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The IAASB, the international standard-setting body developing the International Standards on Auditing (ISAs), issued an exposure draft proposing a new standard on Communicating Key Audit Matters in the Independent Auditor’s Report (ISA 701) and the revision of other standards essential for companies: standards defining the content of the auditor’s public report and the auditor’s opinion (ISAs 700, 705 and 706), standard on Communication with Those Charged with Governance within the audited entity (ISA 260) and standard on Going Concern (ISA 570). In addition, the IAASB has undertaken the revision of its standard on the Auditor's Responsibilities Relating to Other Information in Documents Containing or Accompanying Audited Financial Statements and the Auditor’s Report Thereon (ISA 720).
ACCA
The most visible change is a new requirement for auditors of listed companies to describe what are termed 'key audit matters' – the most important things they already communicate privately to the Board. Investors will be able to see what took centre stage in the audit. This is a huge change and one that makes the audit report much more than a simple pass or fail assessment. Reports will be read and digested.
The auditor reporting project has involved a considerable amount of work to an ambitious timetable set against a background where the European Commission and the US PCAOB have similar proposals under discussion. ACCA is impressed with the extent to which the IAASB proposals have been developed on the basis of research and views expressed in response to an earlier consultation and outreach activities.
EBA
The EBA supports the proposals for a new ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report and revised ISAs aiming at improving auditor’s reporting as the EBA believes they will help to contribute to a clearer and more informative audit report.
The EBA understands the challenges in striking the right balance between providing a useful audit report and the appropriate level of information to be disclosed in an auditor’s report. However, some of the proposals could be improved to encourage more consistent application of the proposed ISAs.
The previous ITC on Improving the Auditor’s Report proposed an enhanced auditor commentary be mandatory in auditors’ reports of public interest entities (PIEs). The proposed ISA 701 limits its mandatory application to the audits of listed entities, with provisions for voluntary application or if national laws or regulation require so. Thus, the new requirements on auditor reporting will cover the audits of listed banks only (amongst the other listed entities). The EBA believes that the scope of the ED should include the audits of all banks (regardless of whether the bank is listed or not), given the important role that banks play in financial stability. A bank audit typically comprises areas involving significant auditor judgement or areas in which there may be greater challenge in obtaining sufficient audit evidence. This would be the case in the critical areas of loan impairment and fair value accounting estimates, where management uses various assumptions and inputs, which may be more difficult for the auditor to validate. The EBA believes that more extensive auditor reporting could help to improve the quality of bank audits in these areas and the oversight function by those charged with governance.
EuropeanIssuers
EuropeanIssuers makes a number of recommendations regarding:
The objectives of such a communication should be the following:
In contrast, the objective of communicating KAM should not be to comment on the financial statements or on the assessments made by the management of the audited entity.
Therefore, it is logical that the auditor should take into account, among the areas of significant auditor attention: