AU-C 560 Subsequent Events: Report Date, Dual Dating and Subsequently Discovered Facts

AU-C section 560, Subsequent Events and Subsequently Discovered Facts, covers events that happen between the balance sheet date and the auditor's report, and facts that come to the auditor's attention after the report is dated. The accounting rules for recognized and nonrecognized events are in ASC 855. For the accounting side and a longer treatment, see subsequent events: Type 1 vs Type 2. This page covers the audit side.

This page paraphrases the standard. Read AU-C 560 in AICPA Professional Standards before relying on any point here.

What is the objective of AU-C 560?

The auditor's objectives are to obtain sufficient appropriate audit evidence about whether events occurring between the date of the financial statements and the date of the auditor's report that require adjustment of, or disclosure in, the financial statements are appropriately reflected in them, and to respond appropriately to facts that become known to the auditor after the date of the auditor's report that, had they been known at that date, may have caused the auditor to amend the report.

What are the three periods?

The standard separates subsequent events by when the auditor learns of them. Different responsibilities apply to each.

The date of the auditor's report and the report release date are different dates. The report is dated no earlier than the date on which the auditor has obtained sufficient appropriate evidence to support the opinion. See AU-C 700. The standard's term for release is the report release date, the date the auditor gives the entity permission to use the auditor's report in connection with the financial statements. A gap between the two is where subsequently discovered facts live.

What procedures are required up to the report date?

The auditor performs procedures designed to obtain sufficient appropriate evidence that all events up to the date of the auditor's report that require adjustment or disclosure have been identified. The procedures are in addition to those applied to particular transactions after period end to obtain evidence about balances, such as cutoff tests. The auditor does not need to repeat procedures where earlier work gave satisfactory conclusions.

The procedures take account of the auditor's risk assessment and normally include:

• obtaining an understanding of any procedures management has established to ensure that subsequent events are identified
• inquiring of management and, where appropriate, those charged with governance about whether any subsequent events have occurred that might affect the financial statements
• reading minutes of meetings of owners, management and those charged with governance held after the financial statement date, and inquiring about matters discussed at meetings for which minutes are not yet available
• reading the entity's latest subsequent interim financial statements, if any

Other procedures that make sense in the circumstances, many of which are practice rather than listed requirements, include:

• updating legal letters close to the report date, see AU-C 501
• reviewing cash receipts and disbursements after year-end, which also supports the search for unrecorded liabilities
• inquiring about changes in debt, equity, large customers or key vendors
• updating the going concern evaluation, see AU-C 570
• reading the latest available internal reports, budgets and forecasts

If the auditor identifies an event that requires adjustment or disclosure, the auditor determines whether it is appropriately reflected. A misstatement from this work goes on the summary of uncorrected misstatements under AU-C 450.

What does the auditor do about facts discovered after the report date but before release?

The auditor has no obligation to perform any audit procedures after the report date. If a fact becomes known that, had it been known at the report date, may have caused the auditor to amend the report, the auditor does the following.

1. Discuss with management and, where appropriate, those charged with governance whether the financial statements need amendment, and inquire how management intends to address the matter.
2. If management amends the financial statements, perform the procedures necessary in the circumstances on the amendment, extend the subsequent events procedures to the date of the new auditor's report, and provide a new or amended report.
3. If management does not amend and the auditor believes it should, and the report has not yet been provided to the entity, modify the opinion as required by AU-C 705 before releasing it.
4. If the report has already been provided to the entity, notify management and those charged with governance not to issue the financial statements to third parties before the necessary amendments are made. If they are issued anyway, the auditor takes action to seek to prevent reliance on the report.

What about facts discovered after the financial statements are released?

The same approach applies, but third parties may already hold the report. The auditor considers whether the financial statements need revision, discusses it with management and those charged with governance, and determines what action is appropriate. Legal advice is often sensible at this point.

If management revises the financial statements, the auditor performs the procedures needed and reviews the steps management takes to make sure anyone in receipt of the earlier statements and report is informed. The new report includes an emphasis-of-matter or other-matter paragraph that refers to the note explaining the reason for the revision and to the earlier report. See AU-C 706. If management does not take the necessary steps, the auditor notifies management and those charged with governance that the auditor will seek to prevent future reliance on the report, and then does so.

Dual dating and new report dates

When management amends financial statements for a specific subsequent event after the report date, the auditor may use one of two approaches for the new or amended report.

• Dual dating. The report keeps its original date for the financial statements except for the specific matter, which carries a later date, for example "February 20, 20X2, except for Note 12, as to which the date is March 9, 20X2". The auditor's subsequent events responsibility extends only to the later-dated item.
• A new report date. The report is redated to a later date, and the auditor's subsequent events procedures extend to that new date.

The choice affects how much additional work is required, since a later report date extends the period over which the auditor must look for subsequent events.

Written representations

The auditor requests a written representation that all events occurring after the date of the financial statements that require adjustment or disclosure have been adjusted or disclosed. The letter is dated as of the report date. See AU-C 580 and the management representation letter template.

What must be documented?

The file should show the subsequent events procedures performed, who was asked and what they said, the events identified and how they were handled in the financial statements, and the date through which procedures were performed. If a subsequently discovered fact arises, document the discussion with management, the actions taken, and any legal advice sought. See AU-C 230 audit documentation.

Common weaknesses in subsequent events files

Practice checks, not requirements of the standard. Gaps to avoid:

• Subsequent events inquiries performed at the end of fieldwork but not updated as of the report date
• Minutes read only through the start of fieldwork
• Representation letter dated before the report date
• Management's evaluation date in the notes inconsistent with the report date
• No documentation of what was asked of management
• Report released before the file showed the subsequent events work was complete

Related

• Subsequent events: Type 1 vs Type 2 (ASC 855)
• AU-C 700 forming an opinion and reporting
• AU-C 706 emphasis-of-matter and other-matter paragraphs
• AU-C 570 going concern
• AU-C 580 written representations
• Search for unrecorded liabilities

Sources

• AICPA, AU-C Section 560, Subsequent Events and Subsequently Discovered Facts
• FASB ASC 855, Subsequent Events
• AICPA, AU-C Sections 700, 705, 706 and 580

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error