The document discusses the new auditor's report requirements that will take effect for audits ending on or after December 15, 2016. Key changes include adding a new section to communicate key audit matters, revising descriptions of management and auditor responsibilities related to going concern, and enhancing descriptions of the audit performed and auditor responsibilities. The new requirements are aimed at making auditor's reports more informative and relevant to financial statement users. The document provides an overview of the new requirements and compares the format of reports under the revised standards versus the current format. An illustrative example of the new auditor's report is also included.

1. The New Auditor’s Report
29 July 2016
Muhammad Shahzad Anjum
Presentation
CFE Lahore

2. Contents and Scope (to discuss the contents
of new audit report)
► Background - Why change the auditor’s report
► What is changing - New and revised audit reporting
requirements
► Application in UK and US and other countries
► Legal requirements in Pakistan for auditor’s report
► Implementation Issues and challenges in Pakistan
Page 2

3. Overview of the IAASB’s Auditor
Reporting Project – New Audit Report
Research & Consultation
Academic Research
(2006 – 2009)
Review of National
Developments /
Initiatives
(2009-2010)
Consultation Paper:
Enhancing the Value of
Auditor Reporting
(May 2011)
Commencement of Standard
Setting
Project Proposal
(December 2011)
Task Force and
Drafting Teams
(January 2012)
Public Consultation
Invitation to Comment:
Improving the
Auditor’s Report
(June 2012)
Outreach and
Roundtables
Released new and revised Auditor Reporting ISA in Jan 2015
Effective Date – Periods ending on or after December 15, 2016
Exposure Draft
(June 2013)

4. Why change the auditor’s report ?
► Business has over the last few years become more complex, due to
( and financial reporting has had to evolve, increasing the judgement,
estimates and uncertainty underlying the financial statements.
► In particular, it was felt that the binary ( Pass / Fail ) auditor’s report with
limited, if any, information that relates specifically to the entity, while providing
no indication of the complexities relating to the entity or the audit.
► The IAASB;s work to develop new audit reporting standards responds to
this call to provide more entity-specific and relevant information in the
auditor’s report.
Page 3
► Since auditing is a profession that goes about its work behind the scenes,
investors and other financial statements users have demanded more
transparency and insight into the audit.

5. Expected Benefits of the New Auditor’s Report
Page 3.1
 More robust interactions and communication
among users, auditors and those charged with
governance (TCWG)
 Increased attention by management and TCWG to
the disclosures referred to in the Key Audit
Matters(KAM) section of the auditor’s report
 Increased professional skepticism in areas where
KAM are identified
 Increased audit quality or users’ perception of audit
quality

6. What is changing ?
► The auditor’s report is the key deliverable addressing the
output of the audit process
► To enhance the communicative value and relevance of the
auditor’s report, the IAASB has introduced new and
revised Auditor Reporting Standards in January 2015
► These standards require various enhancements in the
auditor’s report including the Communication of Key Audit
Matters in the audit report
► The implementation of the new and revised standards will
represent a significant change in the audit reporting
practice
Page 4

7. New and revised Auditor Reporting ISAs
ISA 700 (Revised) - Overarching (influencing)Standard for Auditor Reporting
ISA 705 (Rev)
NEW ISA 701 Modifications
Key Audit to auditor’s
Matters opinions
ISA 570 (Rev) ISA 720 (Rev)
Going Other
concern information
(including (including new
revised reporting)
reporting)
Revisions to ISAs 260 and 706 as a result of ISA 701, and
conforming amendments to related ISAs
All ISAs effective for audits of financial statement for periods ending on or
after 15 December 2016
Page 5

8. Key enhancements to the auditor’s report
► New section to communicate Key audit matters (KAM)
► KAM is the heart of the revised auditor’s reports for listed
entities
► KAM are those matters that, in the auditor’s judgement
were of most significance in the audit of the financial
statements
► ISA 701 sets out requirements and guidance for the
auditor’s determination and communication of key audit
matters
Page 6
1

9. Other Enhancements
Going Concern
► A separate section with the heading “Material uncertainty
related to Going Concern” is required in the auditor’s
report to highlight the existence of any material
uncertainties related to going concern - (instead of
reporting under Emphasis of Matter para)
► New descriptions of responsibilities related to going
concern to be included in the respective sections for
management and auditor responsibilities
► A new requirement for auditor to evaluate the adequacy of disclosures in going
concern “close call” i.e. when events or conditions were identified that may cast significant doubt
on an entity’s ability to continue as a going concern but due to management’s plans, it was concluded
that no material uncertainty exists. Page 7
2
3
4

10. Audit report to state
► Management responsibilites
………In preparing the financial statements, management is
responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going
concern basis of accounting unless management either
intends to liquidate the Group/Company or to cease operations,
or has no realistic alternative but to do so………………
Page 8

11. Other Enhancements (continued)
Other Information in the Annual Report
► Identification in the auditor’s report of what comprises the
other information such as Director’s report, Chairman
review and other financial analysis etc,
► The responsibilities of the management and the auditors
in relation to other information
► A statement that the other information is materially
consistent or not consistent with the financial statements
Page 9
5

12. Audit report to state
Other information [ annexed in annual report ]
Management is responsible for the other information. The other
information comprises the director’s report, analysis etc……………..
Our opinion on the financial statements does not cover the other
information and we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated. If, based on the work we
have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact.[We have
nothing to report in this regard [or a statement that describes any
material misstatement of the other information]].
Page 10

13. Other Enhancements (continued)
► Enhanced description of both the responsibilities of the
auditor and key features of an audit
► Identification of Those Charged With Governance within
the management’s responsibilities section
► An affirmative statement about the auditor’s independence
and the auditor’s fulfillment of relevant ethical
responsibilities
► Disclosure of name of the engagement partner for listed
entities
Page 11
6
7
8
9

14. Form of Audit Report under revised
standards vs. Current Audit Report
Independent Auditors’ Report
Current Audit Report
► Report on the Audit of the Financial
Statements
► Opinion
► Basis for Opinion
► Material Uncertainty Related to Going
Concern (if applicable)
► Emphasis of Matter (if applicable)
► Key Audit Matters
► Other Matters (if any)
► Other Information (if applicable)
► Responsibilities of Management and TCWG
for the Financial Statements
► Auditors’ Responsibilities for the Audit of
Financial Statements
► Report on Other Legal and Regulatory
Requirements
► The engagement partner on the audit [name].
► Signature, Address and Date
► Identification of
financial
statements audited
► Management’s
responsibilities
► Description of audit
scope
► Audit opinion
Page 12

15. Appendix 1: Illustrative auditor’s report
Page 13

16. The new auditor’s report
(Extracted from ISA 700 (Revised) - Forming an Opinion and Reporting on Financial Statements)
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of ABC Company [or Other Appropriate Addressee]
Report on the audit of the financial statements
Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the statement of
financial position as at December 31 20X1, and the statement of comprehensive income, statement of changes in
equity and statement of cash flows for the year then ended, and notes to the financial statements, including a
summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, (or give a true and fair
view of) the financial position of the Company as at 31 December 20X1 and (of) its financial performance and its cash
flows for the year then ended in accordance with International Financial Reporting Standards.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under
those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section
of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to
our audit of the financial statements in [Country], and we have fulfilled our other ethical responsibilities in accordance
with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
financial statements of the current period. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these
matters.
Enhancements to
the auditor’s report
Opinion first. The auditor’s opinion - the
“pass/fail” statement that users have said
they continue to value - is required to be
positioned at the beginning of the report,
followed by the Basis for Opinion.
Required Basis for Opinion section.
Currently required only when the auditor’s
opinion was modified.
New affirmative statement about the
auditor’s fulfillment of independence and
other relevant ethical responsibilities
requirements.
The new KAM section is the centerpiece
of the revised auditor’s report.
Required for audits of listed entities,
but may be applied voluntarily to other
audits.
[Description of each key audit matter in accordance with ISA 701.]
Page 14

17. The new auditor’s report
Other information [ annexed in annual reports]
Management is responsible for the other information. The other information comprises the [information included in the
Annual Report, but does not include the financial statements and our auditor’s report thereon.]
Our opinion on the financial statements does not cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information, we are required to report that fact. [We have
nothing to report in this regard [or a statement that describes any material misstatement of the other information]].
New descriptions of management’s
responsibilities relating to going
Responsibilities of management [and those
charged with governance] for the financial
statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with
IFRSs, and for such internal control as management determines is necessary to enable the preparation of financial
statement that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of
accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic
alternative but to do so.
[Those charged with governance] are responsible for overseeing the Company’s financial reporting process.]
concern. Intended to reflect the
requirements of the applicable financial
reporting framework.
Identification of TCWG is required
when a separate body exists that is
responsible for the oversight of the
financial reporting process (in many
cases, the audit committee).
When individuals responsible for such
oversight are also responsible for the
preparation of the financial statements,
no reference to oversight
responsibilities Is required.
Page 15

18. The new auditor’s report
Expanded description of the auditor’s
responsibilities, including key features
Auditor’s responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism
throughout the audit. We also:
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by management.
of the audit. The auditor's
responsibility section is intended to
explain more fully the concept of a risk-
based audit, as well as to clarify the
meaning of certain audit-technical
terms. This approach results in a fuller
description of the auditor’s
responsibilities in relation to specific
matters, including fraud; internal
control, accounting policies and
estimates, evaluating the overall
presentation, structure and content of
the financial statements and
disclosures, group audits, and
communications with TCWG.
Because of the increased length of this
section, ISA 700 include a provision
that certain components of this
description may be presented in an
appendix to the auditor’s report or,
where law, regulation or national
auditing standards expressly permit, by
reference to a website of an
appropriate authority.
Page 16

19. The new auditor’s report
Auditor’s responsibilities for the audit of the
financial statements (continued)
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the
Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
[[For group audits] Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction,
supervision and performance of the group audit. We remain solely responsible for our audit opinion.]
We communicate with [those charged with governance] regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide [those charged with governance] with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with [those charged with governance], we determine those matters that were of most significance in
the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our
auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably
be expected to outweigh the public interest benefits of such communication.
Report on other legal and regulatory requirements
[The form and content of this section of the auditor’s report would vary depending on the nature of the auditor’s other reporting
responsibilities prescribed by local law or regulation]
The partner in charge of the audit resulting in this independent auditor’s report is [name].
[Signature]
[Auditor address]
[Date]
New descriptions of responsibilities
relating to going concern. Reflects
responsibilities under ISA 570, which
are required regardless of the
applicable framework.
A separate section (when applicable)
relating to other information in an
annual report.
More information will be shared on the
revised auditor’s responsibilities,
including its new reporting
requirements, when ISA 720 The
Auditor’s Responsibilities Relating to
Other Information.
Disclosure of the name of the
engagement partner for audits of listed
entities.
Already common practice in many
jurisdictions, the name of the
engagement partner is now included in
auditor’s reports under the ISAs, but is
only required for audits of listed
entities.
Page 17

20. Closer look - Reporting of Key Audit Matters
► Significant audit risks :
areas of risk of material
Those matters that,
in the auditor’s
professional
judgment, were of
most significance in
the audit of the
financial statements
for the current period
misstatement in the financial
statements
► Significant judgmental
areas in the financial
statements: accounting
estimates with high estimation
uncertainty
► Significant events or
transactions during the
year: with the effects on the
financial statements
Page 18

21. Closer look - Reporting of Key Audit Matters
Going concern assessment
Revenue recognition
Effect of new accounting
standards
Impairment of assets
Valuation of financial
instruments
Measurement of retirement
benefit plan liabilities
Disposal of a business unit
Business combination and
accounting impacts
Deferred Taxation
Goodwill impairment
Provisions for contingencies
Page 19

22. KAM - Decision-making framework
► Auditor’s communication
Matters communicated
with TCWG
Matters requiring
significant auditor
attention
KAM:
Matters
of most
significance
in the audit
of significant matters to
the Board ( Those
Charged with
Governance ) should be
the starting point to
determine the Key Audit
Matters
► The number of KAMs will
vary depending on the
size and complexity of
the entity and the nature
of its business
environment
Page 20

23. Sensitive matters : Not part of KAM Section
► ISA 701 allows for the possibility, in extremely rare
circumstances , that the auditor might decide not to
communicate a matter when:
► Laws or regulations preclude a disclosure such as a
matter that may prejudice an investigation of illegal act
► Adverse consequences on the entity are expected to
outweigh the public interest benefits of communication
► This is a complex decision and involve significant auditor
judgment. Accordingly, the auditor may consider it
appropriate to obtain legal advice
Page 21

24. KAM - what to state
► Description of each KAM in the auditor’s report
required to include:
`
► Why the matter was considered to be one of most
significance in the audit
► How the matter was addressed in the audit - audit
approach and overview of procedures performed with
an indication of outcome
► Reference to the related disclosure(s)
Page 22

25. KAM - points to note
► Should be specific to the entity - avoid generic or
standardized language
► Does not imply that the matter has not been appropriately
resolved in the audit - KAM is Not an Audit Qualification
► KAM is not a substitute for disclosures required in
financial statements
► Does not imply discrete opinions on separate elements of
the financial statements
Page 23

26. KAM - expected impacts
► KAM does not change the audit scope Nor does it change
the responsibilities of the Board (TCWG) and the
management in relation to the financial statements
► KAM only intends to highlight ‘Through the Eyes of the
Auditor” matters of most significance
► Will provide users of the financial statements a basis to
further engage with the management and may be with the
auditors
► Will require Enhanced communication between the
Auditor and the Audit Committees
Page 24

27. Appendix 2: Key audit matters - an
illustration
Page 25

28. Key audit matters - an illustration
Goodwill
[Why a matter was determined to be a KAM]
Under IFRSs, the Group is required to annually test the amount of goodwill for impairment.
This annual impairment test was significant to our audit because the balance of XX as of 31
December 20X6 is material to the financial statements. In addition, management’s
assessment process is complex and highly judgmental and is based on assumptions,
specifically [describe certain assumptions], which are affected by expected future market or
economic conditions, particularly those in [name of country or geographic area].
[How a KAM was addressed in the audit]
Our audit procedures included, among others, using a valuation expert to assist us in
evaluating the assumptions and methodologies used by the Group, in particular those
relating to the forecasted revenue growth and profit margins for [name of business line]. We
also focused on the adequacy of the Group’s disclosures about those assumptions to which
the outcome of the impairment test is most sensitive, that is, those that have the most
significant effect on the determination of the recoverable amount of goodwill.
[Refer to the related disclosures]
The Company’s disclosures about goodwill are included in Note X, which specifically
explains that small changes in the key assumptions used could give rise to an impairment
of the goodwill balance in the future.
Page 26

29. Practice in UK : Recent Practice
Audit Committee
► UK Corporate Governance
Code require to publish in
the annual report a
separate report describing
the work of the Audit
Committee including the
significant issues that the
Committee considered in
relation to the financial
statements and how these
issues are addressed
Auditors
Extended audit report
►A description of significant
risks
►An explanation of how the
auditor applied the
concept of materiality; and
►A summary or the audit
scope, including response
to the significant risk and
application of the concept
of materiality
Page 27

30. Audit Reports issued in UK: Recent Practice
Rolls Royce Holding plc
►6 Pages Report
►7 Significant Risks reported
►Key risks include revenue
recognition, consolidation
of SPV, provisions for
contingencies, Bribery and
corruption
Vodafone Group plc
►8 Pages Report
►7 areas of focus reported
►Key risks include Taxation,
Goodwill valuation, IT
system and controls,
revenue recognition
Page 28

31. PCAOB proposals for changes in the audit
reporting model
► In 2013 PCAOB proposed a new auditing standard to
enhance the auditor’s report
► The proposed new standard require the communication of
Critical Audit Matters as determined by the auditor
► Enhancements to existing language have also been
related to auditor’s independence, auditor’s
responsibilities for fraud and other information in the
annual report
► The effective date of the standard in not yet specified
Page 29
Public Company Account ing Oversight
Board US: Protecting Investors through
audit oversight

32. Adoption in other countries
► Singapore - adopted the revised standard effective 2016
► Malaysia - adopted the revised standard effective 2016
► Australia - comment period over for the exposure draft,
effective date yet to be notified
► India - auditing standards are aligned to ISAs and
therefore, expect the Indian institute to adopt the standard
in due course
► Saudi Arabia - Planned to adopt in 2017
Page 30

33. Implementing the Change: Responsible
Audit Regulators
Audit Firms
Audit Committees
Page 31

34. Implementing the Change
► National auditing standard setters to consider the change
in view of the Laws and Regulations in their respective
jurisdictions
► Audit firms have commenced the important work of
developing implementation guidance, training and
communications to educate the audit teams
► Audit Committees and CFOs to engage with the auditors
at an early stage to identify potential KAMs and how these
matters are currently addressed in the disclosures in the
financial statements, director’s report and CCG report
Page 32

35. Laws and regulations in Pakistan
► Section 255 (3) of the Companies Ordinance, 1984
prescribes the contents of the auditor’s report which
include opinions on the following
► True and fair view of the financial statements: AND
► Completeness of information obtained for the purposes of
audit
► Proper Books of accounts
► Compliance with the requirements of the Companies
Ordinance, 1984 with regard to the accounts
► Expenditure incurred, investments made and business
conducted for the purposes of the company’s business
and objects
Page 33

36. Laws and regulations in Pakistan
Form 35 A
Form 35 B and
SECP’s directives
Form 35 C
• Auditors’ Report in case of
Companies
• Auditors’ Report in case of Banks
• Auditors’ Report for Insurance
Companies
• Auditor’s Report on Consolidated
Financial Statements
Page 34

37. Suggested Approach to Change in the legal
forms relating to the auditor’s report
Independent Auditors’ Report
► Report on the Audit of the Financial
Statements
► Opinion
► Basis for Opinion
► Material Uncertainty Related to Going
Concern (if applicable)
► Emphasis of Matter (if applicable)
► Key Audit Matters
► Other Matters (if any)
► Other Information (if applicable)
► Responsibilities of Management and TCWG
for the Financial Statements
► Auditors’ Responsibilities for the Audit of
Financial Statements
► Report on Other Legal and Regulatory
Requirements
► The engagement partner on the audit [name].
► Signature, Address and Date
Opinions required
by the Companies
Ordinance, 1984
in addition to the
opinion on the
financial
statements (true
& fair view) may
be reported under
a separate
section of the
report in
accordance with
the ISAs
Page 35

38. Role of Audit Committee
► As per the requirements of the Code of Corporate
Governance for listed companies, the Audit Committee is
required to review the financial statements prior to their
approval focusing on:
► Major Judgmental areas
► The going concern assumption
► Any changes in the accounting policies and practices
► Compliance with accounting standards and other
regulatory requirements
► Significant adjustments resulting from the audit
► Significant related part transactions
Page 36

39. Public reporting by directors
► Section 236 of the Companies Ordinance, 198 requires
the Director’s Report to contain he fullest information and
explanation with regard to any reservation, observation,
qualification or adverse remarks contained in the auditor’s
report
► Under the listing regulations every listed company shall
immediately disseminate material information such as
merger or acquisition or loss of any material contract;
purchase or sale of significant assets; any unforeseen or
undisclosed impairment of assets due to technological
obsolescence, etc
Page 37

40. Suggestions
► We should take a holistic approach to incorporate the
required changes in the laws and regulations instead of
updating audit report under ISAs only.
► The UK Model which requires both the Auditors and the
Audit Committee to report on Key audit matters can be
followed
► As we state in the audit report that the audit has been
conducted in accordance with the ISAs, therefore, the
form and content of the audit report should also comply
with ISAs
Page 38

41. Implementation Issues and challenges
► Auditor’s report may be seen as the primary source of
information about a company
► Key Audit Matters may be confused with auditor’s
observations or concerns
► Regulators and tax authorities may require additional
information about Key Audit Matters or challenge the
auditors rather than the management
► Changes in laws and regulations required to implement
the change
Page 39

42. Conclusion
►“If you change the way you look at
things, the things you look at, change.”
Wayne Dyer
► Need to hold more awareness sessions and roundtables
with investors, audit committees, regulators and all
stakeholders to see their views on the potential changes
to the auditor’s report BEFORE deciding the date of
implementation
Page 40

44. Thank you