This is an active project
Dan Montgomery, IAASB Deputy Chair, has overall responsibility for the Auditor Reporting project and is chair of Drafting Team (DT) 701. The Auditor Reporting Drafting Teams are comprised of the following members:
Bruce Winter, IAASB Member and Chair of DT 700
Annette Köhler, IAASB Member
Brendan Murtagh, IAASB Member
Jianhua Tang, IAASB Member
Susan Jones, IAASB Technical Advisor
Denise Weber, IAASB Technical Advisor
Objective(s) of project
The objectives of this project are to:
- Appropriately enhance the communicative value and relevance of the auditor’s report through proposed revisions to International Standards on Auditing (ISAs) requirements that address its structure and content; and
- Determine whether and how the IAASB’s reporting ISAs, in their design, can be modified to accommodate evolving national financial reporting regimes, while at the same time ensuring that common and essential content is being communicated.
Achieving the project objectives is premised on the need to take into account the activities of others, and consider how the IAASB may act to minimize the differences in auditor’s reports that may result from these separate initiatives.
The project will include revision of ISA 700, Forming and Opinion and Reporting on Financial Statements, and as appropriate, the revision of, or conforming amendments to, related communication and reporting requirements relevant to audits (for example, ISA 260, Communication with Those Charged with Governance).
In 2006 the IAASB and the Auditing Standards Board of the American Institute of Certified Public Accountants commenced a joint initiative to commission academic research to identify, and provide information and insights on user perceptions regarding the financial statement audit and the auditor's report among different classes of financial statement users. The research reports for the commissioned research studies completed in September 2009 and are available below.
- The Unqualified Auditor's Report: A Study of User Perceptions, Effects on User Decisions and Decision Processes, and Directions for Future Research (May 2009)
- Report on Research Conducted in the United Kingdom and New Zealand in 2008 Investigating the Audit Expectation-Performance Gap and Users' Understanding Of, and Desired Improvements To, the Audit Report (September 2009)
- Investors', Auditors' and Lenders' Understanding of the Message Conveyed By the Standard Audit Report (September 2009)
- Financial Statement Users' Perceptions of the IAASB's ISA 700 Unqualified Auditor's Report in Germany and the Netherlands (August 2009)
Task Force progress / Board discussions to date
The IAASB considered key messages concerning user perceptions about the standard auditor’s report, identified from analysis of relevant information on that subject, including the research findings and developments in jurisdictions such as the United Kingdom (U.K.), France and Japan at its December 2009 meeting (see Agenda Items 4). The academic research together with the IAASB’s outreach activities as well as the outreach activities of others present compelling evidence of strong demand by investor and user communities for change in auditor reporting. The IAASB also discussed the topic of auditor reporting at its December 2010, March 2011 and May 2011 meetings (Agendas Items 7, 4 and 1 respectively).
In May 2011 the IAASB’s issued a Consultation Paper, Enhancing the Value of Auditor Reporting: Exploring Options for Change, (CP) to consult on the topic of auditor communications as a “call for action.” The objective of the CP was to (i) determine whether there are common views among key users and other parties to the financial reporting process about the usefulness and relevance of auditor reporting, and (ii) obtain views about the extent to which an expectations gap or information gap exists. The CP also sought views about possible options for enhancing the quality, relevance and value of auditor reporting, implications for change and potential implementation challenges, and whether there were factors that would lead to different solutions for different types of entities.
Because others in certain jurisdictions have identified the need to explore enhancements to auditor reporting as well as corporate reporting more broadly, the IAASB plans to explore ways to work collaboratively with groups who have active projects on auditor reporting. Among others:
- The European Commission (EC) currently has efforts underway to reform audit policy arising from lessons from the global financial crisis including proposed regulation and directives that address in part the content of public auditors’ reports as well as auditors’ reports to audit committees.
- The U.S. Public Company Accounting Oversight Board (PCAOB) has several initiatives underway to explore changes to the auditor reporting model, including (a) its concept release (CR) on possible options for changes to the auditor’s report to increase its communicative value; and (b) proposed rules relating to enhanced transparency in auditor’s reports through disclosure of the name of the engagement partner and others participating in the audit. With respect to its CR on auditor reports, the PCAOB has signaled at its November 2011 Standing Advisory Group meeting that it would anticipate issuing standard-setting proposals relating to auditor reporting in the second quarter of 2012.
- The U.K. Financial Reporting Council (FRC) made recommendations to enhance reporting responsibilities for audit committees to the full Board of Directors, via an expanded report made public by inclusion in the entity’s annual report. Auditors would then provide an expanded auditor’s report to include (i) a new section that addresses the completeness and reasonableness of the audit committee’s report; and (ii) identification of any matters in the annual report that the auditors believe are incorrect or inconsistent with the information contained in the financial statements or obtained in the course of their audit. The FRC completed an earlier initiative to facilitate more concise audit reports in 2009 and revised U.K. audit reports to specifically refer to the auditor’s responsibilities in relation to other information that accompanies the audited financial statements.
The IAASB CAG discussed the project at its September 2011 meeting (Agenda Item G, H, and K)
The IAASB approved a project proposal at its December 2011 meeting. The IAASB also considered a summary of the significant comments received from the respondents to the CP at its December 2011 meeting (Agenda Item 5B). While accepting of the plan to issue a comprehensive exposure draft (ED) by June 2013 as outlined in the project proposal, the Board advised that serious consideration should be given to exploring ways to accelerate the project timetable or engage global stakeholders earlier than 2013 through meaningful consultation on key issues.
According, efforts on the Auditor Reporting project have been structured in a coordinated manner that leverages the depth and breadth of IAASB resources. It is in this regard that the project Task Force will be aided by a number of subcommittees (drafting teams) that will take key roles in analysis of issues and options on specific topics, each chaired by a Task Force member.
The IAASB CAG discussed the project at its March 2012 meeting (Agenda Item H)
At its March 2012 meeting (Agenda Item 4), the IAASB discussed the scope and timing of the project to revise ISA 700, Forming an Opinion and Reporting on Financial Statements, and related other ISAs. The IAASB reaffirmed its commitment to this project as its highest priority over its 2012–2014 strategic period.
The IAASB considered a number of recommendations from the Auditor Reporting Task Force, including:
- Proposals requiring auditors to include auditor commentary (AC) in their reports. Amongst other matters, the Task Force was asked to further refine proposed requirements relating to the criteria for, and content of, AC, and develop a proposed objective for AC. In addition, it was noted that the relationship between AC and Emphasis of Matter and Other Matter paragraphs will need to be clarified.
- Proposals requiring auditors to include conclusions about the auditor’s procedures relating to going concern and other information in documents containing audited financial statements. Amongst other matters, the Task Force was asked to further consider whether the proposed conclusion should be expanded to take into account the concept of “material uncertainties” as described in ISA 570, Going Concern.
- Proposals to clarify the auditor’s responsibilities by describing the risk-based audit approach under the ISAs, and clarification of other technical terms in the auditor’s report. The IAASB also deliberated disclosure of the engagement partner’s name in the auditor’s report.
- Proposals relating to the concept of the “building blocks” approach designed to indicate required content in auditor reporting while allowing flexibility to accommodate different national reporting regimes and auditors’ reports on entities of different types and sizes (e.g., listed entities, small- and medium-sized entities, and public interest entities).
At its June 2012 meeting (Agenda Item 3), the IAASB unanimously approved the consultation document entitled Invitation to Comment: Improving the Auditor’s Report (ITC). The ITC set out the IAASB’s indicative direction proposed for the future auditor’s report. The ITC featured a revised auditor’s report that illustrates the application of the IAASB’s suggested improvements. The ITC also provided the IAASB’s rationale for the suggested improvements, together with a discussion of their potential value and impediments, and in what areas feedback was sought. The ITC was open for public comment through October 8, 2012.
The IAASB CAG discussed the project at its September 2012 meeting (Agenda Item F.1).
At its September 2012 meeting (Agenda Item 9), the IAASB received a report back on discussions held at its North American and European Auditor Reporting Roundtables and during other outreach activities to date. Broadly speaking, strong support has been expressed for the IAASB's efforts. Nevertheless, there is diversity of views in terms of both the value and impediments of suggested improvements to the auditor's report and how they could be operationalized in practice.
The IAASB also discussed on a preliminary basis the scope and potential structure of the ISAs to be revised as part of its Auditor Reporting project.
At its December 2012 meeting (Agenda Item 6), the IAASB discussed responses received on aspects of its June 2012 ITC, and the feedback obtained from its three roundtables and other outreach on the topic.
In relation to AC, the IAASB agreed to continue to pursue the concept of AC. Among other matters, the IAASB asked the Task Force to further consider the following:
- A revised objective and title for AC, taking into account the view that a focus on key audit areas and significant auditor judgment may be a useful way forward to respond to concerns from all stakeholders that the auditor should not provide original information about an entity.
- Requirements for AC for listed entities, recognizing that a post-implementation review may be a useful means to inform the IAASB about whether wider application of requirements for AC would be appropriate.
- Criteria to guide robust auditor judgments about what matters to include in AC and the level of detail that should be provided, taking into account the support from many ITC respondents for the IAASB to explore using significant risks as the starting point for AC.
The IAASB also asked the Task Force to further consider whether the concepts of Emphasis of Matter and Other Matter paragraphs should be retained, and how best to engage stakeholders, in particular investors and analysts, as it works to refine the concept of AC and develop further illustrative examples.
The IAASB also agreed to continue to explore auditor reporting on going concern. Among other matters, the IAASB asked the Task Force to further consider how work underway by accounting standard setters, including the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB), may affect the nature and timing of the IAASB’s proposals. It also asked the Task Force to further consider whether reporting on going concern should be required for all entities, or whether an approach based on the importance of going concern considerations to the individual entity would be preferable.
In relation to the "building blocks" approach, the IAASB confirmed that the design of extant ISA 700, which allows flexibility when law or regulation prescribes the form and content of the auditor’s report, should be retained. Nevertheless, among other matters, the IAASB asked the Task Force to further explore how requirements for the auditor’s report, including the use of titles, subtitles and headings, could achieve an appropriate balance between consistency and relevance.
The IAASB reaffirmed its commitment to developing an exposure draft of proposed revised auditor reporting standards by June 2013. It also noted the importance of alignment, to the extent practicable, with others currently addressing auditor reporting, including the EC, FRC and PCAOB.
At its February 2013 meeting (Agenda Item 2), the IAASB further deliberated issues relating to the concept of AC introduced in the June 2012 ITC, Improving the Auditor’s Report. Among other matters, the IAASB supported the following:
- Change the term AC to Key Audit Matter (KAM)
- A revised objective of the auditor for purposes of determining additional information to be included in the auditor’s report, as follows: “The objective of the auditor, having formed an opinion on the financial statements, is to communicate in the auditor’s report those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements.” The objective would be included in a proposed new ISA, tentatively labeled ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report.
The IAASB noted that the revised objective is not intended to signal a shift away from significant matters in the financial statements. Rather, it is intended to articulate a focus in the auditor’s thought process of selecting matters to report based on the audit performed, with reference to the disclosures in the financial statements as appropriate, thereby enhancing users’ understanding of the entity based on insights from further information about the audit.
- Presentation of this additional information as a separate section of the auditor’s report under the heading "Key Audit Matters". Among other matters, the IAASB also noted the following matters for further consideration:
- How proposed ISA 701 should best reflect the IAASB’s view that the auditor’s judgment of what to report externally is derived from what had been communicated with those charged with governance, and whether any clarifications are needed to the requirements or guidance in ISA 260, Communication with Those Charged with Governance.
- How the introductory language in the illustrative example of the new section in the auditor’s report could be drafted to clearly explain to users that the matters discussed in the auditor’s report is not intended to be a comprehensive list of all matters discussed with those charged with governance.
- Whether the initial list of factors intended to guide the auditor’s decision-making process in relation to external reporting could be further streamlined.
- Whether the proposed requirement for the auditor to include a statement in the auditor’s report when no matters for external reporting had been identified is appropriate.
The IAASB also deliberated stakeholder responses to the remaining suggested improvements included in its June 2012 ITC. Amongst other matters, the IAASB supported the following:
- Inclusion of an explicit statement in the auditor’s report with respect to other information. In this regard, the IAASB acknowledged the need to take into account feedback from respondents to the exposure draft of proposed revised ISA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing or Accompanying the Audited Financial Statements and the Auditor’s Report Thereon.
- Specifying the text to be used in the auditor’s report to describe the auditor’s responsibilities for the audit of the financial statements. To address concerns about the length of this standardized material, the IAASB agreed that auditors could be permitted to include this material in an appendix to the auditor’s report. The IAASB also acknowledged that law, regulation or national auditing standards may explicitly permit the auditor to exclude this material from the auditor’s report and instead refer to a website of an appropriate authority.
In relation to the matter of disclosure of the name of the engagement partner in the auditor’s report, the IAASB noted that further study is needed before concluding on whether the IAASB should require disclosure in all circumstances.
The IAASB also considered proposed revised requirements in ISA 700, and a revised illustrative auditor’s report.
Finally, the IAASB received an update about work underway by the IASB and the US FASB relating to going concern.
The IAASB CAG discussed the project at its April 2013 meeting (Agenda Item B).
At its April 2013 meeting (Agenda Item 2), the IAASB considered drafts of proposed ISA 700 (Revised), and proposed new ISA 701.
In relation to proposed ISA 701, which would apply to audits of listed entities and when auditors of entities other than listed entities communicate KAM in the auditor’s report, the IAASB discussed:
- Revised objectives of the auditor focused on the auditor determining, from the matters communicated with those charged with governance, those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements; and, having formed an opinion on the financial statements, communicating those matters in the auditor’s report.
- Factors in relation to determining KAM to communicate in the auditor’s report.
- Proposed requirements when auditors of entities other than listed entities communicate KAM in the auditor’s report.
- Revised introductory language in the illustrative auditor’s report which explains the purpose of the communication of KAM.
- The nature and extent of documentation requirements, and the extent of changes necessary to ISA 260, in light of proposed ISA 701.
The IAASB also discussed issues related to auditor reporting on going concern, including revised wording to be included in the illustrative auditor’s report. The IAASB agreed to undertake limited amendments to ISA 570, while further monitoring the activities of accounting standards setters relating to going concern in order to determine whether there is a need for more extensive revisions to ISA 570 at a later date.
In considering proposed ISA 700 (Revised) and a revised illustrative auditor’s report, the IAASB further deliberated, among other matters, the question of the appropriate level of flexibility that should be allowed in relation to the form and content of the auditor’s report, including the description of the auditor’s responsibilities. The IAASB also further deliberated issues in relation to disclosing the name of the engagement partner in the auditor’s report, and agreed in principle to require disclosure for listed entities.
At the June 2013 meeting (Agenda Item 2), the IAASB unanimously approved the following proposed new and revised ISAs for exposure:
- Proposed ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements – Revised to establish new required reporting elements, and to illustrate these new elements in example auditor’s reports.
- Proposed ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report – A new standard to establish requirements and guidance for the auditor’s determination and communication of KAM. KAM, which are selected from matters communicated with those charged with governance, are required to be communicated in auditor’s reports for audits of financial statements of listed entities.
- Proposed ISA 260 (Revised), Communication with Those Charged with Governance – Amended required auditor communications with those charged with governance, including proposed communication about the significant risks identified by the auditor, in light of proposed ISA 701.
- Proposed ISA 570 (Revised), Going Concern – Amended to establish auditor reporting requirements relating to going concern, and to illustrate this reporting within the auditor’s report in different circumstances.
- Proposed ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report – Amended to clarify how the new required reporting elements of proposed ISA 700 (Revised) are affected when the auditor expresses a modified opinion, and to update the illustrative auditor’s reports accordingly.
- Proposed ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report – Amended to clarify the relationship between Emphasis of Matter paragraphs, Other Matter paragraphs and the KAM section of the auditor’s report.
The Exposure Draft (ED), (Reporting on Audit Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs), was released on July 25,2013 and was open for comment through November 22, 2013.
The IAASB CAG discussed the project at its September 2013 meeting (Agenda Item C) and March 2014 meeting (Agenda Item C).
At its March 2014 meeting (Agenda Item 4), the IAASB discussed the feedback received on its ED. The Board reaffirmed its decision to require reporting of KAM for audits of financial statements of listed entities, and refined its proposals in light of calls for additional guidance to assist with the application and implementation of the proposals. Regarding the topic of auditor reporting on going concern, IAASB leadership continue to engage with IASB leadership in light of respondents’ views that a more holistic approach to reporting on going concern is necessary. However, as IASB’s efforts in this area would not fundamentally address the topic of going concern, the IAASB re-assessed its approach proposed in the ED. Other enhancements to the auditor’s report include disclosure of the name of the engagement partner for listed entities, an explicit statement regarding the auditor’s independence, and an enhanced description of an auditor’s responsibilities in an ISA audit.
At its June 2014 meeting (Agenda Items 2, 3 and 4), the IAASB:
- Reached agreement on the overarching reporting standard, ISA 700, which includes the agreed new requirements to make an explicit statement on independence and identifying the jurisdiction of origin of independence and other ethical requirements in the auditor’s report, and identifying the jurisdiction of origin of the sources of those requirements, as well as naming the engagement partner for listed entities. The Board also progressed revisions to ISA 705 as a result of the changes to proposed ISA 700 (Revised).
- Reached agreement on the scope of proposed ISA 701, in particular the requirements to determine KAM and the conforming amendments to ISA 260. The Board advanced a proposed new requirement to address the possibility that the auditor may decide, in extremely rare circumstances, not to communicate a matter that had been determined to be a KAM in the auditor’s report. The Board also considered revisions to ISA 706 to further differentiate the concept of KAM from Emphasis of Matter paragraphs and Other Matter paragraphs.
- Generally supported requiring statements in the auditor’s report describing management’s and the auditor’s responsibilities with respect to going concern, and a proposed new requirement in ISA 570 to enhance the auditor’s work effort in relation to disclosures when events and conditions may cast significant doubt on the entity’s ability to continue as a going concern but the auditor has concluded that no material uncertainty exists.
- Considered the implications of proposed enhancements resulting from its auditor reporting project on ISA 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, ISA 805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statements and ISA 810, Engagements to Report on Summary Financial Statements, as set out in its ED.
At its September 2014 meeting, the IAASB approved the following new and revised auditor reporting standards:
- ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
- ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report
- ISA 260 (Revised), Communication with Those Charged with Governance
- ISA 570 (Revised), Going Concern
- ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
- ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter paragraphs in the Independent Auditor's Report
- Conforming Amendments to Other ISAs.
Subject to confirmation of due process by the Public Interest Oversight Board, the IAASB plans to release the new and revised auditor reporting standards in January 2015. Activities aimed at promoting awareness and understanding, and effective implementation of the new and revised auditor reporting standards are also scheduled to commence in 2015.
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