The auditor's report on the financial statements, especially those of listed companies, is going to look different and be substantially longer from December 2016 onwards. These substantial changes to the auditor's report will not only affect auditors, but will also require additional communication with and the direct involvement of management and those charged with governance ("TCWG").
In January 2015, the International Auditing and Assurance Standards Board ("IAASB") issued a set of new and revised International Standards on Auditing ("ISAs") on Auditor Reporting, which will be effective for audits of financial statements for periods ending on or after 15 December 2016. This was in response to calls by investors and other users of financial statements for enhanced auditor's reports that are more informative about the audit that was performed.
In Singapore, the Institute of Singapore Chartered Accountants ("ISCA") is currently working on local adoption as part of Singapore Standards on Auditing ("SSAs") and an exposure draft was released in May 2015 detailing the proposed changes to SSAs. SSAs are substantially aligned with the ISAs, however certain local amendments are made to conform to the Singapore statutory and regulatory environment.
What will change?
Auditor's reports for all entities audited under ISAs/SSAs will change, however some of the new requirements are only applicable to audits of listed companies. The key changes are tabulated in the next page.
Key audit matters
The most significant change will be the reporting of key audit matters ("KAM") for listed companies, as required by the new ISA/ SSA 701 Communicating Key Audit Matters in the Independent Auditor's Report. The reporting of KAM is intended to provide more transparency about the audit that was performed by giving more information about those matters that, in the judgement of the auditor, were most significant in the audit of the financial statements.
So which matters in practice are auditors likely to include in the KAM? KAM are to be selected from matters communicated to TCWG (based on existing requirements) i.e. in the Singapore context, typically those matters reported by the auditor in the presentations to the Audit Committee. As KAM are intended to be entity-specific (rather than generic), their selection and description is largely based on the auditor's judgement rather than prescribed by the standards. The auditor chooses the most significant from those matters which required significant auditor attention during the audit and must specifically consider:
- areas of higher risk of material misstatement/ significant risks;
- areas of auditor judgement relating to the financial statements involving significant judgement (such as accounting estimates); and
- the effect of significant events or transactions during the year.
Examples could include going concern, impairment of goodwill, a significant business combination, complex revenue recognition issues etc. The description of KAM is to include why they were considered most significant, how they were addressed in the audit and reference to the related disclosures in the financial statements. It is up to the auditor's professional judgement whether that might include details of the auditor's approach, procedures, findings or other observations. The auditor must also determine an appropriate balance between technical accuracy and understandability in their choice of language and the level of detail to be included in the KAM.
|Mandatory for LISTED ENTITIES, voluntary for others|
|1.||Key audit matters||
|2.||Name of engagement partner||
|3.||Ordering of sections||
|4.||Enhanced going concern reporting ("GC")||
|5.||Statement about auditor's independence and ethical responsibilities||
|6.||Enhanced description of auditor's responsibilities||
The Singapore context and experiences elsewhere
As noted above, the ISAs include certain requirements applicable only to listed companies. In developing the standards the IAASB noted that specific jurisdictions may wish to extend those requirements to other Public Interest Entities ("PIEs"). In the Singapore context, ISCA has considered this as part of its adoption process. Although the initial proposal is to limit reporting of KAM to listed entities at initial adoption, questions have been included in the exposure draft on whether other PIEs (such as all financial institutions) should be included, and it is also possible that the requirements could be extended to these or other entities.
In the UK, the FRC introduced an auditor reporting standard effective since 2013 that requires reporting by listed companies of risks that had the most effect on audit strategy and how they were addressed, which is similar to the reporting of KAM required by the ISA/SSA 701. There are also initiatives with similar objectives underway by the European Union (EU Audit Regulation) and the US PCAOB, and effective from 2014 in the Netherlands. Research conducted in the UK indicates that the reaction from investors has so far been very positive.
Reading the annual reports of UK listed companies for 2013 and 2014, that include descriptions of risks that had the most effect on audit strategy and how they were addressed, is a good way to form an idea of what reporting of KAM under ISA/SSA 701 will look like. performed.
What should management and those charged with governance be mindful of?
We recommend that management and audit committees begin to think about the impact of the new requirements now given the increased level of disclosure in the auditor's report. Reporting of KAM in particular will result in additional time and effort by the auditor, as well as additional communications between the auditor, management and TCWG. In practice, robust discussions are expected about KAM, and sufficient time must be allowed for this in the audit timetable. There will also likely be an increased focus by users of the financial statements on the disclosures in the financial statements that are highlighted in the KAM. The financial statements disclosures continue to be the responsibility of management.
For listed companies with a 31 December year end, it may be a good idea to develop an understanding during the audit of the 2015 financial statements about the types of matters likely to be reported by the auditor. Management may wish to reconsider the extent of disclosures in the financial statements on these areas, and also to make sure that effective communication is in place between the auditor, management and TCWG to allow for timely reporting on the 2016 financial statements once the new requirements are effective.
For more information:
- Visit the IAASB website for copies of the ISA standards and other resources, including Illustrative Key Audit Matters at: www.ifac.org (Auditor Reporting)
- Visit the ISCA website for the Exposure Draft and an Explanatory Memorandum detailing proposed local amendments at: www.isca.org.sg (Auditor Reporting)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.