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)