Developing the IFAC SMP Committee Response: Proposed ISA Enhancements Focused on Financial Statement Disclosures

Christopher Arnold | August 25, 2014 | 3

Over the past decade, financial statements have become progressively more complex, and therefore appropriate, relevant, and high-quality disclosures have become increasingly important to users of financial statements. Financial statements are now more likely to include a variety of disclosures, ranging from the more traditional disclosure items to more subjective or explanatory, non-quantitative disclosures. Moreover, poor-quality disclosure, such as excessive or immaterial disclosure, may obscure understanding of important matters and erode public confidence in financial reporting.

These developments have presented challenges for preparers and auditors in addressing new types of quantitative and qualitative information. In response, the International Auditing and Assurance Standards Board (IAASB) has released for public comment proposed changes to the International Standards on Auditing (ISAs), mainly to the application material, to enhance the focus of the auditor on disclosures at the early stages of the audit. The Exposure Draft (ED), Addressing Disclosures in the Audit of Financial Statements, is open for comment until September 11, 2014.

The proposals include new guidance on auditor considerations relevant to disclosures—from planning and assessing the risks of material misstatement, to evaluating misstatements and forming an opinion on the financial statements. To complement the ED, the IAASB has also issued the Preliminary Staff Publication, Addressing Disclosures in the Audit of Financial Statements, which highlights important matters addressing disclosures as part of a financial statement audit.

The IFAC Small and Medium Practices (SMP) Committee will be responding to these proposals. Indeed, it has been closely monitoring the development of the ED from the outset, providing input by way of comment letters from an SMP/SME perspective on the IAASB agenda materials. The SMP Committee has developed preliminary views in response to various questions posed in the ED, including:

  • We believe that the changes proposed should enhance a more timely and effective audit of disclosures and welcome the provision of additional application material, rather than additional requirements to the ISAs.
  • We are, however, concerned that the cost of implementing the proposed changes may outweigh the benefits for the majority of SMP audit clients and have no corresponding effect on audit quality. The disclosure requirements in the financial reporting frameworks for many small- and medium-sized entity (SME) audits are not as complex as those for large, listed entities, and the auditing of SME disclosures is typically straightforward. In addition, giving appropriate attention to disclosures early in the audit process is unlikely to significantly impact many SME audits as the time to complete these audits is often fairly short.
  • Many of the issues cannot be solved by the IAASB alone. Its close liaison and continued dialogue with the main stakeholder groups and national standard setters who are reviewing how their standards approach disclosures is especially important. For instance, given the similar timing to the International Accounting Standards Board (IASB)’s Disclosures Initiative, we believe further consideration should be given to how the outcomes of both projects could be more closely aligned to avoid further changes to the ISAs in the near future.
  • The issue of materiality for non-quantitative disclosures is an important area for preparers and auditors in practice, and for which SMPs, in particular, would welcome further clarification. However, we support the IAASB’s decision not to change ISA 320, Materiality in Planning and Performing an Audit in isolation.
  • It is well recognized that SMPs do not have access to the in-house technical resources available at larger firms, and so face challenges in efficiently and cost-effectively implementing international standards. We support the suggestion to align the effective dates for the disclosure proposals with the other changes to the ISAs, including those related to the Auditor Reporting project and the revision of ISA 720, The Auditor’s Responsibilities Relating to Other Information. In our view, the minimum timeframe between issuance of final standards and the effective date should be 12 months.

Join the Conversation

To help the SMP Committee develop its response, it would be keen to hear the views of professional accountants in SMPs and SMEs. Please log in and comment below to share your thoughts on the proposed ISA enhancements focused on financial statement disclosures.


Christopher Arnold


Christopher Arnold is a Director at the International Federation of Accountants (IFAC). He leads activities on contributing to and promoting the development, adoption and implementation of high-quality international standards, including the Member Compliance Program, Intellectual Property and Translations. Christopher is also responsible for IFAC’s SME (small- and medium-sized entities), SMP (small- and medium-sized practices) and research initiatives, which include developing thought leadership, public policy and advocacy. He was previously an Audit Manager for Deloitte and qualified as a professional accountant in a mid-tier accountancy practice in London (now called PKF-Littlejohn LLP). Christopher started his career as a Small Business Policy Adviser at the Association of Chartered Certified Accountants (ACCA).   See more by Christopher Arnold


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Join the Conversation (3)

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Paul Onulaka January 5, 2015

The disclosure is very necessary especially qualitative data that can help investors to make a far reaching investment decision. Materiality is subjective. What is material to those of us in Nigeria may not be to those in US and UK. In order to reduce Audit Expectation Gap total disclosure should be a requirement. Paul N. Onulaka Bsc, MBA, ACA, FCCA.

krzysztof burnos September 8, 2014

I do not see any significant changes in the proposals of IAASB. The modifications are like a lifting of ISAs and no critical changes. Besides IAASB states that the ISAs address the issue of disclosure in proper way and the proposed changes are for the clarification of guidance purposes. In my opinion the staff publication should be enough to address the issue of disclosures and no changes in ISAs should be done. We should remember that any modifications of ISAs is a cost for for SMPs.

Kari Lydman August 31, 2014

Shortly: I support the outlines above. More (auditing) standards is not the way to improve the disclosures The disclosures are the responsibility of the management and should never be a responsibility of the auditor in any slightest way. We audit the disclosures as (only) a part of the financial statements as a whole and report consequently. Poor/wrong disclosures might cause a modified auditors report, in the worst case. Materiality is always a totally subjective phenomenon: even the quantitative limits or borders are often too simple, straightforward, to be of any help in actual situations. Materiality can never be calculated because of its totally subjective nature. Not to speak about non-quantitative materiality. But discussion is needed, standards not.


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