Although the current ISAs are of high quality and provide relevant and detailed guidance, it appears appropriate at this point in time to consider carefully whether they provide the auditor with the necessary framework for the audit of developments in financial reporting, especially in the area of disclosures and with the guidance needed to deal with audit issues in this area.

FEE's main comments on the issues raised in the Discussion Paper are summarised below:

Financial reporting matters impacting the audit

- The Discussion Paper describes clearly how financial reporting matters impact the audit. With regard to the auditability of financial statements, the main issue is whether management are able to provide sufficient evidence to support the disclosures they have included. The combination of the complexity of the matters disclosed and the application of financial reporting standards makes this increasingly difficult.

- Extensive rule-based disclosure requirements can easily result in information overload in the financial statements. There is a distinct risk that the quantity of information could reduce the readability and the understandability of the financial statements, due to a lack of consideration given to what is important to the users.

- Therefore, FEE believes that there needs to be clarity under the financial reporting framework that only those disclosures that are material and relevant to the users of financial statements are included.

Behavioural issues

- There is a tendency for preparers to include all disclosures required in the financial statements, regardless of the relevance and materiality of the information. This stems from a wish to be compliant with the relevant standards, as well as from a fear of the negative consequences of non compliance if criticised by regulators for immaterial omissions. It would therefore be appropriate in the application of standards to move away from a checklist-based, box-ticking approach to an approach for the financial statements that is based on judgement, keeping in mind that this is the approach that the financial reporting standards as well as the auditing standards are based on. In this regard, a behavioural change by all parties is needed.

- FEE also believes that when standard setters establish new disclosure requirements they should also assess whether management will be able to provide auditable evidence to support those disclosures.

Audit related matters

- One of the main difficulties regarding auditing disclosures is the application of the risk standards. The developments in financial reporting require management increasingly to exercise judgement in the valuation of assets as well as liabilities. These judgements are often based on assumptions regarding risk that involve significant uncertainty and lead to disclosures of estimates that are difficult to substantiate. The IAASB should consider whether ISAs give sufficient guidance in these particular areas.

- FEE concurs with the IAASB that materiality in the disclosures is a key point, and especially the issue of whether there are different materiality levels for different disclosures. Given the fact that materiality is an accounting issue, it is important that the same materiality level is, in practice, perceived to be the same by all parties (standard setter, preparer, auditor and regulator) involved in the financial reporting chain. It is the preparers of financial statements that should decide which disclosures are material. Subsequently, auditors should apply a risk-based approach to determine those disclosures that are material to the financial statements as a whole and therefore need to be audited.

- Although not addressed in the Discussion Paper, there may be aspects related to the auditability of financial statement disclosures that affect the audit report and auditor’s communication that could be analysed in order to assess whether further clarifications in the ISAs are needed.

- Therefore, FEE calls upon the IAAAB to consider where more guidance could be provided to assist auditors with practical aspects regarding the audit of disclosures as discussed in the responses to individual questions, especially on determination of materiality in the planning and performance of the audit and the use of professional judgement for qualitative disclosures.

 

FEE encourages the IAASB to take these issues forward as a matter of priority, and to engage in an even closer cooperation with the IASB. Also, there would be benefit in an enhanced dialogue with regulators and enforcers of financial statements, in order to mitigate the identified risks of misperceptions of the views of various stakeholders at regional as well as international level.

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