(P7 PYQ) Chapter 13: The Audit of Historical Financial Information

(P7 PYQ) Chapter 13: The Audit of Historical Financial Information
Dec 2013 Q1(a)(i)(ii)

(i) Explain the risk of material misstatement to be considered(In planning
     the group audit). Commenting on their materiality to the group FS.

     Matters to be discussed:

     (i) Zennor Co

     (ii) Broadway Co
(ii) Identify any further information that may be needed.
____________________________________________________________

(i) Zennor Co

     Materiality (Zennor Co)

     1) What should be done 1st to evaluate the materiality? How to translate?
         (Retranslation from Dingu to $, with the exchange rate of 4 Dingu = $1)

     2) What is the amount of projected pft and total asset after translation?
          (Projected pft = $22.5m, total assets = $200m)

     3) Is the projected pft and assets material? Why?
         (Pft represents 11.3% of group pft, asset represent 8% of group asset =
          Material and considered to be a significant component of it.)
     4) What is significant component?
         (Something that is identified by the auditor as being of individual financial
          significance to the group)
     5) Why is Zennor Coa significant component?
         (Due to its risk profile and the change in group structure which has occured
          in the year.)

     6) Any other item of Zennor Co is material? Why?
         (Goodwill arising on the acquisition of Zennor Co, it amounts to 2.4% of
          group asset = Material)
         [Because the bal. above, including goodwill, are based on foreign currency,
          Need to retranslated at the yr end using closing exchange rate.(To determine
          and conclide on materiality as at the year end.)]

     7) How should materiality being assessed?
         (Assess based on the new, enlarged group structure)
     8) When is the materiality for the group FS as a whole will be determined?
         (When establishing the overall group audit strategy)
     9) What is the effect of adding Zennor Co to the group?
         (Cause materiality to be different from previous yrs, affecting audit strategy
          and the extent of testing in some areas)

     Risks of material misstatement (Zennor Co)

     (a) Retranslation of Zennor Co's Financial Statements.
          1) What is the related IAS and the requirement(Rules)?
              (According to IAS 21 The effects of Changes in Exchange Rates
              (Asset and Liabilities of Zennor Co should be retranslated using close
               exchange rate.)
              (Income and Expenses should be retranslated at the exchange rates at the
               date of transactions)
   
          2) What is the risk? (Incorrect exchange rates are used for the retranslations)
          3) What is the impact of the risk?
              [Result in over/understatement of asset, liabilities, inc and exp that are
               consolidated(Include goodwill)]
              (Exchange gains and losses arising on retranslation and to be included in the
               group OCI are incorrectly determined.)

     (b) Measurement and recognition of exchange gains and losses.

          1) What is the problem of exchange gains and losses?
              (Calculation of exchange gains and losses can be complex)
          2) What is the risk? Example?
              (Risk that it is not calculated correctly, or some elements are omitted, E.g.
               Exchange gains and losses arising on retranslation of goodwill may be
               missed out of the calculation)

          3) What is the related IAS and the requirement(Rules)?
              (IAS 21, states that exchange gains and losses arising as a result of the
               retranslation of the subsidiary's balances = Recognied in OCI)
          4) What is the other risk? For example?
              (Incorrect classification, E.g. the gain or loss could be recognised incorrectly
               as part of pft for the yr.)

     (c) Initial measurement of goodwill.
          1) What should be done to calculate goodwill?
              [Assets and liabilities of Zennor Co must have been identified and measured,
               (At fair value at the date of acquisition)]

          2) Why is there risk of material misstatement?
              (Because the various component of goodwill each have specific risk attached)
          3) Example of risk?
              [Not all assets and liabilities may have been identified.(Contingent liabilities
               and contingent assets may be omitted)]
              [Fair value is subjective.(And based on assumptions which may not be valid)]
              [The cost of investment is not stated correctly.(Any contingent consideration
               has not been included in calculation)]

     (d) Subsequent measurement of goodwill.
          1) What is the related IAS and the requirement(Rules)?
              (IFRS 3 Biz Combinations, goodwill should be subject to an impairment
               review on an annual basis)
          2) What is the risk?
              (A review has not taken place.)
          3) What is the impact of the risk?
              [Goodwill is overstated, and Group operating expenses understated.
               (if impairment loss have not been recognised)]

     (e) Consolidation of income and expenses
          1) What is in the case? What should have been done?
              (Zennor Co was acquired on 1/2/2013, its inc and exp should have been
               consolidated from that date)
          2) What is the risk? (Full year's inc and exp have been consolidated)
          3) What is the impact of the risk? (Overstated group profit)

     (f) Disclosure
          1) What is the related IAS and the requirement(Rules)?
              (IFRS 3, Required extensive disclosures to be included in the notes to the
               Group financial statements)
          2) What is the item to be included? [Acquisition date, reason for acquisition
              and a description of the factors (Which make up the goodwill acquired)]
          3) What is the risk? (The disclosures are incomplete or not understandable)

     (g) Intra-group transactions
          1) What is in the case? [There will be significant volume of intra-group
              transactions. (As the group is supplying Zennor Co with inventory)]
          2) What is the risk?
              (Intra-group sales, purchases, payables and receivables are not eliminated)
          3) Impact of the risk?
              (Overstated revenue, cost of sales, payables and receivables in the group FS.)

          4) What is the other risk?
              (Intercompany transactions are not identified in either/ both companies' a/c
               systems)

          5) What is the related IAS and the requirement/rules?
              (IAS 24 Related Party Disclosures, Intra-group transactions = Related party
               Disclosures) [Zennor Co is under the control of the Group]
              [No disclosure of the transactions is required (In the group FS) in respect of
               intra-group transaction. (Bcz they're eliminated on consolidation)]
              (Both the individual FS of the Group Co supplying Zennor Co and the FS of
               Zenor Co = Must contain notes disclosing details of the intra-group transactions)
          6) What is the risk? (Disclosure is not provided)

          7) What is the other issue in the case?
              (Cars may be supplied including a pft margin or mark up)
          8) What should be done?
              (A provision for unrealised pft should be recognised in the group FS.)
          9) What is the impact of the risk(Provision not accounted)?
              (Group inventory will be overstated, Operating pft overstated)

     (h) Completeness of inventory
          1) What is the risk?
             [Cars which are transit to Zennor Co (At the yr end) may be omitted from inv,]
             [Items of inv will be missing from the Group's current asset (As they may have
              been recorded as despatched from the seller, but not yet as received by Zennor
              Co.)]
          2) Why the risk may happen?
              (Cars spend a lot of time in transit and awaiting delivery to Zennor Co.)
              (Without a good system of controls in place)
          3) Is the amount of inventory material? Why?
              (Inv in transit to Zennor Co = 2.3% of Group total assets.)
              (Material to the consolidated FS.)

     (i) Further information in relation to Zennor Co

          1) Prior yr FS and Auditor's reports.
          2) Minutes of meetings (Where acquisition were discussed)

          3) Biz Background (E.g. from the Co's website or trade journals)
          4) Copies of system documentation (From the internal audit team)
          5) Confirmation from Zennor Co's previous auditors.
              (Of any matters which they wish to bring to our attention)
          6) Projected FS for theyr to 31/12/2013.
          7) A copy of the due diligence report.
          8) Copies of prior year tax computations.
         
(ii) Broadway Co
     Materiality
     1) Is Broadway Co material? Why?
         (Pft made on the disposal of Broadway Co represents 12.5% of group pft for
          the year = Therefore, the transaction is material to the group FS)
   
     2) How to calculate/derived the asset derecognised (For the disposal)?
         (Subsidiary was sold for $180m & pft on disposal $25m was recognised =
          Group's FS must have derecognised net assets of $155m on the disposal)
     3) Is the amount of asset dercognised material? Why?
         (It amounts to 6.2% of the Group's assets = Material)
         [This is assuming that the pft on disposal has been correctly calculated.]      

     Risk of material misstatement
     (a) Derecognition of assets and liabilities.
          1) What should be done (For the disposal of Broadway)?
              [All of its assets and liabilities (Which have been recognised in the Group FS)
               = Should have derecognised (At their carrying value), including and goodwill
                  in respect of the Co.]
          2) What is the risk?
              (Not all assets, liabilities and goodwill have been derecognised.)
          3) What is the impact of the risk?
              [Overstatement of those balances, Incorrect pft on disposal (Being calculated
               and included in Group pft for the yr.)]

     (b) Profit consolidated prior to disposal.
          1) What is the risk?
              (Broadway Co's inc for the yr has been incorrectly consolidated)
          2) What should have done?
              [Include pft in Group pft (Up to date that control passed)]
              (Any pft included after that point = Overstatement of Group pft for the year)

     (c) Calculation of profit on disposal
          1) What is the risk? (The pft has not been accurately calculated)
          2) Example of the risk?
              [Proceeds received have not been measured at FV. (As required by IFRS 10
               Consolidated FS)], or
              (That elements of the calculation are missing)

     (d) Classification and disclosure of profit on disposal.
          1) What is the related IAS and the requirement (Rules)?
              [IAS 1 Presentation of FS = Requires separate disclosure on the face of the
               FS of material items. (To enhance the understanding of performance during
               the year)]
          2) What should be done according to the IAS? Why?
              [Separate disclosure is necessary (As pft of $25m is material)]
          3) What is the risk?
              [Pft is not separately disclosed. (E.g. Netted from operating expenses =
               Leading to material misstatement)]

          4) What is the other related IAS and the requirement (Rules)?
              [IAS 7 Statement of Cash Flows = Requires a note which analyses the assets
               & liabilities of the subsidiary (At the date of disposal)]
              [Extensive disclosure requirements exist in relation to subsidiaries disposed of]
          5) What is the risk? (Not all necessary notes to the FS are provided)

     (e) Treatment of the disposal in parent Co individual financial statements
          1) What should be done?
              [The parent co's FS = Should derecognise the original cost of investment,
                                              Recognise a pft on disposal (Based on the diff between
                                              the proceeds of $180m and the cost of investment)]
          2) What is the risk?
              (Investment has not been derecognised or pft incorrectly calculated)

     (f) Tax on disposal
          1) What should be done? [An accrual in both the parent Co and the group FS (For
              the tax due on disposal)]
          2) How to calculate the tax due on the disposal?
              (Calculated based on the pft recognised in the parent Co.)
          3) What is the risk? (Tax is not accrued for, and Tax calculation is not accurate.)
          4) What is the impact of the risk? (Overstated pft, Understated liabilities)
     
     (g) Further information needed
          1) Is there any need for further information in relation to audit planning? Why?
              [No need any further information. (As Compton & Co no longer the auditor of
               Broadway Co)]
________________________________________________________________________

Dec 2013 Q3(a)(i)

Comment on the matters which you should consider.

Matters to be discussed:

(i) Impairment of assets.

(ii) Provisions and Liabilities

(iii) Going concern

_________________________________________________________________

(i) Impairment of assets.

   (a) Mine

       1) Materiality level?
           (Mine recognised at $10m = 5.7% of total sales, material to SOFP)

       2) What happened in the case? (Accident caused part of the mine to be
            unusable, indicates impairment)

       3) What is the related IAS and requirement(Rules)? [IAS 36, Requires
            an impairment review shd be conducted(When there is indicator of
            potential impairment of assets)]

       4) What should be done by management? Purpose? (Perform a review,
            to determine the recoverable amount of the mine)

       5) What is the impact if management do not do as the requirement of
            the IAS? [Asset overstated, Pft overstated.(If impairment review
            not performed, no adjustment on carrying value of the mine)]

       6) What is the correct accounting treatment in the case? (1/3 mine
            become unusable = Presumably no f.e.b. can be derived, therefore
            1/3 of mine's carrying value need to be write off)

       7) Is the amount material? (Amount write off is $3.33m = 18.5% of pft
            of the year, therefore potentially material to Dasset Co's pft)

       8) What is the worst case scenario?
            [>1/3 of the mine unusable (Due to the mine being unsafe and should
             shut down, or National Coal Mining Authority withdraw license to
             operate the Ledge Hill mine completely)]

       9) What is the impact of worst case scenario? Material?
            (The impairment loss would be extended to full value of mine,
              Increase materiality of matter in FS)

   (b) Equipment

        1) What happened in the case? (Some eqp may no longer be used, some
             eqp may be recovered, but it is likely that large proportion of it will
             have to be abandoned and written off)

        2) What is the impact on impairment?
             (Increase the impairment loss to be recognised)

   (c) Separate disclosure

       1) What is the related IAS regarding presentation of FS and the rules
            (Requirement)?
            (IAS 1, Require individual inc or exp disclosed separately)

       2) What should be done(Example) in the case according to the IAS?
            (Impairment of asset as an example which may warrant separate
             disclosure)

   (d) Catogorisation of Asset/ Expenses

        1) How and when to treat the costs to ensure safety?
            (Cap Exp, at the time the cost incurred.)

        2) How to treat the cost incurred incurred in making the tunnels safe?
            Why being treated this way? (Expensed off, As they do not relate
             to f.e.b. and do not meet the definition of an asset)

        3) What is the risk in this aspect? (Cap and rev exp have not been
            appropriately taken)

(ii) Provisions and Liabilities.


(iii) Going Concern

_______________________________________________________________________

Dec 2013 Q3(a)(ii)

Describe the audit evidence which you should expect to find.

1) What? (A copy of operating license.)
    Why? [Reviewed for conditions relating to health and safety and for potential fines(
     Which may be imposed in the event of non-co)

2) What? (A written representation from management)
    Why? ()

3) What? (A copy of board minutes)
    Why? ()

4) What? (A copy of report issued by engineers or other mining specialist.)
    Why? ()

5) What? (Any quotes obtained for work to be performed.)
    Why? ()

6) What? (Reviewing a specialist report.)
    Why? ()

7) What? [A copy of surveyor's report(On the residential properties)]
    Why? [Reviewed for the expert's opinion (Whether they should be demolished)]

8) What? (Copies of legal correspondence)
    Why? (Reviewed for any further claims made by local residents.)

9) What? (A review of the Ledge Hill Mine accident book)
    Why? (Confirmation that no one was injurred in the accident.)

10) What? (A copy of management's impairment review, if any.)
     Why?
     (Evaluated to ensure that assumptions are reasonable.), and
     (In line with with auditor understanding of the situation)

11) What? [Confirmation (That impairment losses have been recognised as an
      operating expenses)]

12) What? [A review of draft disclosure notes to the FS (Where provisions and
     contingent liabilities have been discussed)]

13) What? (A review of cash flow and profit forecasts.)
     Why? (Forming a view on the overall going concern status of the Co.)

Reporting on Audited Financial Statements - Significant Changes Proposed (Last updated: Member of P7 Exam Team 24/4/2015)

Reporting on Audited Financial Statements - Significant Changes Proposed
(Last updated: Member of P7 Exam Team 24/4/2015)

Matters to be discussed:

(i) Milestones of the plans to make significant changes to how auditors communicates
    audit-related matters.
(ii) Background to the Invitation to Comment.

Key Suggestions from the Invitation to Comment
(iii) Ordering of elements within the auditor's report - the opinion and basis for opinion
     paragraphs
(iv) Going Concern

(v) Auditor commentary
(vi) Other Information
(vii) Respective responsibilities of management an the auditor.

(viii) Further suggestions to provide transparency about the audit.
(ix) Conclusion

__________________________________________________________________

(i) Milestones of the plans to make significant changes to how auditors communicates

    audit-related matters.

    1) IAASB plans to make significant changes to how the auditor communicates

        audit-related matters. (To shareholders and other users of audited FS)

    2) In June 2012 = An Invitation to Comment was published.

        (Asking for feedback on a range of proposed changes to the structure and content

         of the auditor's report)

        [Aiming to enhance its usefulness for decision making.]

    3) In July 2013 = An Exposure Draft was issued which specifies the revisions

                             planned to be made to a suite of International Standards on Auditing.

                             (Changes that will mark a substantial change in the way that

                              auditors report their findings.)

(ii) Background to the Invitation to Comment.

    1) In May 2011 = A consultation paper 'Enhancing the Value of Auditor Reporting:

                              Exploring Options for Change. (Was published by IAASB)

    2) Consultation Paper + Academic Research + Conclusions from dialogues (Between

        the IAASB and national standard setters) = Resulted in the draft proposals

        published in the Invitation to Comment.

    3) Findings of work (Carried by European Commission and the US Public Company

        Accounting Oversight Board) backed the feedback of the consultation paper =

        Suggesting that user of FS are calling for more information in the auditor's report.

        (To understand key audit issues and their implications.)

    4) Users need more assistance to understand increasingly complex FS and to have

        information on where audit work has been focused (Particularly in relation to

        the subjective areas of the accounts)

        [One of the themes of these findings.]

    

   5) Invitation to Comment = To obtain specific feedback on how the auditor's report

                                           can be changed to provide information (That is more

                                           pertinent to the decisions made by users of the FS).

   6) Auditor's report has been criticised for being too short, too vague.

       (In summary not very useful.)

       [This sentiment was accentuated by the global financial crisis, which caused

        many investors and other users of FS to question whether the content of the

        auditor's report could be made more informative.(Especially in relation to going
        concern matter and with a view to the report providing greater transparency in
        relation to significant audit- related matters and in how the audit was
        conducted.)]

    7) Chairman of IAASB = Summarises the need to consider revision to the auditor's
                                         report in the forward to the Invitation to Comment.
        (By saying:' More than ever before, however, user of audited FS are calling for
         more pertinent information for their decision-making in today's global biz
         environment with increasingly complex financial reporting requirements)
    8) Users, in particular institutional investors and financial analysts, want to:
        - Know more about individual audits, and
        - To gain further insights into the audited entity and its FS.
        (Being spurred by global financial crisis)
    9) While the auditor's opinion is valued = Many perceive that the auditor's report
                                                                could be more informative.
        (Change is therefore essential.)

Key Suggestions from the Invitation to Comment

(iii) Ordering of elements within the auditor's report - the opinion and basis for opinion

     paragraphs

     1) The Invitation Comment = Contains an illustrative auditor's report.

     2) The structure of report = Begins with the opinion paragraph, followed by the

                                             basis of opinion paragraph.

     3) IAASB believes that:

        - Placing the opinion at the start of the auditor's report = Makes it more prominent.
        - Inclusion of a basis for opinion paragraph in all auditor's reports (Whether the

          opinion is modified or not) = Will enhance understandability.

     4) The basis for opinion paragraph states:

         - Compliance with ISAs and relevant ethical requirements, and

         - The audit evidence obtained is sufficient and appropriate.

           (To provide a basis for opinion)

(iv) Going Concern

      1) Too little about going concern matters (In existing auditor's report).

          [Shareholders and other users with insufficient info to reach an informed

           conclusion on going concern matters.]
      2) Illustrative auditor's report = Contains a separate paragraph highlighting the
                                                   importance of going concern matters.
                                               (Immediately beneath the basis of opinion paragraph)
      3) IAASB stated in the invitation to Comment:
          - The recent global financial crisis has highlighted the importance to financial
            markets of clear and timely financial reporting,
          - It has also resulted in a greater focus on the assessment of going concern
            and related disclosures.
      4) Some respondents (To IAASB's May 2011 consultation) asked for:
          - Clarification of the respective roles and responsibilities of management and
            the auditor regarding going concern, and
          - For auditors to report the outcome of their audit work regarding going concern. 

      5) Suggestion that all auditor's report should include (Having regard to the

          applicable financial reporting framework):

          - Conclusion regarding the appropriateness of management's use of the going

            concern assumption, and

          - A statement regarding whether material uncertainties related to events or
            conditions (That may cast doubt on the entity's ability to continue as a going
            concern) have been identified. [Based on the audit work performed]

      6) The illustrative report makes clear that:

          - Not all future events or conditions can be predicted,

          - The statement about the absence of material uncertainties = Is not a guarantee

            as to the entity's ability to continue as a going concern.

          [To minimise potential misunderstanding.]

      7) Separate paragraph in the section of the auditor's report dealing with

          management's responsibilities:

          - Describe management's responsibilities in relation to going concern.

          [This explains that management make an assessment about the entity's ability to

           continue as a going concern (Taking into account all available information about

           the future, which at least, but is not limited to, 12 months from the end of the

           reporting period.)]

(v) Auditor commentary

     1) Users of FS (Especially analysts and investors) = Pressing for the auditor's report

         to contain more info on important matters in the FS, or key audit findings.

         (To facilitate more informed decision making)

     2) Many users of account:

         - Welcome further insight into matters of judgement (Where subjectivity has been

           used in preparing and in auditing the FS).

     3) Other users suggested:

         - Relevant info could be included on features of the audit process itself.

           (Such as the use of experts, or the involvement of other auditors)

     4) Matters that may be considered relevant for inclusion in audit commentary

         paragraph (Suggested by Invitation to Comment)

         - Areas of significant management judgement

           [E.g. Entity's accounting practices (Including accounting policies, accounting

            estimates, and financial statement disclosures)]

         - Significant or unusual transactions

           [E.g. Significant related party transactions or restatements.]

         - Matters of audit significance (Including areas of significant auditor judgement in

           conducting the audit.). Example:

           (a) Difficult or contentious matter noted during the audit, or other audit matters

                (That would typically be discussed with an engagement quality control

                 reviewer or those charged with governance), and

           (b) Other issues of significance related to the audit scope or strategy.

     5) The illustrative auditor's report includes within the audit commentary paragraph
         sections = Discussing the accounting and audit issues relating to:
         - Outstanding litigation,
         - Goodwill,
         - The valuation of financial instruments,
         - The audit strategy relating to the recording of revenue, accounts receivable,
           and cash receipts, and
         - The involvement of other auditors.
     
     6) The content of the audit commentary paragraph would be very entity-specific,
         and would be likely to include the matter that are discussed with those charged
         with governance during the audit. 
         [IAASB believes auditor commentary should be tailored to the facts and
          circumstances of the entity. (To avoid being labelled as 'boilerplate')]

     7) The need for Emphasis of Matter and Other Matter Paragraph to be eliminated.
         (As the issues commonly referred to in those paragraphs under existing ISA
          requirements, could be included instead in the audit commentary.)
        [IAASB will make a decision on whether to retain the current requirements (In
         relation to Emphasis of Matter and Other Matter Paragraphs) as part of its
         overall review of the auditor's report.]
     8) Further deliberations being made as to whether:
         - The audit commentary paragraph should be required for all entities, or
         - Just for public interest entities with the auditors of other entities having the
           option to include the paragraph.
           (To highlight certain matters if deemed necessary)

(vi) Other Information

      1) Definition = Financial and non-financial information which is included in a

                            document (Containing audited FS and the auditor's report).

      2) Example of other information: Chairman's statement, directors' report, operating

          and financial review and/or management disclosure and analysis (With the exact

          contents often mandated by local legislation or by listing requirements)

      3) IAASB's May 2011 consultation paper, respondents is being asked whether

          beneficial in including a statement about auditor's responsibilities (Regarding other

          information in the auditor's report)

          [Feedback suggested a lot of support for a specific statement or conclusion in the

           auditor's report on the other information presented (Alongside the audited FS)]

      4) Invitation to Comment suggests = Auditor's report should include a statement

                                                            regarding whether the auditor has identified

                                                            material inconsistencies between the other

                                                            information and the audited FS.

      5) The illustrative audit report = Includes a short paragraph explaining the auditor's

                                                    responsibilities regarding other information(As well

                                                    as a statement that no material inconsistencies have

                                                    been found).

          [The illustrative report includes a disclaimer that the auditor has not audited the

           other information as part of the audit of the FS.(To minimise the potential for

           misunderstanding)]

      6) In the event that material inconsistencies were found and not resolved = A more

          detailed explanation would be required.

(vii) Respective responsibilities of management an the auditor.

      1) IAASB is suggesting = The paragraphs in the auditor's report that deal with the

                                            responsibilities of management and of the auditor should

                                            be enhanced.

      2) Aim = Hope additional disclosure will narrow the expectation gap.

                   (By providing a more detailed and relevant description of the role of

                    management and the auditor in the financial reporting and auditing

                    process)

      3) A specific responsibility of management is the assessment of going concern.

         (This would be made clear in a separate paragraph.)

      4) In terms of auditor's responsibilities, more information to clarify technical terms

          would be useful to users of FS = Help to better explain the nature of a risk-

          based audit.)

      5) Downside of lengthy paragraphs = Add volume to to the auditor's report.

          (So, the IAASB is considering making it more explicit = That this content of

           the auditor's report can be cross-referenced to a standard wording provided in

           another location - National standard setter's website)

          [This is already common practice in some countries, such as the UK.)

(viii) Further suggestions to provide transparency about the audit.

      1) Disclosure of the name of the engagement partner.

         (Aim = To promote greater accountability of the partner who is ultimately

                    responsible for the conduct of the audit)

      2) A statement of compliance with relevant ethical requirements.

         (IAASB considers that the increased focus on auditor's independence makes

          such a statement an important feature of the auditor's report = It would enhance

          the credibility of the report).

      3) Description of the involvement of other auditors (Which could either be

          presented within the audit commentary or in a separate part of the audit report)

          [IAASB believes that the involvement of other auditors is sometimes a significant

           audit issue which should be highlighted.(Downside: May incorrectly imply that
           responsibility for the audit opinion is shared.)]

(ix) Conclusion

     1) IAASB has proposed some significant changes to the structure and content of

         the auditor's report.

     2) Advantages to these proposals for the users of FS:

         - Increasing complexity of financial statements, and

         - The need for both preparers and auditors to exercise significant judgement.

           (When performing their roles.)

         - Additional disclosures should enhance users understanding of the audit

           process and the nature of risk-based auditing.

     3) Downsides of proposal:

         - Cost may well outweigh the benefit for some entity.(As the increased of

           length of the auditor's report)

IAASB Developments (Last updated: Member of P7 Exam Team 24/4/2015)

IAASB Developments (Last updated: Member of P7 Exam Team 24/4/2015)

Matters to be discussed:

(i) Auditor Reporting
(ii) Proposed New and Revised International Standards on Auditing (ISAs)
(iii) Audit Quality
(iv) The reason why the Framework For Audit Quality is in the public interest.

(v) Conclusion

__________________________________________________________________

(i) Auditor Reporting

    1) Main objective of project = To enhance the communicative value and relevance

                                               of the auditor's report.

                                               (Through proposed revisions to ISA requirements that

                                                address its structure and content)

     2) This project will include revision of:

         - ISA 700, Forming an Opinion and Reporting on Financial Statements, and

         - The revision of, or amendments to, related communication and reporting

           requirements relevant to audits, for e.g., the requirements of ISA 260,
           Communication with Those Charged with Governance.

     3) In 2006 - The project began when the IAASB commissioned several academic

                      studies (Which looked into the perceptions of the users of FS on the

                      audit process and the value of the auditor's report)

     4) These studies and the results of other work performed by IAASB = Indicated

         a strong demand amongst user groups for a change in auditor reporting.

     5) Several further consultations followed, resulting in the IAASB deciding that:

         - Revisions to ISA 700 and related ISAs was necessary, and
         - The completion of the project by the end of 2014 is seen a high priority.

           (By the IAASB)

     

     6) In May 2011 - A consultation Paper entitled Enhancing the Value of Auditor

                              Reporting: Exploring Options for change was issued.

                              (Followed by an invitation to Comment Improving the Auditor's

                               Report (ITC) in June 2012)

     7) The ITC proposed = Significant changes to the format and content of the

                                       auditor's report, including:

                                       (a) Much more emphasis on going concern matters

                                       (b) Improved discussion of matters of significance to the

                                            audit, and

                                       (c) Better clarification of the responsibilities of

                                            management and of the auditor.

     8) ITC featured a revised auditor's report = Illustrating the application of the

                                                                    IAASB's suggested improvements.

     9) During 2013, IAASB deliberated on the comments that had been received on

         the ITC. Generally the feedback of the ITC was positive, but some

         respondents were concerned about:

         (a) The length of the proposed audit report, and

         (b) Many felt that while the enhanced contents of the report were beneficial to

              users of FS some of the content would be superfluous in the audit report

              of a non-listed entity.

     10) In July 2013, an Exposure Draft, Reporting on Audited Financial Statements:

          Proposed New and Revised International Standards on Auditing (ISAs) was

          released.

          (Based on lengthy discussions arising from comments made on the ITC)

          [The proposed changes will affect not just ISA 700, but a whole suite of

           standards that are affected and 1 new ISA is proposed.]

      

(ii) Proposed New and Revised International Standards on Auditing (ISAs)

    1) Proposed ISA 701, Communicating Key Audit Matters in the Independent
        Auditor's Report:

        - A new standard to establish requirements and guidance for the auditor's

          determination and communication of key audit matters.

        - Key audit matters (Which are selected from matters communicated with those

          charged with governance) are required to be communicated in auditor's reports

          for audits of FS of listed entities.

    2) Proposed ISA 260 (Revised), Communication with Those Charged with

        Governance:

        - Amended in respect of the required auditor communications with those charged

          with governance (Including a proposed communication about the significant

          risks identified by the auditor)

    3) Proposed ISA 570 (Revised), Going Concern. Amended:

        - To establish auditor reporting requirements relating to going concern, and

        - To illustrate this reporting within the auditor's report in different circumstances.

    4) Proposed ISA 705 (Revised), Modifications to the Opinion in the Independent

        Auditor's Report. Amended:

        - To clarify how the new required reporting elements of proposed ISA 700

          (Revised) are affected (When the auditor expresses a modified opinion), and

        - To update the illustrative auditor's reports accordingly.

    5) Proposed ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter

        Paragraphs in the Independent Auditor's Report. Amended:

        - To clarify the relationship between Emphasis of Matter paragraph. Other Matter

          paragraphs and the Key Audit Matters section of the auditor's report.

    [As at April 2004, IAASB has not confirmed when the new and amended ISAs will

     be issued, or their effective date.]

    [Certainly, when the new ISA requirements become effective, they will bring some

     very significant changes in auditor reporting. (Changes which the IAASB has been

     developing for almost 8 years)]

(iii) Audit Quality

     1) Objective of project = To establish in the public interest an international

                                         framework that describes audit quality holistically,

                                         including:

         (a) The influences of input, output and context factors.

         (b) Stakeholders' varying perspectives on audit quality, and

         (c) The importance of relationships between auditors and other key participants

              in the financial reporting supply chain (ie Management, those charged with

              governance, investors and regulators), which influence audit quality.

     2) IAASB intends to develop a new framework on audit quality = Began to elicit

         public comment on this. (Through the issuance in 2010 of a document entitled

         Audit Quality)

         [An IAASB Perspective which was intended to provoke debate on the matter

          of audit quality.]

         [The paper begin with the message:'The turbulent events of the global financial

          crisis have highlighted the critical importance of credible, high-quality financial

          reporting.]

     3) IAASB also demonstrated the importance of considering the role of audit quality

         in the broader context of quality financial reporting. (Achieving quality financial

         reporting depends on the integrity of each of the links in the financial reporting

         supply chain.)

     4) External audit (One of the links) plays major role in supporting the quality of

         financial reporting around the world. (Whether in the context of the capital

         markets, the public sector or the private or non-public sector.)

         [It is an important part of the regulatory and supervisory infrastructure = Thus

          an activity of significant public interest = Audit quality is therefore a matter of

          high importance for the IAASB.]

     5) This extract from the paper highlights that:

         - Audit quality is seen as a key issue by the IAASB, and

         - Illustrates the role that the auditor has to play in maintaining the credibility of

           financial reporting. (A matter which was much debated in the press around the

           time of the global financial crisis)

         [The paper also states that: ' Maintaining the quality and robustness of the ISAs

          is, and will remain, a core objective of the IAASB.']

     6) In Feb 2014, IAASB issued A Framework For Audit Quality - Key Elements That

         Create an Environment for Audit Quality.

         - It is not an ISA, and

         - Does not contain specific requirements relating to the performance of an audit.

         - It does not replace the existing IAASB documents ISQC1, Quality Control for

           Firms that Perform Audits and Reviews of Financial Statements, and Other

           Assurance and Related Services Engagements and ISA 220, Quality Control

           for an Audit of Financial Statements.

(iv) The reason why the Framework For Audit Quality is in the public interest.

      (IAASB expects that Framework will generate discussion, and positive actions to

       achieve a continuous improvement to audit quality)

     1) Encourage national audit firms, international networks of audit firms, and

         professional accountancy organisations to reflect on how to improve audit quality

         and better communicate information about audit quality.

     2) Raise the level of awareness and understanding among stakeholders of the

         important elements of audit quality.

     3) Enable stakeholders to recognise those factors that may deserve priority
         attention (To enhance audit quality)

         - E.g. Framework could be used to inform those charged with governance about

           audit quality and encourage them to consider their roles in enhancing it.

     4) Assist standard setting, both internationally and at a national level.

         - E.g. IAASB will use the Framework when it revises ISQC 1 and the ISAs.

         - It may assist the International Ethics Standards Board for Accounts (IESBA)

           and International Accounting Education Standards Board (IAESB) in

           considering improvements to their authoritative pronouncements.

     5) Facilitate dialogue and closer working relationships between the IAASB and

         key stakeholders (As well as among these key stakeholders themselves)
     6) Stimulate academic research on the topic, and
     7) Assist students of auditing to more fully understand the fundamentals of the
         profession they are aspiring to join.

     [The framework is to be provide some supplementary discussion on matters
      relating to audit quality of interest. (Not just to auditors, but to anyone interested
      in the issue of audit quality)]

(v) Conclusion

     1) The project on auditor reporting = Likely to result in significant changes in the
                                                          structure and content of the audit report.

     2) The project on audit quality = Should ultimately achieve increased confidence

                                                    in the rigour of the audit process.

     3) Both of these IAASB initiatives should work:

         - To reduce the expectation gap, and

         - Enhance the credibility of the auditor's opinion.