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CA Intermediate · Auditing and Ethics · Completion and Review

Rao & Associates, auditors of Sagar Chemicals Ltd, complete the audit for FY 2025-26 and the audit report is dated 20 May 2026. On 5 June 2026, before the financial statements are issued, the auditor learns that a major customer, whose receivable of significant amount was fully recognised, was declared insolvent on 28 May 2026 because of conditions existing at the balance sheet date. Under SA 560 on Subsequent Events, what is the correct response?

The auditor should discuss the matter with management and those charged with governance. If the financial statements are amended, the auditor performs the necessary procedures and issues a new or dual-dated report, because the facts became known after the report date but before the statements were issued, as SA 560 requires.

  1. ATake no action because the event occurred after the audit report date
  2. BDiscuss the matter with management and those charged with governance, and if the financial statements are amended, perform procedures and issue a new or dual-dated reportCorrect
  3. CMention the event only in the Key Audit Matters section without any amendment
  4. DWithdraw the audit report and resign from the engagement immediately

Explanation

The facts become known after the report date but before issue of the financial statements. SA 560 requires the auditor to discuss with management whether the financial statements need amendment, and if they are amended, extend procedures to the new report date and provide a new or dual-dated report. Ignoring it or immediate resignation is not the prescribed response, and a KAM reference does not replace correcting the financial statements.

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