Subsequent Events

What are subsequent events?

On about one in five audits we've worked, the subsequent events review turned up something that changed the FS. Not a disclosure tweak, but a real adjustment to the numbers. The problem is that most teams treat this section as a tick box exercise: run the ISA 560.7 procedures in January, file them, and move on. Then a customer goes insolvent in February and nobody catches it before signing.

ISA 560 splits the auditor's work into two time windows. The first runs from the balance sheet date to the date of the auditor's report ( ISA 560.6 ). During this period, the auditor must perform procedures designed to identify events that require adjustment or disclosure. ISA 560.7 specifies minimum procedures: obtaining the latest interim FS, inquiring of management about new litigation or commitments, reading minutes of meetings held after the balance sheet date, and reviewing correspondence with legal counsel.

The second window runs from the auditor's report date to the date the FS are issued ( ISA 560.14 ). Here the auditor has no obligation to perform additional procedures. If the auditor becomes aware of a fact that would have caused the report to be modified, though, ISA 560.14 requires discussion with management and a determination on whether the FS need amendment.

IAS 10.3 defines adjusting events as those providing evidence of conditions that existed at the balance sheet date. Non-adjusting events indicate conditions that arose after the balance sheet date. The auditor's job under ISA 560 is to determine which category applies and to evaluate whether management has accounted for them correctly.

Why it matters in practice

In our experience, teams perform ISA 560.7 procedures too early (often in January for a December year end) and fail to update them close to signing. ISA 560.7 requires the procedures to cover the period "up to the date of the auditor's report." A three-month gap between the procedures and the signing date leaves the window unmonitored, and significant events get missed entirely.

Consider a logistics company with a 31 December reporting date and a report signing scheduled for late March. Review of board minutes reveals two events: a warehouse fire in January (a new condition, no pre-existing deficiency) and a major customer entering insolvency in February (a customer that had been experiencing cash flow difficulties throughout Q4, with overdue balances flagged in November). The fire is non-adjusting. It requires disclosure but no adjustment. The insolvency is adjusting. The customer's financial difficulties existed at the balance sheet date, and the expected credit loss provision must be revised in the year-end FS.

We've seen the classification decision between adjusting and non-adjusting events under-documented on most files we review. Teams record the event but do not record why they classified it in one category rather than the other. This is the point that generates the most review notes on subsequent events WPs. ISA 560.9 requires sufficient evidence to support the classification, which means documenting the condition that existed (or did not exist) at the balance sheet date.

Key standard references

• ISA 560.6 sets out the auditor's responsibility for events between the FS date and the auditor's report date.
• ISA 560.7 lists the minimum subsequent events procedures: reading interim financials, inquiring of management, reading board minutes, and reviewing legal correspondence.
• ISA 560.9 requires sufficient appropriate evidence to support the classification and accounting treatment of subsequent events.
• ISA 560.14 covers the obligation when the auditor becomes aware of facts after the report date but before the FS are issued.
• IAS 10.3 defines adjusting events (conditions existed at year end) and non-adjusting events (conditions arose after year end).

Related terms

Related reading

Jurisdiction notes

ISA 560 addresses events occurring between the date of the FS and the date of the auditor’s report. In the United Kingdom, ISA (UK) 560 is substantively identical to the base standard; the FRC emphasises that auditors must perform procedures up to the date of the auditor’s report and evaluate whether subsequent events require adjustment or disclosure. In the Netherlands, NV COS 560 applies the same requirements in Dutch; the AFM expects auditors of PIE entities to consider subsequent events in the context of going concern assessments ( NV COS 570 ). In Germany, IDW PS 203 supplements ISA 560 with additional guidance on the Wertaufhellung principle, distinguishing between events that "illuminate" conditions at the balance sheet date and those that create new conditions. In Australia, ASA 560 mirrors the base ISA, with ASIC noting that auditors should be alert to events that may require revision of previously issued financial reports under the Corporations Act 2001.

In the United States, subsequent events are addressed by AU-C 560 for non-public entity audits and PCAOB AS 2801, Subsequent Events, for SEC registrant audits. US GAAP classifies subsequent events under ASC 855 into Type I (recognised events providing additional evidence about conditions existing at the balance sheet date) and Type II (non-recognised events providing evidence about conditions arising after the balance sheet date). AU-C 560 requires auditors to perform procedures through the date of the auditor’s report, including inquiry of management and reading of minutes. For SEC registrants, AS 2801 requires similar procedures and the auditor must consider subsequent events in the context of SEC filing requirements, including the potential need for updating the auditor’s report when FS are reissued or included in SEC filings.

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