FINANCIAL REPORTING AND IR

For some time, investors, analysts and other users of financial statements have been calling for the auditor’s report to be more informative, and include relevant insights gained during the audit.

The International Auditing and Assurance Standards Board (IAASB) addressed this issue in July 2013 when it released an Exposure Draft with proposed new standards aimed at fundamentally transforming the auditor’s report.

The proposed standards focus on providing communicative value to users and would require an auditor’s report to include a description of matters considered to be of most significance in the audit of financial statements (key audit matters). The IAASB is aiming to expand the content of the auditor’s report beyond being a simple pass/fail assessment, so that it provides information about the audit to users of the report.

The proposal to describe key audit matters would be mandatory for audits of listed entities. For each key audit matter identified, the auditor would:

• explain why it considers that matter to be one of the most significant in the audit and – to the extent the auditor considers it necessary to this explanation – its effect on the audit; and
• include a reference to the related disclosure (if any) in the financial statements.

Identifying key audit matters

Auditors would be expected to use professional judgment to identify key audit matters from the issues communicated to the audit committee (i.e. those charged with the entity’s governance). The proposals suggest a number of areas the auditor should take into account:

• significant risks or areas involving significant auditor judgment;
• areas in which the auditor encountered significant difficulty during the audit, including any difficulty in obtaining sufficient audit evidence; and
• circumstances that required significant modification of the auditor’s planned approach.

More general factors – such as the industry in which the entity operates, and recent significant economic, accounting, regulatory or other developments – may also be relevant.

What are the potential impacts?

The IAASB believes disclosing more information about the audit will increase confidence in the quality of the audit, thereby demonstrating its strength and value to users. Implementing the proposals would also involve more interaction between the audit committee and the auditor, which the IAASB believes could enhance communication between the parties.

Other proposals

The Exposure Draft also proposes several changes to improve transparency and clarify auditor responsibilities, including:

• an explicit statement that the auditor is independent of the entity within the meaning of relevant ethical requirements and has fulfilled other ethical responsibilities; and
• naming the engagement partner in the audit report of listed entities.

In addition, the Exposure Draft proposes introducing:

• statements on management’s use of the going concern basis of accounting, and its assessment of whether material uncertainties exist; and
• the auditor’s conclusions on such statements.

Since key audit matters are selected from those discussed with the audit committee, the Exposure Draft includes limited amendments to the standard that addresses such communications. The Exposure Draft proposes the auditor communicate significant risks when providing an overview of the planned scope and timing of the audit to the audit committee. It also proposes the auditor communicate circumstances that required significant modification of the auditor’s planned approach to the audit, to align the factors the auditor considers in determining key audit matters.

Next steps

The IAASB sought comments on all matters addressed in the Exposure Draft, including:

• the overall form and content of the auditor’s report, and whether it meets users’ desire for increased transparency about the audit; and
• the potential effect of the proposals on the processes by which management and the audit committee prepare and present the financial statements, including any additional effort or costs that may be expected.

Reponses to the Exposure Draft, submitted by November 22, 2013, will help the IAASB finalize its proposed standard.

You can download a copy of the Exposure Draft from the IAASB press release.