Lecture - Chapter – 1

12 “Standards on Auditing”
(10) SA – 560 “Subsequent Events”

(a) Meaning of Subsequent Events:

Events occurring after B/s date, but before date of audit report,

and

includes the facts that have become known to the auditor after the date of audit

report.

FY 19-20

01.04.2019 31.03.2020 25.06.2020 20.08.2020 01.09.2020 30.09.2020

Date of Date of Date of Date of

approval of Audit Issue of AGM

F.S. report F.S.

Events as Events as per SA Facts as per SA

Per AS/Ind-AS

(b) Audit Procedures in case of subsequent events:

(i.e. Events upto date of audit report)

(i) Perform procedures to obtain evidences that all events requiring adjustments

or disclosures have been identified.

(ii) For this purpose, auditor may -

(a) Obtain an understanding of procedures followed by management to

identify the events.

(b) Inquire the management* as to occurrence of significant events that

may effect the financial statements.

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(c) Read the minutes of meeting, if any, held after B/s date.

(d) Study the Interim financial statements, if any prepared by the entity,

subsequent to B/S date.

(iii) If auditor identify any event which requires any adjustment or disclosure,

auditor should ensure its appropriate treatment in the books of account as per

requirements of applicable FRF (AS – 4/ Ind AS – 10).

(iv) Obtain a written representation from the management that all known events

that require adjustments/ disclosure as per FRF have been appropriately

adjusted or disclosed.

*Matters to be Inquired:

1. Whether new commitments, borrowings or guarantees have been entered into.

2. Whether sales or acquisitions of assets have occurred or are planned.

3. Whether there have been increases in capital or issuance of debt instruments,

such as the issue of new shares or debentures, or an agreement to merge or

liquidate has been made or is planned.

4. Whether any assets have been appropriated by government or destroyed, for

example, by fire or flood.

5. Whether there have been any developments regarding contingencies.

6. Whether any unusual accounting adjustments have been made or are

contemplated.

7. Whether any events have occurred or are likely to occur that will bring into

question the appropriateness of accounting policies used in the F.S., as would

be the case, for example, if such events call into question the validity of the

going concern assumption.

8. Whether any events have occurred that are relevant to the measurement of

estimates or provisions made in the F.S.

9. Whether any events have occurred that are relevant to the recoverability of

assets.

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(c) Audit Procedures for facts known to auditor after date of Financial Statement:

FACTS

(I) Facts that have been become known (II) Facts that have become

to auditor after date of audit report known to auditor after

But before issue of F.S. date of issue of F.S.

In general, auditor has no duty towards such events, however, if he is of the opinion

that had he aware of this fact before date of AR, a modified opinion was issued.

Ask the management to revise the F.S. Discuss the matter with

management and ask for

Mngt. agree Mngt. refuses revision of F.S.

Auditor need to perform Issue Modified report If mngt. deny, take

additional procedures over if AR not yet delivered preventive action to prevent

the amended part of F.S. to management. users reliance on AR.

Auditor should issue, either However, if report has If mngt. agree, auditor

- revised AR with new date already been delivered to should perform additional

or mngt., ask the mngt. not Procedures and issue a

- original report with to issue the AR with F.S. new audit report

comment on additional incorporating an EOM Para

procedures with new date. Mngt. does not consider stating the reasons for

the request of auditor revision of F.S.

Report shall contain an OM

Para stating the procedures withdraw audit report

performed on subsequent and

events. take preventive action so as prevent user’s reliance on

Audit Report.

Do Practice – Questions on SA 560

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Standards on Auditing Chapter 1
(11) SA – 570 “Going Concern”

(a) Basic Concept of Going Concern Basis of Accounting: Reading from Book

(b) Auditor’s procedures w.r.t. evaluation of Going Concern:

(i) Risk Assessment procedure:

- Auditor should obtain understanding of events and conditions that may

cast significant doubt over the appropriateness of Going Concern Basis

of Accounting.

- Auditor should inquire the management w.r.t. following:

(a) How management assesses the appropriateness of G.C. basis of

accounting.

(b) Period selected by management.

(in no case, it should be lower than 12 months)

(c) Other factors as considered by management.

- Auditor should remain alert throughout the audit for evidences of

events that may cast significant doubt on entity ability to continue as a

going concern.

(ii) Auditor’s Responses:

Situation – I: Management has not assessed the appropriateness of G.C.

- Discuss with management the basis on which Financial

Statement are prepared.

- Ask the management the basis on which management

intends to use the Going Concern Basis.

- On the basis of such discussion, auditor should determine

the procedures to be performed in such situation.

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Chapter 1 Standards on Auditing
Situation – II: Period selected by management < 12 months.

- Request the management to reassess the Going Concern

assumption for a minimum period of 12 months.

- If management refuses to reassess the appropriateness

of Going Concern on extended period, auditor should

consider the effect of refusal over the audit and audit

report.

Situation – III: Auditor identify the events that cast significant doubt

over the appropriateness of G.C. basis of a accounting.

Auditor shall perform the additional procedures as mentioned

below:

(i) Discuss with the management / TCWG, future plans and

evaluating the viability and feasibility of those plans.

(ii) Evaluating the forecast of cash flows.

(iii) Obtain a WR from management as to future plans

(iv) Request management to reassess the G.C. assumption

considering the events & conditions identified by auditor.

(v) Review the mitigating factors discussed with the mngt.

(vi) Study the minutes of meetings to find out the solutions

discussed to overcome the problem of Going Concern

(vii) Inquire status of pending litigations in the court or other

authorities.

Events or conditions that cast significant doubts over appropriateness of G.C.

basis of accounting:

(a) Financial:

(b) Operating: Examples to be learned from the main book

(c) Others:

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(c) Conclusion and Reporting:

Based on the audit procedures performed and audit evidences collected, auditor is

required to conclude as to appropriateness of Going Concern basis of accounting and

report Accordingly.

Conclusion

(a) Going Concern Appropriate (b) Going Concern Inappropriate

No material uncertainty Material Uncertainty exist Adverse opinion

Unmodified opinion

Appropriate disclosures given Disclosures not given

in financial statements or

Disclosures given are not

Appropriate

Unmodified opinion with a separate

Section in the audit report titled as Modified opinion

“Material uncertainty relating to (Qualified or Adverse)

Going Concern”

DO Practice – Questions on SA 570

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Chapter 1 Standards on Auditing
(12) SA – 580 “Written Representations”
(a) Meaning and Nature of Written Representation (WR):

- WR is a written statement provided by management/TCWG on request of

auditor to confirm certain matters or to support other evidences.

- WR is considered as an audit evidence, being a response to inquiry by auditor.

However, WRs cannot be considered as sufficient and appropriate in relation to

matter covered by WR.

- If auditor draws his conclusion on any matter, solely on the basis of WR

issued by management/TCWG, such approach cannot be considered as correct.

- WRs should be in the form of a formal letter addressed to auditor.

- WRs is required w.r.t.

(a) Management responsibilities (FRF, F.S., I.C.) and

(b) Matters on which other SA requires WRs

- WRs should be dated and in no case, date should be after the date of audit

report. To the extent possible date should be near the date of audit report.

(b) Special Situations:

Auditor request WR from Mngt./ TCWG

WR provided by management Management denied to

provide WR

WR reliable WR not reliable WR Doubtful

- Discuss with Management

Consider it Determine its perform procedures reasons for denial

Audit possible effects on to resolve doubts - Reevaluate mngt. integrity

evidence audit and issue - If reasons not satisfactory

disclaimer of opinion If doubts not resolved and sufficient doubt on

if sufficient doubt determine its possible integrity of management,

exist as to integrity effect on audit opinion issue disclaimer of opinion

of management resolved

DO Practice – Questions on SA 580

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