SUBSEQUENT EVENTS – The Topic We All Jumped to with the COVID Virus Lockdown, without Reading the Standard
Subsequent events — the topic we all jumped to when the COVID-19 virus hit and the lockdown became a reality. How difficult can it be? Look at your adjusting and non-adjusting events and move on. And, of course, this strategy may be applied to all engagements not completed yet. Thank God, you say, the completed engagements have fallen outside the net.
Not true. A scenario which was seldom relevant in the past, and hardly ever received any attention, has now hit us without us realising that it is exactly what the COVID lockdown represents. That is, “Facts Which Become Known to the Auditor after the Financial Statements Have Been Issued”. Yes, you have read correctly, and your shock is totally justified. There are necessary procedures when facts become known AFTER the issue of the financial statements.
Read ISA 560 paras 14 to 16 carefully and determine which of your high-risk clients, especially those with fair-value adjustments and impairments, would have issued materially different financial statements, had the COVID-19 virus crisis and lockdown been known. Cognisance needs to be taken of the users and what would influence their decisions.
The burning question is, “How far does one need to go back to consider the effect of the COVID-19 virus and the lockdown?” The standard does not state the period.
First, let’s look at the IFRS for SMEs criteria for adjusting events. These criteria require that financial statements be adjusted for adjusting events, i.e. events that provide additional evidence for determining a carrying value or disclosure at yearend. I submit that for clients for which material adjustments would have occurred, had the circumstances of COVID-19 been known at the time of the audit report, regardless of the time period involved, the matter needs to be taken up with management, in terms of paras 14 to 17 of ISA 560. Management’s response will dictate further procedures to be performed by the auditor.
For non-adjusting events, only disclosure is required. Again, only the materiality of the effect of the event and the response of management will determine the further procedures the auditor should take.
Therefore, it is advisable that auditors communicate with the management of audit clients for which audit reports have been issued, where material amounts or disclosures are in question, owing to the COVID-19 virus and the lockdown, as set out in para 14 of ISA 560.