Audit and Assurance · Subsequent events

Subsequent Events: Reporting Implications and Exam Questions

Updated 11 October 2026

Subsequent events are events between the reporting date and the date of the auditor's report (and facts found later). Adjusting events must be reflected in the financial statements. If management refuses and the effect is material, the auditor modifies the opinion. Material non-adjusting events need disclosure; if disclosed, an emphasis of matter may be used.

Understand Subsequent Events Reporting Implications and Exam Questions

A subsequent event is something that happens after the reporting date. IAS 10 splits them into two types. Adjusting events give more evidence about conditions that existed at the reporting date. Non-adjusting events relate to conditions that arose after the reporting date.

ISA 560 deals with the auditor's duty. The auditor must perform procedures to find events up to the date of the auditor's report that need adjustment or disclosure. Typical procedures are reading board minutes, enquiring of management, reviewing the latest management accounts and reviewing post-year-end cash receipts from customers and invoices from suppliers.

The duty changes with the timing. Up to the date of the auditor's report, the auditor actively seeks events. From the report date to the date the financial statements are issued, there is no duty to perform procedures. Management is responsible for informing the auditor of facts that become known in this period, and the auditor responds to facts that come to attention. After issue, there is no duty to search, but the auditor responds to facts that would have caused the report to be amended. Then comes the effect on the report.

The reporting effect depends on how management treats the event. If an adjusting event is material and management will not adjust, the financial statements are materially misstated. The auditor gives a qualified opinion ("except for") if the effect is material but not pervasive, or an adverse opinion if it is both material and pervasive. If a material non-adjusting event is not disclosed, the same logic applies, because the disclosure is missing. Where disclosures are omitted, the auditor includes the omitted disclosures in the basis for opinion section only if practicable and unless prohibited by law. This applies to omitted disclosures only. For a misstated amount, the auditor describes the misstatement and quantifies it if practicable.

An emphasis of matter paragraph is different. It is used when the matter is properly presented or disclosed in the financial statements, and is of such importance that users need to understand it. The opinion is not modified. A material non-adjusting event that is fully disclosed may be highlighted this way. Never use it as a substitute for a modified opinion.

Written representations (ISA 580) back this up. Management confirms in writing that all subsequent events needing adjustment or disclosure have been dealt with. This is a standard representation. It is not enough alone: it cannot replace other evidence. If management refuses to provide it, the auditor discusses the matter with management, reconsiders management's integrity and the reliability of other evidence, and takes appropriate action, which may include modifying the opinion.

Key rules to remember

Adjusting event rule: Evidence of conditions existing at the reporting date → adjust the financial statements; Examples: customer insolvency confirming a receivable was impaired, inventory sold below cost, a court case settled for a different amount from the provision.
Non-adjusting event rule: Conditions arising after the reporting date → disclose if material, do not adjust; Disclose the nature of the event and an estimate of its financial effect. Examples: a major acquisition, a fire after year end, a fall in market value of investments.
Opinion decision: Material, not pervasive → qualified (except for); material and pervasive → adverse; Applies when management will not adjust or disclose as required.
Emphasis of matter condition: Matter fundamental to users' understanding + adequately disclosed → emphasis of matter, opinion unmodified; Not available if the matter is misstated or undisclosed.
Auditor's timing under ISA 560: Up to the date of the auditor's report: actively seek events. Report date to issue date: no duty to perform procedures, but respond to facts that come to attention. After issue: no duty to search, but respond to facts that would have caused the report to be amended; Any new facts discovered need discussion with management and possibly an amendment of the financial statements.

How to solve Subsequent Events Reporting Implications and Exam Questions questions

Use this method for any scenario on a subsequent event and its reporting effect.

1Identify the dates: reporting date, date of the auditor's report, date the financial statements are issued.
2Classify the event as adjusting or non-adjusting by asking whether the condition existed at the reporting date.
3Decide the correct accounting: adjust, disclose, or neither. Work out the amount and compare it with materiality.
4Check what management has done. Has it adjusted or disclosed correctly?
5If management is wrong and the amount is material, choose the opinion: qualified if not pervasive, adverse if pervasive. Explain the reason.
6If management is right and the matter is fundamental, consider an emphasis of matter paragraph with the opinion unmodified.
7State the audit procedures needed and the written representation to obtain from management.
8If the event arises after the report date, state who must be informed and what action follows.

Quickest way: Four-question check

When to use it: Use in objective test questions and as a planning frame for Section B or C answers when time is short.

Did the condition exist at the year end? Yes means adjusting, no means non-adjusting.
Is it material? If not, there is no reporting issue.
Has management dealt with it correctly? If yes, consider emphasis of matter only if fundamental. If no, modify the opinion.
Is the effect pervasive? No means qualified, yes means adverse. Then add the representation point.

Common mistakes in Subsequent Events Reporting Implications and Exam Questions

Using an emphasis of matter paragraph when management has refused to adjust a material error.
Students see it as a milder option that avoids modifying the opinion.
Fix: Emphasis of matter only works where the financial statements are correct and disclosed. A material misstatement needs a modified opinion.
Treating every post year-end event as adjusting.
The event seems important so students assume it must change the numbers.
Fix: Ask whether the condition existed at the reporting date. A fire or a new acquisition after year end is non-adjusting.
Choosing an adverse opinion automatically for any material misstatement.
Confusing material with pervasive.
Fix: Qualified is the default for material but isolated errors. Adverse needs pervasive effect on the financial statements as a whole.
Saying the written representation is sufficient evidence on its own.
Letters of representation look conclusive.
Fix: They support, but do not replace, audit procedures. Say you still need inspection of post year-end evidence.
Ignoring the date of the auditor's report.
Students focus on the event and forget the timing rules.
Fix: State where the event falls. Up to the report date, the auditor must actively seek events. From the report date to the issue date, there is no duty to perform procedures, but the auditor responds to facts that come to attention. After issue, there is no duty to search, but the auditor responds to facts that would have caused the report to be amended.
Describing audit procedures with no link to the scenario.
Students recite a generic list.
Fix: Tie each procedure to the event, such as reviewing the cash received from the named customer after year end.

Worked examples

Example 1

Prior to signing the audit report on Zeta Co, you find that a customer owing $400,000 went into liquidation two weeks after the year end. The cause was financial difficulty that existed at the year end. Materiality is $150,000. Management refuses to write off the balance. Profit before tax is $3 million. State the effect on the audit report.

Show the solution

The customer's financial difficulties existed at the year end, so the liquidation provides evidence of an impaired receivable. It is an adjusting event under IAS 10.
The receivable should be written off or impaired. IAS 10 requires this adjustment whatever its size.
Management refuses to adjust, so receivables and profit are overstated. No evidence of recovery from the liquidator is given, so treat the full $400,000 as the potential misstatement. Materiality decides whether the failure to adjust affects the opinion. At $400,000 against materiality of $150,000, the misstatement is material.
The overstatement is about 13% of profit before tax ($400,000 ÷ $3,000,000 = 13.3%). The effect is material but not pervasive, because it is confined to receivables and the matching effect on profit.
Therefore a qualified opinion ("except for") is appropriate. The basis for opinion paragraph should describe the misstatement and quantify it if practicable.
An emphasis of matter paragraph would be wrong because the financial statements are misstated. Obtain a representation that management has considered all subsequent events, and note that its refusal reduces its reliability.

Answer: This is an adjusting event, and management's refusal creates a material but not pervasive misstatement, so the auditor gives a qualified "except for" opinion.

Example 2

After year end but before the audit report date, Orion Co bought a competitor for $12 million, financed by a loan. Materiality is $200,000. The financial statements include a full note on the acquisition. Explain the audit reporting implications and the written representation required.

Show the solution

The acquisition occurred after the reporting date and does not provide evidence of conditions at that date. It is a non-adjusting event.
At $12 million it is far above materiality, so disclosure is required: its nature and an estimate of its financial effect.
Management has disclosed it, so the financial statements are not misstated and no modification is needed. Check the note is complete, for example loan terms and the estimated effect.
The auditor may include an emphasis of matter paragraph if the matter is fundamental to users' understanding. It would refer to the note and state that the opinion is not modified. If the auditor does not judge it fundamental, no paragraph is needed.
Obtain a written representation from management that all subsequent events requiring adjustment or disclosure have been adjusted or disclosed. Also review the board minutes and loan agreement.

Answer: This is a non-adjusting event, properly disclosed, so the opinion is unmodified. An emphasis of matter paragraph is optional and only if fundamental. Obtain the subsequent events written representation.

Exam tips

Always state the type of event and why. The marks are often for the reasoning, not just the conclusion.
In opinion questions, give three things: the type of opinion, the reason, and whether the effect is pervasive.
If the question says the event is disclosed, think emphasis of matter. If it says management refuses, think modified opinion.
Link every audit procedure to the facts in the scenario. Name the customer, the asset or the date.
For objective questions, be careful with options that suggest the emphasis of matter replaces a modified opinion. That is always wrong.

Subsequent Events Reporting Implications and Exam Questions: frequently asked questions

When does a subsequent event lead to a modified opinion?

It does when the event is material and management will not adjust or disclose it as IAS 10 requires. The opinion is qualified if the effect is not pervasive and adverse if it is pervasive. A limitation of scope could also lead to a modified opinion.

Is an emphasis of matter paragraph compulsory for a disclosed subsequent event?

No. It is at the auditor's judgement and is used only when the matter is fundamental to users' understanding of the financial statements. The matter must be properly disclosed, and the opinion remains unmodified.

What do written representations say about subsequent events?

Management confirms that all events after the reporting date needing adjustment or disclosure have been adjusted or disclosed. The auditor still performs procedures, because the representation is not sufficient evidence alone.

What if a fact comes to light after the auditor's report is issued?

The auditor first discusses it with management and, where appropriate, those charged with governance, and decides whether the financial statements need amendment. If management amends them, the auditor performs further procedures and issues a new report. If management does not take the necessary steps, the auditor notifies management and those charged with governance that the auditor will take action to prevent future reliance on the report.