IAASB looks again at auditors’ responsibilities for the annual report

28 Apr 2014

The International Auditing and Assurance Standards Board (IAASB) has issued a revised proposal on what auditors need to do in relation to the information in a company’s annual report beyond the audited financial statements (‘other information’). It’s a topical issue, also being debated by the US Public Company Accounting Oversight Board, and an integral part of the EU audit reforms.

“There have been significant developments in recent years in corporate reporting – in particular, in relation to the information included in entities’ annual reports,” said Prof. Arnold Schilder, IAASB Chairman. “The importance ascribed by users to this other information and the weight they place on it have notably increased since ISA 720 was originally issued.”

“Auditors have certain responsibilities relating to this other information as part of an audit of an entity’s financial statements, and the IAASB is intending to appropriately strengthen them,” he said.

The IAASB first issued proposals in 2012 designed to ‘raise the bar’ on the auditor’s responsibilities for other information. “At the time, we expressed concern that the purpose and what auditors were expected to do lacked clarity and, as a result, were unworkable” said Diana Hillier, a partner in PwC’s Assurance practice. “And we were not alone in our view – while we and other respondents broadly supported strengthening the responsibilities, the approach in the 2012 proposals came under a lot of criticism.”

The Board has taken that feedback on board and has tried to more clearly articulate the nature and extent of the auditor’s responsibilities, including:

  • performing limited procedures to evaluate the consistency of the other information with the audited financial statements;
  • while reading the other information, considering whether there is a material inconsistency between the other information and the auditor’s knowledge obtained during the course of the audit; and
  • remaining alert for other indications that the other information appears to be materially misstated.

The IAASB also proposes further clarifying the definitions of the terms ‘other information’ and ‘annual report’, enabling them to be appropriately applied in light of differing corporate reporting regimes and practices in a range of jurisdictions and circumstances. And the auditor’s report will both describe the responsibilities and include a statement on whether or not the auditor has anything to report.

“It’s an important balance to get right – leveraging the auditor’s insight from the financial statement audit to the annual report in a meaningful way without creating expectations that the information has been verified”, said Ms Hillier. “We’ll be looking closely at what the IAASB is proposing. However, the Exposure Draft looks to be heading in a much more workable direction.”