Completing the audit: subsequent events, representations and reporting judgments

By late February 2027, the work on Tamarack's components, controls and estimates is largely done. What remains is a sequence of procedures that can still change the financial statements and the auditor's report: searching for subsequent events, obtaining written representations, reading the other information that will accompany the statements, evaluating misstatements and disclosures in total, and deciding what the report will say. ACCT-331 introduced the auditor's report and key audit matters; this lesson focuses on the judgments that arise at the end of a complex engagement, using the Tamarack audit, whose report is planned for March 4, 2027.

Subsequent events

ASC 855, Subsequent Events, distinguishes recognized subsequent events, which provide additional evidence about conditions that existed at the balance sheet date, from nonrecognized subsequent events, which provide evidence about conditions that arose after that date. Recognized events are reflected in the financial statements; nonrecognized events are disclosed if necessary to keep the statements from being misleading. An SEC filer evaluates subsequent events through the date the financial statements are issued; other entities evaluate through the date they are available to be issued and disclose that date.

Under AU-C 560, the auditor performs procedures designed to identify events between the date of the financial statements and the date of the auditor's report that require adjustment or disclosure. Typical procedures include inquiring of management and legal counsel, reading minutes of board and audit committee meetings held after year end, reading the latest interim financial information and budgets, and examining significant transactions after year end, such as large credit notes, payments to settle provisions and new borrowings. Procedures should be performed as close as possible to the report date.

The program classifies the events found in Tamarack's subsequent events review, from January 1 to the March 4 report date, and decides what each requires.

# Subsequent events log from January 1 to the report date of March 4, 2027 (invented, thousands).
materiality = 1_400
events = [
    ("2027-01-12", "Customer owing 1,180 at year end files for bankruptcy; insolvency began in 2026", 1_180, True),
    ("2027-01-28", "Lawsuit filed in 2026 settled for 640; provision at year end was 400", 240, True),
    ("2027-02-09", "Fire destroys Snacks warehouse stock bought in 2027", 2_300, False),
    ("2027-02-17", "Board approves acquisition of a cold-storage business for 18,500", 18_500, False),
    ("2027-02-24", "Annual price list increase of 3% announced", 0, False),
    ("2027-03-02", "Mexican tax audit assessment relating to 2024, previously unknown", 310, True),
]
print(f"{'Date':<12}{'Type':<15}{'Amount':>8}  Action")
for date, text, amt, condition_existed in events:
    if condition_existed:
        kind = "recognized"
        action = "adjust the statements" if amt >= 70 else "adjustment trivial"
    else:
        kind = "nonrecognized"
        action = "disclose" if amt >= 0.5 * materiality else "no disclosure needed"
    print(f"{date:<12}{kind:<15}{amt:>8,}  {action}: {text}")
adj = sum(e[2] for e in events if e[3])
print(f"\nTotal recognized amounts: {adj:,} (compare with materiality {materiality:,})")

Date        Type             Amount  Action
2027-01-12  recognized        1,180  adjust the statements: Customer owing 1,180 at year end files for bankruptcy; insolvency began in 2026
2027-01-28  recognized          240  adjust the statements: Lawsuit filed in 2026 settled for 640; provision at year end was 400
2027-02-09  nonrecognized     2,300  disclose: Fire destroys Snacks warehouse stock bought in 2027
2027-02-17  nonrecognized    18,500  disclose: Board approves acquisition of a cold-storage business for 18,500
2027-02-24  nonrecognized         0  no disclosure needed: Annual price list increase of 3% announced
2027-03-02  recognized          310  adjust the statements: Mexican tax audit assessment relating to 2024, previously unknown

Total recognized amounts: 1,730 (compare with materiality 1,400)

Three events reflect conditions that existed at year end and require adjustment. The customer bankruptcy in January confirms that its 1.18-million-dollar receivable was impaired at December 31, because the customer's financial difficulties began in 2026. The lawsuit settled for 640,000 dollars against a provision of 400,000 provides evidence of the obligation that existed at year end, so the provision is increased by 240,000. The Mexican tax assessment relates to 2024 and is newly discovered; the obligation existed at year end, so it is recognized. Together the three adjustments total 1.73 million, above group materiality, and management agrees to record them.

Two events reflect conditions arising after year end. The fire in February destroyed stock bought in 2027, so the loss belongs to 2027; at 2.3 million dollars before insurance recoveries, it is disclosed. The board's approval of an 18.5-million-dollar acquisition is disclosed as a significant commitment and future event. The price increase needs no disclosure. The program's disclosure threshold of half of materiality is a teaching simplification; in practice the test is whether the omission would make the statements misleading, considering qualitative factors.

Facts discovered after the report date

The auditor has no obligation to perform procedures after the report date, but if a fact becomes known that, had it been known at that date, might have caused the auditor to amend the report, the auditor discusses it with management and determines whether the financial statements need amendment. If they are amended before issue, the auditor extends subsequent events procedures to the new report date or dual-dates the report, keeping the original date except for the note describing the amendment, which carries a later date. If the statements have already been issued, management may need to recall or reissue them; if management refuses to take necessary action, the auditor takes steps to prevent reliance on the report, often with legal advice.

Written representations

AU-C 580 requires written representations from management with appropriate responsibilities, usually the CEO and CFO, that management has fulfilled its responsibility for preparing the financial statements, has provided all relevant information and access, and has recorded all transactions. Other standards require specific representations, for example on fraud, non-compliance with laws, related parties, subsequent events, estimates and going concern, and uncorrected misstatements, with a summary of the uncorrected items attached. Representations are dated as near as practicable to, but not after, the date of the auditor's report, and must cover all periods referred to in the report.

Written representations are necessary evidence but not sufficient on their own for any material matter. They do not replace procedures. If management refuses to provide a required representation, or the auditor concludes that representations are unreliable because of doubts about management's integrity, the auditor must consider the effect on the audit, which can include a disclaimer of opinion. For a group, the group engagement team also obtains representations from component management through component auditors, covering matters such as completeness of intercompany balances.

Other information

AU-C 720 requires the auditor of a private entity to read the other information in the annual report and consider material inconsistencies, with an Other Information section in the report. For issuers, PCAOB AS 2710 requires the auditor to read other information in documents containing audited financial statements, such as the Form 10-K, and consider whether it is materially inconsistent with the statements; the auditor's report does not include an other information section. For Tamarack, the team reads management's ICFR report and MD&A, which describe the goodwill material weakness, for consistency with its findings.

Evaluating misstatements and the overall presentation

At completion, the team accumulates all misstatements identified, from the group team, component auditors and specialists, and asks management to correct them. Uncorrected misstatements are evaluated individually and in total against materiality, including qualitative factors: whether a misstatement changes a loss into income, affects compliance with a covenant, hides a change in earnings trend, or relates to a matter of interest to regulators. For Tamarack, the covenant is a sensitive qualitative factor: an uncorrected misstatement of 300,000 dollars that would take the net debt to EBITDA ratio over 3.5 would be material even though it is well below 1.4 million.

The team also performs final analytical procedures on the statements as a whole, to see whether they are consistent with its understanding, and evaluates whether the statements, including disclosures, achieve fair presentation. Late changes, such as the adjustments from the subsequent events review and the goodwill impairment, need to be traced through to the final statements, the notes and the MD&A.

Key audit matters and critical audit matters

For issuers, PCAOB AS 3101 requires the auditor to communicate critical audit matters: matters arising from the audit that were communicated or required to be communicated to the audit committee, that relate to accounts or disclosures that are material to the financial statements, and that involved especially challenging, subjective or complex auditor judgment. For Tamarack, Hollis Ward identifies two CAMs: the goodwill impairment assessment for the snacks business and the trade promotion accruals. Each description identifies the matter, the principal considerations for determining that it is a CAM, how it was addressed and the relevant accounts or disclosures. Private entity auditors may communicate key audit matters under AU-C 701 if engaged to do so.

The two concepts overlap but are not identical. Both select the most difficult areas of the audit and explain them to readers. The international concept emphasizes the matters of most significance; the PCAOB concept is defined by three criteria and does not cap or target a number. In both, a matter that leads to a modified opinion or a material uncertainty related to going concern is reported in its own section, not as a key or critical audit matter.

Modified opinions and additional paragraphs

The decision to modify the opinion depends on two questions: is there a material misstatement, or an inability to obtain sufficient appropriate evidence; and, if so, are its possible effects pervasive? Pervasive effects are not confined to specific elements, accounts or items, or, if confined, represent a substantial proportion of the statements, or relate to disclosures fundamental to users' understanding.

Separately, under AU-C 706, the auditor may include an emphasis of matter paragraph to draw attention to a matter appropriately presented or disclosed that is fundamental to users' understanding, such as a major catastrophe or significant subsequent event, and an other matter paragraph to communicate a matter relevant to users' understanding of the audit or the auditor's responsibilities. Neither modifies the opinion. For Tamarack, the team considers an emphasis of matter on the February fire but concludes it is not fundamental to users' understanding; the disclosure itself suffices.

Tamarack's report, dated March 4, 2027, therefore contains an unmodified opinion on the financial statements with two critical audit matters, and, because of the goodwill material weakness, an adverse opinion on internal control over financial reporting. The two opinions may be presented in a combined report or in separate reports that refer to each other.