IAASB Roundtable Presentation - Kuala Lumpur

1. IAASB Auditor Reporting
Roundtable
Improving the Auditor’s Report
October 8, 2012
Kuala Lumpur, Malaysia
Page 1

2. Welcome and Introductory Remarks
Prof. Arnold Schilder, IAASB Chairman
Page 2

3. Why Is the IAASB Suggesting Changes to the
Auditor’s Report?
• Reflections on today’s global economic challenges indicate that the
auditor’s report could be more relevant and informative to users
– Improved auditor reporting is essential to the continued relevance of
the audit profession globally
– Now is the time for change, but no clear agreement on what should
be changed
• Increased complexity in financial reporting and global business
activity has increased users’ need for more information
– Audit is valued, but the auditor’s report could be more informative
– Users, in particular investors, want more relevant and decision-useful
information about the entity, the financial statements and the audit
• Important to now lay the foundation for the future of global auditor
reporting and improved auditor communications
– Creative solutions are needed to overcome challenges
Page 3

4. IAASB’s Response
• Auditor Reporting #1 priority
– IAASB progressing revisions to auditor reporting standards, and
other standards as appropriate, on an accelerated basis
• Invitation to Comment (ITC) unanimously approved
– Sets out the IAASB’s indicative direction and rationale, and
describes the IAASB’s perspectives on value and impediments
• ITC includes illustrative auditor’s report
– New sections on Going Concern, Auditor Commentary, and
Other Information
– Most relevant information positioned first (e.g., auditor’s opinion)
– Further improvements to:
 Better explain an audit
 Enhance transparency
Page 4

5. Exploring a Global Solution
Important to address differing perspectives on how best to
communicate audit results in a manner relevant to users, while
allowing for comparable auditor reports
Consistency in pursuit of achieving easily
recognizable and comparable global auditor’s
reports
Relevance to enhance usefulness
of global auditor reports, and
accommodate jurisdictions’ laws and
regulations
Page 5

6. IAASB Auditor Reporting Project Status
Commencement of
Research & Standard Setting Consultation on
Next Steps
Consultation Indicative Direction
Academic Invitation to Comment:
research Improving the Auditor’s Exposure Draft
(2006 – 2009) Project proposal Report
(June 2013)
(December 2011) (June 2012)
Review of national Comments Due
developments (October 8, 2012)
/initiatives
(2009-2010)
Roundtables Final Standards
Task Force and NY, Brussels & KL
Consultation Paper: Subcommittee (June 2014)
Enhancing the Value of Appointments (September –
October 2012 )
Auditor Reporting (January 2012)
(May 2011)
Visit the Auditor Reporting Page at www.iaasb.org/auditor-reporting for updates
Page 6

7. What Do We Need from You?
• Your views will help inform the IAASB’s standard-setting
proposals in a way that will best serve the public interest
• Broad overarching considerations include
− Do the suggested improvements increase the value of the
auditor’s report? Why or why not?
− What are the potential merits and drawbacks of the suggested
improvements? Are there other alternatives that could be
considered?
− What additional considerations, if any, should be made for audits
of SMEs (e.g., emerging growth companies) and public sector
entities?
− Should consistency continue to be a primary objective in auditor
reporting?
Page 7

8. Today
• Three Sessions
– Auditor Commentary – Dan Montgomery, IAASB Deputy Chair
– Going Concern & Other Information – Merran Kelsall, IAASB Member
– Transparency & Clarification – James Gunn, IAASB Technical
Director
• For Each Session
– Introduction
– Panelist remarks to stimulate debate
– Roundtable discussion
• Announcements
– James Gunn, IAASB Technical Director
Page 8

9. Auditor Commentary: Moving beyond Boilerplate
Dan Montgomery
IAASB Deputy Chair
Task Force Chair
Page 9

10. Why an Auditor Commentary Section?
• Suggested new section aimed at improving communicative
value of the auditor’s report
• Highlights matters that are, in the auditor’s judgment, likely
to be most important to users’ understanding of the audited
financial statements or the audit
• A vehicle for providing
– A “roadmap” to help users better navigate complex financial reports
– Additional context to the matters highlighted (e.g., explaining why the
matter was important from an audit perspective or briefly describing the
auditor’s procedures and findings)
– Information about key judgments made by the auditor to provide more
transparency regarding how the audit was conducted
Page 10

11. More about Auditor Commentary
• Entity-specific information, the nature and extent of which
is determined based on facts and circumstances of the
particular engagement
• Leverages existing concepts of Emphasis of Matter and
Other Matter paragraphs
• Required for public interest entities (includes all listed
entities)
• Provided at the discretion of the auditor for other entities
Page 11

12. What Could Be Addressed in Auditor Commentary?
• Areas of high risk of material misstatement
• Areas of significant management judgment, including the
application of accounting policies
• Significant or unusual transactions
• Significant aspects of the audit scope and strategy
• Difficult or contentious matters identified during the audit
• Other matters discussed with those charged with
governance/audit committee or required to be addressed
by law or regulation
Page 12

13. Auditor Commentary: Navigating a Way Forward
Both value and impediments exist
Essential to strike an appropriate balance
ITC examples illustrate the concept of auditor commentary
Page 13

14. Auditor Commentary (AC): Discussion Questions
1. Is the concept of AC an appropriate response to the call
for auditors to provide more information in auditor reports?
2. Do the illustrative examples of AC deliver the informational
value sought? If yes, how might this information be helpful
in decision making? If not, what aspects are not valuable,
or what is missing?
3. Should an AC section be required for audits of all entities?
4. Are there unique considerations for audits of non-public
entities, in particular audits of SMEs?
5. What risks and impediments exist to providing AC in the
auditor's report? How might they be overcome?
 Adapted from ITC Questions for Respondents
Page 14

15. Auditor Commentary: Panelists
Tan Sri Datuk Dr Abdul Samad Alias, Malaysia Venture
Capital
Jamie Allen, Asian Corporate Governance Association
Julia Tay, Accounting & Corporate Regulatory Authority
of Singapore
Len Jui, China Auditing Standards Board and Global
Public Policy Committee
Sukanta Dutt, Malaysian Institute of Accountants,
Auditing and Assurance Standards Board
Hans Koopmans, PricewaterhouseCoopers
Page 15

16. Auditor Commentary
Roundtable Participants’
Views and Reactions
Page 16

17. Auditor Commentary
Len Jui
China Accounting Standards
Board/ Global Public Policy
Committee
IAASB Auditor Reporting
Roundtable
Kuala Lumpur, Malaysia
October 8, 2012
Page 17

18. American:
Such good food! Taste as if they are
cooked by a French chef!
Page 18

19. French:
Only a French chef can cook such
good food!
Page 19

20. British:
We don’t really care how the food
tastes…anything will taste good
after several pints of beer!
Page 20

21. Chinese:
My cooking is
terrible, but my
guests honor
me by finishing
all the food I
cooked!
Page 21

22. Japanese：
Culinary skills
cannot only be
judged by the taste
of the food, but
also through
appreciating the
chef’s artistic
expression!
Page 22

23. Auditor Commentary (AC): Discussion Questions
1. Is the concept of AC an appropriate response to the call
for auditors to provide more information in auditor reports?
2. Do the illustrative examples of AC deliver the informational
value sought? If yes, how might this information be helpful
in decision making? If not, what aspects are not valuable,
or what is missing?
3. Should an AC section be required for audits of all entities?
4. Are there unique considerations for audits of non-public
entities, in particular audits of SMEs?
5. What risks and impediments exist to providing AC in the
auditor's report? How might they be overcome?
 Adapted from ITC Questions for Respondents
Page 23

24. Auditor Commentary: Panelists
Tan Sri Datuk Dr Abdul Samad Alias, Malaysia Venture
Capital
Jamie Allen, Asian Corporate Governance Association
Julia Tay, Accounting & Corporate Regulatory Authority
of Singapore
Len Jui, China Auditing Standards Board and Global
Public Policy Committee
Sukanta Dutt, Malaysian Institute of Accountants,
Auditing and Assurance Standards Board
Hans Koopmans, PricewaterhouseCoopers
Page 24

25. Auditor Commentary
Roundtable Participants’
Views and Reactions
Page 25

26. Going Concern & Other Information: Making the
Implicit Explicit
Merran Kelsall
IAASB Member
Task Force Member
Page 26

27. Why a Going Concern Section?
• The global financial crisis highlights the importance of timely
financial reporting with an increased focus on entities’
assessment of going concern and related disclosures
• Policy debates and proposals in response to the economic
crisis, incl. EC proposals and UK Sharman report, suggest
a need for transparency with respect to auditors’ work on
going concern
• Respondents to 2011 IAASB consultation asked for
– Clarification of the respective roles and responsibilities of management
and the auditor regarding going concern
– Auditors to report the outcome of their work effort regarding going
concern
Page 27

28. Going Concern: Suggested Improvements
• New reporting requirement for all auditor’s reports to
include
– A conclusion regarding the appropriateness of management's use of
the going concern assumption; and
– A statement regarding whether, based on the audit work performed,
material uncertainties related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern
have been identified
• Makes explicit the auditor’s objectives and work effort
required by the auditing standard (ISA 570)
• Language would be tailored based on the applicable
financial reporting framework
Page 28

29. Going Concern: Suggested Improvements
• New section is complemented by a new description of
management’s responsibility with respect to going
concern
• Similar to current audit requirements, when a material
uncertainty has been identified that is adequately
disclosed in the financial statements, the auditor would
draw users’ attention to such disclosure
Page 29

30. More about Going Concern Improvements
• Is there sufficient clarity as to the meaning of material
uncertainties about going concern to support explicit
statements in the auditor's report?
• Is there merit in auditors describing their rationale as to
why material uncertainties do not exist?
• Would it be desirable to disclose (possibly as part of
Auditor Commentary) events or conditions that attracted
significant audit attention even if the auditor concludes
that no material uncertainties exist?
Page 30

31. Why a New Section on Other Information?
• Other Information
– Includes financial and non-financial information (e.g., Management’s
Discussion & Analysis (MD&A), Operating and Financial Review (OFR)
Statements)
– May address both historical and prospective information
• Overwhelming majority of respondents to 2011 IAASB
consultation indicated that including a statement about the
auditor’s responsibilities regarding other information i) would
increase transparency or ii) was already local practice
• Strong support for some form of auditor conclusion with
respect to other information
Page 31

32. Other Information: Suggested Improvements and
Future Considerations
• New “Other Information” section required for all audits
where relevant
• Statement as to whether, based on reading the other
information, the auditor has identified material
inconsistencies between the audited financial statements
and other information
• Auditor also required to explicitly identify the other
information that was read
Page 32

33. Going Concern & Other Information: Discussion
Questions
1. Do the suggested auditor statements related to going
concern and other information provide useful
information to users?
2. What risks or impediments exist to providing these
statements? How might they be overcome?
3. What are your views about the placement of the new
sections in the auditor’s report?
4. Do you agree with the content and placement of the
new description of management’s responsibilities with
respect to going concern?
 Adapted from ITC Questions for Respondents
Page 33

34. Going Concern & Other Information: Panelists
Abdul Jalil Rasheed, Aberdeen Islamic Asset Management
Nik Mohd Hasyudeen Yusoff, Audit Oversight Board
Securities Commission (Malaysia)
Ian Parker, KPMG
Soo Yan Tan, Ernst & Young
Page 34

35. Going Concern & Other Information
Roundtable Participants’
Views and Reactions
Page 35

36. Transparency & Clarification: Making the Audit
More Understandable
James Gunn
IAASB Technical Director
Page 36

37. Why More Standardized Information about Audits?
• Respondents to 2011 IAASB consultation
− Supported including additional information in the auditor’s
report to further describe the auditor’s responsibilities
− Suggested that clarifying certain technical terms would
contribute to narrowing the expectations gap and improve
auditor reporting
− Highlighted the important role that management and TCWG
play in the financial reporting process
• IAASB sees merit in more fully explaining the concept of
a risk-based audit
Page 37

38. Improvements Related to Transparency about the
Audit
• For all audits, required identification of engagement partner
responsible for the audit
− Proponents suggest this would provide engagement partner with greater
sense of personal accountability
− Already required in many jurisdictions
− Possible impediments include a perceived reduction in firm responsibility
and possible increased liability for engagement partner in certain
jurisdictions, in particular the US
• Explicit statement about the auditor’s compliance with relevant
ethical requirements
− No specific identification of the applicable ethical code
• Information about the involvement of other auditors and an
enhanced description of auditor’s responsibility in a group audit
Page 38

39. Improvements Related to Clarifying Communications
about the Audit
• Clarification of respective responsibilities of management
and those charged with governance
• Fuller description about the auditor’s responsibilities
– Emphasizes the auditor’s responsibilities relating to fraud, internal
control, accounting policies, financial statement disclosures, and
accounting estimates
– Should an option be provided to streamline the content of the
auditor’s report by moving the description of auditor’s responsibility
elsewhere (e.g., NSS website)?
• Acknowledges and allows for variation in the description of
the responsibilities of management and those charged with
governance (e.g., directors) based on national laws or reg.
Page 39

40. Transparency & Clarification: Discussion Questions 
1. Should the auditor’s report identify the engagement partner
responsible for the audit?
2. What are your views with regard to disclosures about the
involvement of other auditors? Why is this information critical to
your decision-making process?
3. Do the descriptions of the responsibilities of management / those
charged with governance and auditors help your understanding
an audit?
4. Should the description of auditor responsibilities be permitted to
be placed outside of the auditor’s report (e.g., a website)?
5. What are your views on the revised format of the illustrative
auditor’s report in the ITC, including ordering and placement?
6. To what extent should consistency continue to be a primary
objective in auditor reporting?
 Adapted from ITC Questions for Respondents
Page 40

41. Transparency & Clarification: Panelists
Prof. Paul Gillis, Peking University Guanghua School of
Management
Andrew Stringer, Institute of Chartered Accountants in
Australia
Handri Tjendra, Indonesian Institute of Certified Public
Accountants--
Christina Foo, IFAC Small and Medium Practices
Committee
Tang Seng Choon, BDO
Page 41

42. Transparency & Clarification
Roundtable Participants’
Views and Reactions
Page 42

43. Conclusion and Closing Remarks
Ken Pushpanathan, MICPA President
Prof. Arnold Schilder, IAASB Chairman
Page 43