Confidence in financial statements is vital to the IAIS objectives of market confidence, financial stability and consumer protection. The decision to make disclosures must be considered with a view to the benefits to users of the information and the costs of preparing it, including auditing those disclosures.

As highlighted in the discussion paper, the notion of ‘true and fair’ is a dynamic concept. To be achieved, the concept would require constant challenge to the nature and the level of disclosures over time, depending on factors such as the wider economic environment in which the entity operates and what is judged as relevant to the users.

The outbreak of the financial crisis highlighted the problems that firms in the financial sector had in capturing, through their financial reporting, the reality of emerging problems. This led to a significant loss of confidence in the ability of some firms to manage the emerging risks and to provide timely disclosures about this.

The main reasons that contributed to this are well described in the part of the discussion paper regarding the weaknesses that could negatively affect the preparers’ behaviour and efficiency. It is useful to quote the following issues:

- disclosures are prepared late in the financial reporting process and may be produced using a less formal procedure;

- the lack of anticipation, the inability to stand back and the difficulty in making judgment about what is significant often leads preparers to repeat disclosures made in prior years that are no longer relevant, and to neglect to enhance disclosures to reflect properly new matters or matters that have changed in their significance; and

- the desire to avoid lengthy debates with auditors and the fear of ‘missing something’ leading to additional disclosures without consideration of their materiality or significance.

With regard to the role of the auditors, the discussion paper raises good questions about particular challenges in obtaining sufficient appropriate audit evidence in relation to some disclosures and whether all disclosures are capable of being audited.

However, the discussion paper does not appear to bring real answers or insight for those who have suggested that auditors do not always show sufficient professional judgement and scepticism in their approach to the audit of disclosures. The IAIS believes that it is important to emphasise the emerging view that - in light of the increasing relevance of disclosures for the understandability of financial statements – the audit of disclosures is as important as the audit of the primary financial statements. The IAIS agrees that ISAs are not ambiguous on this point but the application of ISAs raises some issues. Auditors need to apply adequate challenge when auditing managements’ estimates, related judgements and disclosures. If the underlying estimates and judgements are not suitably explained through appropriate disclosure in financial statements, users’ resulting lack of understanding about them may impede comparability across entities and impair their ability to understand better and critically assess the financial performance and position of the entity.

That is why the IAIS believes that auditors should properly consider audit process issues, for example (i) the timing of discussing and challenging key disclosures with management; (ii) the timing of audit of disclosures; and (iii) the allocation of work within the audit team to audit disclosures. In particular, a greater focus might be needed in the following areas:

- training and supervising audit staff about relevant questions and difficult issues when auditing disclosures;

- the importance of the identification and assessment of the risk of material misstatement in relation to the different assertions; in particular, understandability requires separate consideration from experienced members of the audit team;

- the planning and the carrying out of audit work on draft disclosures and modifications at the planning stage of the audit;

- the planning of work to allow timely communication by the auditor to those in charge of governance (the audit committee or other committee of the entity) of the issues raised in relation to disclosures as well as those relating to the audit of the primary financial statements;

- the involvement (both from the auditor and the entity) of persons with an adequate level of experience and seniority to apply suitable professional judgement to the nature and the level of materiality of the disclosures, considering the requirements of investors and other stakeholders.

Regarding the questions raised in the, ED, the IAIS´ main comments are the following:

ISAs: Despite being limited, the IAIS believes that the different ISAs provide adequate general requirements in respect of disclosures. However, the IAIS believes that it could be useful to issue specific IAPS with the purpose of enhancing audit practices regarding questions and issues relative to the quality of disclosures and related risks throughout the audit process, from the planning stage through to completion.

Auditability: The IAIS believes there should be a presumption that all disclosures can be audited, in the context of the audit of the financial statements as a whole. This is the case even if they are very subjective, forward-looking, or reliant on management’s intent. In certain circumstances, it may not be possible for the auditor to verify some explanations and forward-looking financial information until a future period. In this case, the auditor should ensure that the entity has disclosed adequately that fact and the underlying assumptions and factors that support the information.

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