Auditor's report of the future starts to take shape

19 Aug 2013

The focus of the debate on the future of auditor reporting is now on the nature and extent of changes – and whether auditors’ reports will look similar in different parts of the world or if different reporting models will emerge.

“Of course, it is central to all the consultations going on around the world to determine what information will be meaningful and valuable to investors and to avoid simply adding more boilerplate,” said PwC partner Diana Hillier. “Investors have focused most on seeking the auditor’s perspective on risks around the significant accounting estimates and the more subjective areas of the audit. But it is too early to conclude exactly what the final content of the future auditor’s report will be.”

June exposure draft for the IAASB

The International Audit and Assurance Standards Board (IA ASB) is on course to release its vision of an expanded audit reporting model in an exposure draft in June. It will feature increased transparency into those matters that were of most significance in the audit and a new section on going concern.

The key audit matters reported would be drawn from matters communicated to those charged with governance – it would be surprising if they weren’t. In deciding which of those matters to include, auditors would be asked to take into account such matters as:

  • Areas of focus in the audit
  • Areas in which the auditor encountered significant difficulty in performing the audit
  • Circumstances that required a significant modification to the audit plan

“These and other proposals on auditor reporting will represent a huge change in practice,” said IA ASB chairman Arnold Schilder. “But the IA ASB sees them as critical to the continuing perceived value and relevance of the audit, and to enhancing audit quality.”

US PCAOB Q3 consultation

The US Public Company Accounting Oversight Board (PCAOB) also anticipates issuing a proposal for public comment this summer. While their new model is not yet known, recent speeches make clear that the nature and scope of the audit won’t change – rather it’s about making the results of that work more relevant.

“I hope it will...help focus the auditor’s mindset on the investor needs and perspective,” remarked PCAOB chairman James Doty in a recent speech. “The audit report should speak to the financial statement user.”

UK FRC focus on audit process

In the UK, at least some of the matters that the IAASB and PCAOB envisage will be in the auditor’s report will be in the audit committee’s report as a result of the UK Financial Reporting Council’s (FRC) 2012 Effective Company Stewardship recommendations.

The FRC has also just released an update to ISA700 (UK and Ireland), mandating: “a fuller description of the work the auditor has undertaken”. This follows its consultation on how far audit reports should provide insight into the audit itself. It is hoped that this new requirement (live for companies with audits commencing after 1 October 2012) will provide a ‘hook’ for investors to engage with the company about the audit, and give them far more insight.

The standard requires auditors to: provide an overview of the scope of the audit, showing how this addressed risk and materiality; and describe the risks that had the greatest effect on the audit strategy, resourcing and audit team focus.

Nick Land, UK FRC Audit and Assurance Council chairman said: “the improved report will be a better basis for engagement by investors with companies and we encourage auditors and companies to work together to develop succinct communication to do so”.

EU audit reform proposals

There remain many hurdles before the EU audit reform is completed, but the JURI Committee of the European Parliament (EP) recently voted on what they support. The outcomes of this vote are significant in that they represent the current position of the Parliament as it enters into detailed negotiations with the Council of Ministers and the European Commission (EC) on a ‘compromise text’, which will form the basis of any new legislation (see page 45).

On the auditor’s report, the EC’s original proposals were modified to align more closely with International Standards on Auditing (ISA) requirements and latest thinking of the IA ASB, and include:

  • Conclusions on going concern
  • A description of the most important assessed risks of material misstatement, together with a summary of the auditor’s response to those risks and key observations from that audit work.