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

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(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.