i) Auditor’s Responsibility for Subsequent Events:

• Between the year-end date and the date the auditor’s report is signed:
  The auditor has an active duty to design and perform audit procedures to obtain sufficient and appropriate evidence for all events that require adjustment or disclosure in the financial statements. These events must be identified and appropriately reported in the financial statements. The procedures should be performed as close as possible to the date of the auditor’s report. The auditor should also seek written representations from management regarding subsequent events up to the date of the report. If any material subsequent events requiring adjustment or disclosure are not addressed, the auditor may need to modify the audit opinion.
• Between the date the auditor’s report is signed and the date the financial statements are issued:
  After the auditor’s report is signed, the auditor is not required to perform audit procedures or make any additional inquiries regarding subsequent events. However, if the auditor becomes aware of facts that could materially affect the financial statements, they must:
  • Discuss the matter with management.
  • Determine if the financial statements need to be amended.
  • If necessary, perform additional audit procedures related to the amendment(s).
    The auditor should also extend their review of subsequent events up to the date of the new audit report if the financial statements are amended.

(6 marks)

ii) Reporting the Legal Claim in the Financial Statements:
As the audit concluded that the likelihood of the legal claim being successful is only possible (not probable), IAS 37 requires the company to disclose the contingent liability in a note to the financial statements. The disclosure should include:

• A description of the nature of the contingent liability.
• An estimate of its financial effect.
• Indications of uncertainties surrounding the timing and amount.
• The possibility of any reimbursement from third parties, if applicable.

(4 marks)