Why is it important for an audit report to be properly dated?
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Consider the following scenario. One morning, you see your audit client's name emblazoned across the front page of the local newspaper. The story describes a long-term business deal gone awry and hints of embezzlement by the corporate controller. Doubt enters your mind as you envision every document you inspected and recall every conversation you had during the audit. You wonder if you missed something. Show Whether it is a newspaper headline, a conversation with a client, or an industry development, a seemingly innocuous piece of new information about a completed audit engagement may raise concern that, had this been known when the auditor's report was issued, the auditor might have revised the report. Referred to as a "subsequent discovery of fact," new information that comes to light after the financial statements and related audit report are issued necessitates the auditor's consideration. This consideration and management's response may reveal that the financial statements or related disclosures require adjustment, the report may need to be withdrawn and reissued, users of the financial statements may need to be notified, and the CPA firm may even need to consider ending the client relationship. Consider the auditor in the scenario above. What if a bank had loaned money to the client, or a new investor had just made a large cash infusion into the business? What if key financial metrics or debt covenants were barely reached and now may be questionable? If a CPA firm does not respond properly to a subsequent discovery of fact, third-party users of the financial statements may assert that the CPA firm failed to take necessary action to prevent reliance on the auditor's report on the financial statements. Indeed, approximately one-quarter of audit claims asserted against CPA firms in the AICPA Professional Liability Insurance Program are brought by third parties. Consequently, it is important that CPA firms be vigilant regarding information received after issuing an audit report and cognizant of the professional standards that guide their response. NOW WHAT? The AICPA Clarified Statements on Auditing Standards, specifically AU-C Section 560, Subsequent Events and Subsequently Discovered Facts, guide the auditor's response to subsequently discovered facts in an audit engagement. Auditors should consider implementing the following measures when responding to a subsequent discovery of fact:
WHAT IF THE CLIENT REFUSES? A client may disagree or choose not to revise the financial statements. Even if client management agrees to revise the financial statements, it may not properly inform financial statement users of the situation. Should either of these situations arise, the CPA should take specific steps depending on the circumstance as outlined in AU-C Section 560, paragraphs .14, .17—.18, and .A23—.A26. These steps may include communications to management and those charged with governance, notification to applicable regulatory agencies, and notification to third-party users. Consultation with the firm's legal counsel is also recommended. RISK MANAGEMENT TIPS A subsequent discovery of fact, whether it is embezzlement within a client's organization, the termination of a key contract affecting previously recognized revenue, or another unexpected event, places CPAs in a delicate situation that demands a focused and timely response. Consider the following risk management techniques to help minimize professional liability risk related to a subsequent discovery of fact:
WHAT ABOUT REVIEW ENGAGEMENTS? The AICPA Statements on Standards for Accounting and Review Services (SSARSs) guide a CPA's response to a subsequent discovery of fact after the date of an accountant's review report. Accountants performing review services are advised to consult the SSARSs when faced with a subsequent discovery of fact. Daniel J. Gartland is a risk control consultant at CNA. Continental Casualty Co., one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. For more information, call Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, at 800-221-3023 or visit cpai.com. This article provides information, rather than advice or opinion. It is accurate to the best of the author's knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations. Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured. When should an audit report be dated?01 The auditor should date the audit report no earlier than the date on which the auditor has obtained sufficient appropriate evidence to support the auditor's opinion.
Why is it important that audits are properly documented?Preparing sufficient and appropriate audit documentation on a timely basis helps to enhance the quality of the audit and facilitates the effective review and evaluation of the audit evidence obtained and conclusions reached before the auditor's report is finalized.
What is the auditor's responsibility on the events after the date of the report?A9. During the period from the date of the auditor's report to the date the financial statements are issued, the responsibility to inform the auditor of facts which may affect the financial statements rests with management.
What is an audit date?Audit Date means the date on which the Auditor issues its report in respect of the Scheme's balance sheet and income and expenditure account for the corresponding Accounting Period.
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