequate disclosure, an inappropriate basis, or a material limitation on scope. An adequately disclosed uncertainty gives an unmodified opinion with a separate section.
• Using an Emphasis of Matter paragraph for a material uncertainty. Fix: Under ISA 570 (Revised) use the heading Material Uncertainty Related to Going Concern. Emphasis of Matter is for matters appropriately presented or disclosed that are fundamental to users' understanding of the financial statements.
• Treating a representation letter as enough evidence on its own. Fix: Always pair a representation with other procedures, such as inspecting contracts, board minutes or post year-end documents.
• Dating the letter after the auditor's report or well before it. Fix: State that the letter is dated as near as practicable to the report date, and updated if signing is delayed.

Exam tips

• Always state the three dates before classifying anything. Markers look for evidence that you know which ISA 560 period applies.
• Tie each procedure to the specific event. Generic lists score poorly in a scenario-based case study.
• Show professional skills: judge materiality using the figures given, be sceptical about management's explanations, and finish with a clear recommendation.
• Link the event to going concern and the auditor's report. A post year-end loss often affects both.
• Use bullet points with short reasons. Each point should state the issue, the evidence and the implication.
• Tie every indicator and every procedure to a fact in the scenario. Generic lists earn few marks.
• Always state the responsibility split in one line when a question asks about roles. It is an easy mark.
• For report questions, state the conclusion first (appropriate basis or not, uncertainty or not) and then the opinion type.