Proposed changes to auditor reporting (Part 2)

Amara Miller, Guest Columnist

Part 1 of this article, published last Sunday, outlined possible changes to auditor reporting issued by the US Public Company Accounting Oversight Board (PCAOB). Part 2 outlines proposed changes to auditor reporting currently being considered by the International Auditing and Assurance Board (IAASB).

The consultation paper issued by the IAASB in May explores similar themes and is based on responses from financial statement users and other stakeholders across a broad range of jurisdictions. The possible options for change explored by IAASB are discussed under five main headings:

Format and Structure of Standard Auditor's Report

The current options being considered are:

• To reposition the auditor's opinion paragraph below the introductory paragraph.
  
• To remove or relocate (and, as appropriate, expand) paragraphs outlining management's responsibility for the financial statements and auditor's responsibility.
  
• To provide auditor commentary on matters significant to users' understanding of the financial statements, or of the audit.
  
• To include auditor reporting on other information in documents containing the audited financial statements, that is, a report on auditing procedures required by ISA 720.
  
• Increased use of emphasis of matter or other matter paragraphs.

Matters similar to the 'Clarification of the Standard Auditor's Report' section of the PCAOB's concept release are also discussed in this section of the IAASB's consultation paper.

Other Info in Documents Containing Audited Financial Statements

Matters discussed under this heading are similar to 'Auditor Assurance on Information Outside the Financial Statements', discussed in the PCAOB's concept release.

ISA 720, The Auditor's Responsibilities Relating to Other Information In Documents Containing Audited Financial Statements, requires the auditor to read the other information that is included in a document containing audited financial statements and the auditor's report thereon ('other information") in order to identify material inconsistencies, if any, with the audited financial statements. The ISAs require the auditor to take appropriate action if the auditor identifies a material inconsistency, or if the auditor becomes aware of an apparent material misstatement of fact. This may involve providing additional commentary in an 'Other Matter(s)' paragraph in the auditor's report to describe the material inconsistency.

The IAASB indicates "the standard auditor's report in most jurisdictions is silent with respect to the auditor's responsibility for, or involvement with other information". It has been suggested that this creates ambiguity for readers about the auditor's responsibilities relating to that information. It has been noted, however, that drawing attention to one, but not other, responsibilities of the auditor (such as the auditor's assessment of the entity's ability to continue as a going concern) could potentially be confusing, or imply a higher level of responsibility for the other information.

Management Discussion and Analysis and other narrative sections of an entity's financial report are increasingly being used by management to communicate relevant information to users, and (research shows) users are attaching greater importance to such information for decision making. Research results indicate "some [financial statement users] have suggested that auditors should be required to include a statement in the auditor's report about the auditor's responsibilities relating to the other information in documents containing audited financial statements, or even a conclusion regarding such other information. This is already required in some jurisdictions."

Auditor Commentary on Matters Significant to Users' Understanding of the Audited Financial Statements

The matters discussed in this section of the IAASB's paper are similar to the 'Auditor's Discussion and Analysis' section of the PCAOB's concept release.

Users of the audited financial statements believe that the auditor, in the course of performing the audit, obtains information such as key areas of risk of material misstatement in the financial statements, critical accounting estimates, and management judgements as well as management's selection and application of accounting policies that would be of value to them in their decision making. It has been suggested that the auditor provide information about the audit such as areas of significant auditor judgement, for example: judgements about material uncertainties that may cast doubt on the entity's ability to continue as a going concern, or judgements pertaining to recognition, de-recognition, measurement or disclosure of relevant items within the financial statements; the level of materiality applied by the auditor to perform the audit; the entity's internal controls, including significant internal control deficiencies identified by the auditor during the audit; areas of significant difficulty encountered during the audit and their resolution.

Some have suggested that expanded commentary about topics such as these in the auditor's report on the financial statements would provide greater transparency into the entity, its audited financial statements and the audit performed.

ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report provides for auditors to draw matters to the users' attention through additional communications in the auditor's report.

The auditor may use an emphasis of matter paragraph when, in the auditor's judgement, it is necessary to do indicate a matter, although appropriately presented or disclosed in the financial statements, that is of such importance that is significant to users' understanding of the financial statements.

The auditor may use an 'Other Matter' paragraph to indicate any other matter that is relevant to the users' understanding of the audit, the auditor's responsibilities, or the auditor's report.

In France, the auditor is required to include a separate section in the auditor's report for French statutory audits, referred to as the "justification of assessments," where the auditor identifies certain key areas of the financial statements and provides information about the auditor's procedures in those areas.

A recent survey carried out in France among groups representing a wide range of users revealed that users believe the additional disclosures: enhance the communicative value of the auditor's report, even when the auditor's report is unqualified; serve as an aid in reading the financial statements; serve as an alert to readers by highlighting specific areas of the financial statements; and focus readers' attention on more subjective areas of the financial statements that are of interest and enable the auditor to explain what the audit involved, and what areas were of concern.

The survey also indicated areas of difficulty in using these disclosures such as: they may not be readily understandable by less knowledgeable users of audited financial statements because they typically use technical language that can only be fully appreciated by those with appropriate financial reporting and auditing background, are sometimes complex to read and the auditor tends to view these disclosures as increasing their exposure to liability.

Enhanced Corporate Governance Reporting Model: Role of Those Charged with Governance Regarding Financial Reporting and the External Audit

ISA 260, Communication with Those Charges with Governance and ISA 265, Communicating Deficiencies in Internal Control to those Charged with Governance and Management require the auditor to communicate with those charged with governance on a number of matters.

The enhanced model of corporate governance reporting suggestion would provide further reporting to financial statement users by reporting those charged with governance (or the audit committee) to the entity's stakeholders (or other external stakeholders); in conjunction with expanded reporting by the independent auditor on the report provided by those charged with governance.

In the UK, the Financial Reporting Council has proposed a model with the following elements:

"(a) The external auditor would provide an enhanced report to the audit committee setting out the information necessary for the audit committee to understand fully the factors the auditor has relied upon in exercising professional judgement in the course of the audit and in reaching the audit opinion;

"(b) The audit committee would report publicly, explaining how it has discharged its responsibility for the integrity of the entity's annual report and for the oversight of the external audit process, including any matters of material significance identified by the auditors in their report to the audit committee that are not addressed elsewhere in the annual report; and

"(c) The external auditor would report on the completeness and reasonableness of the audit committee's report."

This model would reinforce the entity's responsibility for proper disclosure to financial statement users without fundamentally changing the role of the independent auditor.

Other Assurance or Related Services in Information Not Within the Current Scope of the Financial Statement Audit

Some respondents indicated the need for auditor commentary on information about the entity's: corporate governance arrangements, business model, including the sustainability thereof, enterprise-wide risk management, internal controls and financial reporting processes and key performance indicators.

The objective of papers presented is to enhance the reporting quality of financial statements for investors and other financial statement users and thereby improve the effectiveness and efficiency of capital markets. The options presented by the PCAOB and the IAASB have implications on the boundaries between the respective roles and responsibilities of management and those charged with governance, and the auditor with respect to the financial reporting process. Some of the options presented may also have implications for liability exposures for management, those charged with governance and auditors. Any decision to extend the scope of the audit would also have implications for laws and regulations, across jurisdictions, and auditing standards, applicable to those jurisdictions, would need to be developed accordingly.

Amara Miller is a chartered accountant in Jamaica and a US-certified public accountant. Email feedback to columns@gleanerjm.com and amcsjamaicaltd@gmail.com.