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The New Auditor’s Report and IAASB’s Work Plan
1. Page 1
The New Auditor’s Report
and IAASB’s Work Plan
Dan Montgomery, Auditor Reporting Implementation Working
Group Chair, Former Auditor Reporting Task Force Chair and
IAASB Deputy Chair
Johannesburg, South Africa
October 12, 2015
3. Page 3
Why Change the Auditor’s Report?
• Foundation for the future of global auditor reporting
and improved auditor communications
• Essential to the continued relevance of the audit
profession globally
– Audit opinion is valued, but could be more
informative
– Users want more relevant and decision-useful
information about the entity and the financial
statement audit
4. Page 4
New and Revised Auditor Reporting Standards –
Key Features
AuditorReport
Audit Opinion – Required to be presented first
Key Audit Matters – Required for listed entities
Going Concern – Additional focus
Other Information – New section
Responsibilities – In the audit; Independence and ethical
obligations; Engagement partner (listed entities)
5. Page 5
Expected Benefits of the New Auditor’s Report
• Enhanced communicative value to users
• 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. Page 6
Decision-Making Framework for Determining KAM
Matters that were
communicated with TCWG
Matters that
required significant
auditor attention
Matters of most
significance
in the
audit
Key Audit
Matters
7. Page 7
Initial Step in Determining KAM
The auditor will always consider
• Areas of higher assessed risks of material
misstatements or significant risks (i.e., risks requiring
special audit consideration)
• Significant auditor judgments relating to areas of
significant management judgment (e.g., complex
accounting estimates)
• Effect on the audit of significant events or transactions
Matters that were
communicated with TCWG
Matters that required
significant auditor attention
8. Page 8
Determination of Matters of Most Significance in the
Audit – KAM
• KAM is determined by the auditor’s consideration of the
– Nature and extent of communication with TCWG
– Importance to intended users’ understanding of the financial statements
– Nature and extent of audit effort needed to address
– Nature of the underlying accounting policy, its complexity or subjectivity
– Nature and materiality, quantitatively or qualitatively, of corrected and
accumulated uncorrected misstatements due to fraud or error (if any)
– Severity of any control deficiencies identified relevant to the matter (if any)
– Nature and severity of difficulties in applying audit procedures, evaluating the
results of those procedures, and obtaining relevant and reliable evidence
Matters that required significant
auditor attention
Matters of most significance
in the
audit
9. Page 9
KAM – What They Are, and What They are Not
• The auditor’s perspective on matters of most
importance to the audit
• A concise summary of important audit matters versus
more detailed and robust discussions with TCWG
(e.g., the audit committee)
• NOT a replacement of or supplement for
management’s perspective embodied in the financial
statements and disclosures
• NOT a scorecard on management’s performance or
the relative aggressiveness or conservatism in
management’s accounting policies or judgments
10. Page 10
KAM – Delivering Entity-Specific Information to Users
Consistency
and
Comparability
Relevance and
Usefulness
Boilerplate;
generic
language;
not relevant
to the entity
or the audit
Entity- and audit
specific
information of
increased value
11. Page 11
Are KAM Always Communicated in the Auditor’s
Report?
• Auditor is required to include each KAM unless
– Law or regulation precludes disclosure
– In extremely rare circumstances, the auditor determines that the matter
should not be communicated
Adverse consequences of communicating the KAM would reasonably be
expected to outweigh the public interest benefits of such communication
• In certain limited circumstances, there may be no KAM to be
communicated
• Concepts of EOM and OM paragraphs are retained
– EOM and OM paragraphs cannot be used as a substitute for
communicating a matter determined to be a KAM
12. Page 12
Enhanced Auditor Reporting on Going Concern
• Changes to ISAs and the auditor's report to focus
more on GC
– Explicit description of the respective
responsibilities of management and the auditor in
all auditor’s reports
– Separate GC section required when material
uncertainty exists, with a heading “Material
Uncertainty Related to Going Concern”
– New requirement to challenge adequacy of
disclosures for GC “close calls”
13. Page 13
Interaction Between KAM and Going Concern (GC)
• Matters relating to GC, including “close calls”, may be
determined to be KAM and communicated in the
auditor’s report in accordance with new ISA 701
• When a material uncertainty related to GC exists, it is
by nature a KAM, but is reported separately in the
“Material Uncertainty Related to Going Concern”
section of the auditor’s report
More information about GC is available in the Auditor Reporting
Toolkit at: www.iaasb.org/auditor-reporting.
14. Page 14
Other Changes to the Auditor’s Report
• Auditor’s opinion required to be presented first
• Required Basis for Opinion section for unmodified
opinions
• Statement about independence and other ethical
responsibilities
• Naming of the engagement partner (listed entities only)
• Enhanced description of auditor responsibilities and key
features of the audit
• Required identification section when TCWG are
separate from management
15. Page 15
New Webpage www.iaasb.org/auditor-
reporting with easy access to new and
revised standards and other resources
• Auditor Reporting Fact Sheet
• Auditor Reporting “At a Glance”
• Basis for Conclusions
• Publications on GC and KAM
• Illustrative KAM examples
• Plans for webcasts, podcasts and other
potential publications
Resources – Auditor Reporting Toolkit
16. Page 16
• IAASB-supported “roll-out plan” with objectives of
– Promoting awareness
– Informing and educating users
– Learning about experiences of those responsible for adopting and
implementing the standards
– Preparing for post-implementation review
• Planned activities
– Outreach and other communications
– Auditor Reporting Toolkit
Implementation Support
New and revised Auditor Reporting standards are effective for
periods ending on or after December 15, 2016
18. Page 18
Enhancing Audit Quality
• Clarified ISAs and ISQC 1 serve fundamental role in
underpinning audit quality, need to evolve in response to
– Changes in business environment
– Firm’s business models (structures; organization of audits)
– ISA Implementation Monitoring findings and other feedback on
current practices
– Audit inspection findings
– Outreach and other interactions
Key Strategic Objective: Ensure that ISAs continue to form the
basis for high-quality, valuable and relevant audits conducted
worldwide by responding on a timely basis to issues noted in
practice and emerging developments
19. Page 19
Work Plan for 2015–2016 ― Priority Projects
The IAASB in the Coming Years
2015:
(1) Intense exploration, research
and outreach One discussion
paper (ITC);
(2) Project proposal related to ISA
540
2016:
Analysis of comments and
dialogue Proposals for
standard setting and other
guidance
Enhancing Audit Quality
with a Clear Public Interest Perspective
Quality
Control
Group
Audits
ISA 540,
Incl. FI
Professional
Skepticism
20. Page 20
Timing―ITC
• Issuance of ITC (Quality Control; Group Audits;
Professional Skepticism) – Dec 2015; Comment
period of 150 days ending May 2016; outreach events
held while ITC is out for comment and possibly after
• Comment analysis and discussion – May 2016–Sept
2016
• Approval of project proposals (Quality Control and
Group Audits), and decision on IAASB way forward re:
Professional Skepticism – Sept 2016
• Development of Exposure Drafts (Quality Control and
Group Audits) – Sept 2016–mid-2017
21. Page 21
• Project proposal for holistic revision of ISA 540 planned for
December 2015
– Commitment to standard-setting activities to commence immediately
• Project update planned for Dec 2015/Jan 2016 to
– Raise awareness of challenges likely to be encountered by auditors
and preparers with respect to IFRS 9
– Alert auditors and other interested parties to the IAASB’s work in
this area and its consideration of the relevant issues
– Highlight how the extant ISAs and other material addresses the
audit issues in relation to IFRS 9 (for FIs and other entities)
IAPN 1000 also relevant
– Signal the IAASB’s plans with respect to the issues that are likely to
be addressed in the revision of ISA 540 and the proposed timeline
Timing―ISA 540, Including Audits of Financial
Institutions
22. Page 22
• Monitoring of identified and emerging developments in audit,
assurance and related services and provide
recommendations to the IAASB on topics to be pursued
– Data analytics and the effect on the audit, including whether ISAs
could be viewed as restricting innovation
– Integrated reporting, including the demand for assurance on
integrated reports
• Services other than audits, in particular for SMEs
– “Hybrid engagements” and how agreed-upon procedures may be
used in connection with other services, including the IAASB’s recently
revised review and compilation standards
Preparing for the Future
KAM are defined as those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.
A Key Audit Matters section is required in the auditor’s report for audits of financial statements of listed entities in accordance with new ISA 701; may be required by law or regulation, or auditor may provide voluntarily, for other entities.
The auditor’s decision-making process is a two-step process, beginning first with the narrowing of matters to those that required significant auditor attention and then a further narrowing of matters to those matters to the matters of most significance.
As an initial step in determining KAM, ISA 701 requires the auditor to determine, from the matters that were communicated with TCWG, those matters that required significant auditor attention.
The three bullets on this slide are the considerations for the auditor in determining matters requiring significant auditor attention.
The framework in ISA 701 provides auditors with a decision-making process to determine KAM. It builds on, and is conditioned on, the auditor’s application of a risk-based approach in conducting the ISA audit. Therefore, while entities themselves may have similar sets of facts and circumstances, audits of similar entities may not be conducted in the same way.
The manner in which ISA 701 is drafted achieves an appropriate balance between prescription to promote consistency in which matters are determined and communicated as KAM. It also provides guidance to auditors to describe KAM in a manner that is specific to the particular entity and the audit engagement that was performed, thereby making it most useful and relevant to investors and other users.
The description of a KAM will naturally refer to any related disclosures in the financial statements. However, the level of detail for each individual KAM description is a matter of professional judgment, and may vary depending on the specific facts and circumstances of the particular engagement.
The flexibility that ISA 701 allows is intended to enable auditors to be as entity-specific and audit-specific as possible in describing each KAM so that they continue to be relevant and useful to investors and other users.
Auditor’s opinion required to be presented first, but law or regulation may prescribe alternate presentation provided certain requirements are met
Statement about independence and other ethical responsibilities – Either (i) Disclosure of the sources of relevant ethical requirements; (ii) Jurisdiction of origin; or (iii) Reference to the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code)
Enhanced description of auditor responsibilities and key features of the audit – may be placed in appendix or where law or regulation permits, on a website of appropriate authority
New WG formed to develop this material and plans for additional outreach on the topic
- Stress that IAASB’s activities alone are not enough to support effective implementation – necessary for preparers and TCWG to understand the new and revised ISAs, in particular ISA 701 so that they can be better prepared for discussions about KAM and the other new enhancements in the auditor’s report
- Also to highlight is the possibility of developing FAQs as feedback is obtained from implementation
- Want to hear from Committee members about what questions and concerns that have been identified