A New Set of Auditor Reporting Standards Aims to Make Reports More Relevant

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  • 07 October 2015
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A New Set of Auditor Reporting Standards Aims to Make Reports More Relevant in the USA.

Auditor reporting standards have received a major overhaul. The International Auditing and Assurance Standards Board (IAASD) worked alongside the American Institute of Certified Public Accountants (AICPA) since 2006 to create a new set of standards with one main goal: make auditor reports more relevant.

Nearly a decade of research and consultations went into the new set of standards which was finally issued in January of 2015.

The revision will be required for financial statements ending on or after December 15, 2016. Changes have been made to the:

  • ISA 700
  • ISA 570
  • ISA 705
  • ISA 706
  • ISA 206

The ISA 701 is the new standard which must be followed by all audit of financial statements.

Auditors must fully comply with the changes executed and understand how the changes will have an impact on current auditing procedures and standards. Compliance begins with understanding the most important revisions made within the ISA 700 and ISA 570 as well as the new reporting standards of ISA 701.

The revisions in ISA 705, 705 and 206 are discussed briefly due to the minor revisions made.

Understanding ISA 701

A completely new component that will be added to an auditor’s report, this section will include one important element: Key Audit Matters (KAM). It is the responsibility of the auditor that has a complete set of general financial statements to convey KAM in accordance with the new ISA 701 standards.

The IAASB has stated that the addition of KAM is to highlight the significant issues of an audit as understood by the auditor.

KAM is meant to improve the quality of an audit while increasing confidence.

The auditor will need to base KAM on the communication of those in charge of governance of material that requires significant attention of the auditor. KAM may be relevant in:

  • Cases of control deficiencies deemed severe.
  • Areas wherein the auditor faced difficulty collecting evidence or consultation.
  • Situations where accounting methods or policies were complex or subjective compared to industry standards.
  • Matters where there is concern for other users of the submitted financial statements.
  • Misstatements due to fraud or error.
  • Areas, stated within the ISA 315, which are deemed significant risks.

It is unlikely that an auditor would not list at least one KAM unless in the event where operations or assets are very limited. The number of KAM will be affected by the complexity and size of the entity and the nature of business conducted.

Key Changes in ISA 700

There have been revisions in ISA 700 that must be implemented in accordance with the new standards. The way reports are structured will be altered. The auditor’s opinion will come first in the report relating the key matters almost immediately.

The opinion section will come right after the introduction and identification paragraph.

Following the opinion paragraph will be a paragraph for the basis for opinion. This paragraph will:

  • State that the auditor is an independent entity.
  • Affirm that the auditor has fulfilled ethical responsibilities.

The paragraph may mention the Auditor’s Responsibility section of the report, which mentions the responsibilities of the auditor under the International Standards on Auditing. Under the new standards, the Auditor’s Responsibility section of the report must contain:

  • Representations in relation to misstatements that arose due to fraud or error.
  • Professional judgment throughout the audit.
  • Communication with governance regarding the timing and scope of the audit, including significant findings and deficiencies that are controlled internally.
  • A statement that the auditor remained complaint with the ethical requirements if an audit is an audit of financial statements of listed entities.

Paragraph 40 (c) states that when law, regulation or national standards allow, a reference can be made to the respective authority’s website, stating the description of the auditor’s responsibilities. This information would allow a reference to the authority’s website rather than incorporating the responsibilities of the auditor in the final report.

Examples of the revised presentation can be found within the revised ISA 700.

The revised presentation must be followed by all reports under the new revisions, so it is of the utmost importance for all auditors to familiarize themselves with the proper presentation structure.

Key Changes in ISA 570

Much needed changes have been made in ISA 570. Enhanced communication is the main revision that has been made due to calls for warnings on potential issues. The Going Concern is the focal point, and the IAASB has instituted:

  • Standardized language on approaching the issue.
  • Entry-specific information as pertains to the auditor’s findings.

The changes that have been implemented in ISA 570 further:

  • Establish guidance on disclosures when or if a material uncertainty exists during an audit.
  • Require an auditor to evaluate the adequacy of disclosure in the event of a close-call situation.

Matters that deal with the going concern may be a KAM if the auditor has difficulty forming an opinion in accordance with ISA 701. Reports will be more relevant and transparent for users as a result.

Description of a KAM

The introduction of KAM will require an auditor to include:

  • Matters that are most significant to the audit.
  • How the auditor addressed the matter in the audit.
  • Reference to related financial statement disclosures (where applicable).

All audits of financial statements of listed entities which follow the ISAs will include key audit matters. Provisions that have been made outside of KAM will be incorporated into all audits, not just financial statements of listed entities.

Further ISA revisions have been made, including:

  • ISA 705: The modification of the Opinion in the Independent Auditor’s Report.
  • ISA 706: Revisions have been made to Emphasis of Matter Paragraphs and Other Matter Paragraphs section.
  • ISA 206: Changes have been made to the Communication with Those Charged with Governance.

The new auditor reporting standards work off of 9 years of research and consultation, ensuring that auditor reports are more clear and relevant. Changes have been finalized, and all auditors are responsible for following the new reporting standards.

Revisions, modifications and additions will need to be followed for all financial statements ending on or after the December 15, 2016 date as stated by the IAASD.

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