Auditor Reporting

Project Status

This is an active project

Staff

Kathleen Healy
Brett James
Diane Jules
Ken Siong

Task Force

Dan Montgomery, IAASB Member and Chair
Jon Grant, IAASB Member
Merran Kelsall, IAASB Member
William (Bill) R. Kinney, Jr., IAASB Member
Annette Köhler, IAASB Member
Bruce Winter, IAASB Member

The project Task Force will be aided by a number of subcommittees that will take key roles in the analysis of issues and options on specific topics, each chaired by a Task Force member.

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 ISA 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).

Background

In 2006 the IAASB and the Auditing Standards Board of the AICPA 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 (SAG) 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 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 that will take key roles in analysis of issues and options on specific topics, each chaired by a Task Force member.

 

At its March 2012 meeting, 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 in their reports. Amongst other matters, the Task Force was asked to further refine proposed requirements relating to the criteria for, and content of, auditor commentary, and develop a proposed objective for auditor commentary. In addition, it was noted that the relationship between auditor commentary 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).

Next Steps

The IAASB will further consider relevant issues in two teleconferences to be scheduled in April 2012. The IAASB is anticipated to consider a draft consultation document for approval at its June 2012 meeting.