AU-C 708 is the AICPA auditing standard that addresses the consistency of financial statements across reporting periods, covering matters like changes in accounting principles and corrections of prior-period errors. It is not the standard on subsequent events. That is a common mix-up, because AU-C 560, “Subsequent Events and Subsequently Discovered Facts,” is the standard people often mean when they cite AU-C 708 by mistake.1U.S. Government Accountability Office. Professional Standards Update No. 70, April 2018 Through June 2018 The two standards impose very different obligations, and pointing to the wrong number can send you down the wrong path.
What AU-C 708 Actually Covers
AU-C 708 deals with whether financial statements are presented consistently from one period to the next. Its subject matter includes changes in accounting principles and corrections of prior-period errors, and how those matters are treated in the auditor’s report. It is a reporting standard, not a fieldwork standard about hunting for post-year-end events.
If you are studying for the CPA exam, preparing for peer review, or reviewing an auditor’s workpapers, the standard number matters. Citing AU-C 708 when you mean the subsequent events guidance will point a reviewer to the wrong requirements, and the requirements do not overlap.
Why AU-C 708 and AU-C 560 Get Confused
Both standards live in the auditor’s reporting neighborhood, both can affect how the audit report reads, and both are cited in situations where something about the financial statements has shifted. That is enough surface similarity to cause the mix-up, especially in exam prep materials and quick references.
The distinction is worth locking down. AU-C 708 asks whether the current period’s statements are comparable to prior periods given the accounting policies applied. AU-C 560 asks whether events after the balance sheet date change what the current period’s statements should say in the first place. Different question, different procedures, different timing, different disclosures.
If You Meant AU-C 560: Subsequent Events
Most searches that reach for “AU-C 708” on a subsequent events question are really after AU-C 560. That standard requires auditors to actively search for events occurring after the balance sheet date that could change the numbers or disclosures in the financial statements, and it spells out what happens when material facts surface after the audit report is already signed.
The Three Dates That Frame the Standard
Everything in AU-C 560 revolves around three dates. The financial statement date is the last day of the reporting period. The auditor’s report date is when the auditor has gathered enough evidence to sign the opinion. The issuance date is when the financial statements are issued or made available for issuance.
Between the balance sheet date and the report date, the auditor has an active duty to search for events that could affect the financial statements. After the report is signed, the active search ends, but responsibilities continue if material facts come to light before or after issuance.
Public Versus Private Entities
The evaluation period is not identical for every entity. SEC filers and conduit bond obligors whose debt trades on a public market must evaluate subsequent events through the date the financial statements are actually issued.2Financial Accounting Standards Board. Accounting Standards Update 2010-09, Subsequent Events (Topic 855) All other entities evaluate through the date the financial statements are available to be issued, which can be earlier. Private companies often have a shorter window, since “available to be issued” typically means the financials are complete and could be distributed, even if they have not yet been sent to anyone.
Non-SEC filers must also disclose in the notes the date through which subsequent events were evaluated and whether that date represents when the statements were issued or when they became available for issuance.2Financial Accounting Standards Board. Accounting Standards Update 2010-09, Subsequent Events (Topic 855) SEC filers are exempt from that particular disclosure requirement.
What the Auditor Must Do Before Signing
During the subsequent events period, the standard prescribes specific procedures at or near the report date. The auditor must read the most recent interim financial statements available and compare them with the statements being audited.3Public Company Accounting Oversight Board. AU Section 560 – Subsequent Events The auditor must make specific inquiries of management about contingent liabilities, capital structure and working capital changes, the status of items based on tentative or preliminary data at year-end, unusual adjustments, related party changes, and significant unusual transactions.
Beyond inquiries, the auditor reads available minutes of meetings of shareholders, directors, and relevant committees, inquires about matters discussed at meetings whose minutes are not yet available, inquires of the entity’s legal counsel about litigation and claims, and obtains a written representation letter from management dated as of the report date confirming whether any events require adjustment or disclosure.3Public Company Accounting Oversight Board. AU Section 560 – Subsequent Events
Recognized Versus Nonrecognized Events
When a subsequent event turns up, classification governs the treatment. Recognized subsequent events (Type 1) provide additional evidence about conditions that existed at the balance sheet date and require adjustment of the financial statement amounts.3Public Company Accounting Oversight Board. AU Section 560 – Subsequent Events The settlement of a lawsuit after year-end for an amount that differs from the accrued liability, or the bankruptcy of a customer that confirms a receivable was already uncollectible, are typical examples.
Nonrecognized subsequent events (Type 2) reflect conditions that arose after the balance sheet date. These do not change the financial statement numbers, but if omitting the event would make the statements misleading, disclosure in the notes is required.3Public Company Accounting Oversight Board. AU Section 560 – Subsequent Events A fire that destroys a production facility after year-end, a major acquisition completed in the subsequent period, or significant new borrowings fall in this bucket.
Facts Discovered After the Report Date
The active search ends at the report date, but the auditor’s responsibilities do not. If the statements have not yet been issued, the auditor discusses the event with management, determines whether adjustment or disclosure is needed, and extends procedures before signing a revised report. If the statements have already been issued and a material fact that existed at the report date comes to the auditor’s attention, the auditor determines whether the fact is reliable and whether it would have changed the audit report; if both are yes, the auditor advises management to disclose the situation to anyone known to be relying on the statements and to issue revised financial statements with a new auditor’s report.
Where management refuses to act, the auditor must take independent steps to prevent continued reliance on the original report, including notifying the board that the auditor will act if management does not, and notifying regulatory agencies and known users that the report should no longer be relied upon.
Related Standards Worth Knowing
For public company audits overseen by the PCAOB, the equivalent subsequent events standard is AS 2801, which is substantially the same in content because the PCAOB originally adopted it from the AICPA’s earlier version. On the accounting side, FASB’s ASC 855 (Subsequent Events) governs how entities recognize and disclose subsequent events in the financial statements themselves. ASC 855 tells management how to handle subsequent events; AU-C 560 tells the auditor how to verify that management got it right. Neither of these is AU-C 708, and neither is what AU-C 708 addresses.