The objective of this project were to develop amendments to ISA 810, Engagements to Report on Summary Financial Statements to explain how the enhancements resulting from the new and revised Auditor Reporting standards apply to engagements to report on summary financial statements.

At its upcoming meeting on June 15–19, 2015, the IAASB will discuss matters related to the International Ethics Standards Board for Accountants’^® (IESBA^®) proposals related to responding to non-compliance with laws and regulations (NOCLAR).

The IESBA’s proposals are open for comment through September 4, 2015.

During the June 15 meeting, the IAASB will be asked to consider and approve a project proposal, as well as the proposed amendments to the international standards. If approved, it is anticipated that these proposed amendments will be issued in July 2015 and exposed for a period of 90 days.  

The IAASB Consultative Advisory Group will discuss the topic at a special teleconference to be held on June 10, 2015. Due to the limited nature of these proposed changes, the IAASB is unlikely to hold a public forum, roundtable or other initial information-gathering activities. Rather, stakeholders are encouraged to respond to the exposure draft when issued and, if considered necessary, provide feedback to IAASB staff in advance of the upcoming meeting.

Contact IAASB Senior Technical Manager Brett James, brettjames@iaasb.org.  

Introduction

This document provides a short summary of a roundtable discussion about the need for more transparent auditor reporting and on enhancing audit quality. The event was jointly hosted by the IAASB and FEE on April 23, 2015, in Brussels, Belgium, and was part of a global outreach. The feedback received on these matters will inform the IAASB’s future standard setting projects in 2015 and beyond. The proceedings of the roundtable were designed to encourage frank discussion among participants in order to openly share their views on these strategic topics.

Participants consisted of experienced professionals from across EU Member States, who either hold positions with audit committees of companies in different sectors and industries or have experience as a corporate governance stakeholder. Attendance was by invitation only. The roundtable was held under the Chatham House Rule (i.e., participants are free to use the information received from the event, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed).

Key Discussion Themes

Auditor Reporting

The IAASB’s new and revised Auditor Reporting standards are intended to revamp and promote the auditor’s report, not solely as a means to an end, but rather as an informative, valuable and meaningful product of the audit of the financial statements. The new auditor’s report aims to enhance the value of the audit, and contribute to the continued relevance of the profession.

For many, the most interesting and significant outcome of the IAASB’s auditor reporting project is the requirement for auditors of listed entities to include a new section in their auditor’s reports to describe key audit matters (KAMs), i.e. matters that were of most significance during the audit.

Auditor Reporting on KAMs

KAMs are intended to provide transparency to the users of the auditor’s report. Participants posed a number of questions about what constitutes a KAM, the basis of assessment thereof, and who should be determining what has to be included in the auditor’s report as a KAM.

It was explained that the natural starting point for KAMs should be from the matters communicated to the audit committee as they are typically the matters that required the most of the auditor’s attention. Then, depending on the nature of the issues and other factors (such as the extent of discussion with the audit committee), the auditor assesses which of these issues merit being included in the auditor’s report as KAMs. The auditor bears sole responsibility for what is to be reported as a KAM; however, participants noted that advance discussion with management is to be foreseen.

Participants engaged in a discussion about the understandability of the auditor’s reports and whether the language used could be simplified to cater for a wider audience. It was recognized that the requirements in the new revised Auditor Reporting standards pose an excellent opportunity for the profession to review the language used in order to add to the transparency and usefulness of the auditor’s report.

The importance of communication between the auditor and the audit committee was emphasized, and there was consensus that this should start as early as possible in the process. In response to a participant questioning the impact of these new requirements on the discussions held between the audit committee and the auditor, and the impact on the workload of the audit committee, it was clarified that the matters to be discussed between the audit committee and the auditor are not intended to change to meet these new requirements. KAMs are not meant to add burden or supplementary interactions, nor limit or replace discussions between the auditor and the audit committee.

Certain potential unintended consequences relating to the inclusion of KAMs were raised by participants. These were:

• The risk of KAMs monopolizing the discussions between the auditor and the audit committee;
• The risk of KAMs being too technical for the average reader, or too boilerplate; and
• The risk of a disproportionate part of this interaction focusing on the form rather than on the substance of the matter disclosed.

The interaction among management, the audit committee and the auditor in terms of reporting was discussed. It was reiterated that it is management’s responsibility to identify and disclose risks and issues relating to the entity, and not the auditor’s. One of the participants provided the example of a company that decided on an enhanced audit committee report. There was a view that this development was essentially an early adoption of ISA 701 by the entity’s auditors. It was further noted that the enhanced communication by both parties – the auditor and the audit committee – had a synergistic effect, which served to enhance the clarity and understandability of the entity’s financial reporting information.

Audit Quality

The IAASB publication; A Framework for Audit Quality: Key Elements that create an Environment for Audit Quality (AQ Framework) was used as a reference for the discussion on this topic. Participants agreed that internal audit should be referenced more prominently in the AQ Framework as one of the key players in ensuring audit quality.

Participants acknowledged the difficulty of defining audit quality, and in general of measuring quality of a service provider. From their experience, participants could easily identify a badly conducted audit; however, determining what constitutes a quality audit is not as easy.

Participants observed an impact on audit quality in the long term caused by declining audit fees at present. It was acknowledged that audit fees have been declining in recent years, to a greater or lesser extent in different countries and sectors. Some participants attributed declining audit fees to financial pressure experienced by clients in the aftermath of the financial crisis. Other participants suggested that the problem may be deeper and linked to the limited economic value attributed to the auditor’s report relative to management’s responsibilities as outlined in the management representation letter.

One participant questioned whether audit quality would be preserved if accounting firms performed cost cutting exercises across all functions. The same participant argued that cost cutting exercises have been performed successfully by a number of companies, as a response to the financial crisis. Investing in technology might be a good way to iimprove the efficiency of the external audit while reducing costs in the long run. It was generally felt, however, that quality audits require quality auditors and that the cost of the audit will need to be kept under attention. 

There was agreement that the development of staff and investment in technology were the key differentiators for accounting firms, and are proven to positively influence audit quality. On the subject of developing staff, one participant probed about whether attracting people with business experience to the audit profession would enhance audit quality, especially for the audits of companies which operate in complex and highly regulated environments. The diversity of personnel with different backgrounds (personal experience, education, training, soft skills) was seen as strategic.

Participants’ List

Hosts

1. Arnold Schilder – Chairman, IAASB
2. Dan Montgomery – Chair, IAASB Auditor Reporting Taskforce and Former IAASB Deputy Chair
3. Myles Thompson – Vice-President and Chair of the Audit and Assurance Policy Group, FEE (moderator)
4. Hilde Blomme – Deputy Chief Executive, FEE

Lunch Invitees

1. Inge Boets – Audit Committee Chair, Euroclear plc and Euroclear SA
2. Brigitte Boone – Audit Committee Chair, Studio 100
3. Johan De Lille – Audit Committee Chair, Materialise NV
4. Francky Depickere – Audit Committee Chair, KBC Group, KBC Bank, and KBC Assurances
5. Alan Johnson – Non-executive Director, Jerónimo Martins SGPS, S.A, Member of IFAC Professional Accountants in Business Committee
6. Philip Johnson – Audit Committee Chair, Yorkshire Building Society and Addleshaw Goddard, Member of the Audit Committee, Wellcome Trust, former FEE President
7. Pieter Jongstra – Audit & Risk Committee Chair, APG Group NV
8. Kristian Koktvedgaard – Chair of Consultative Advisory Group, International Ethics Standards Board (IESBA)
9. Maryse Michel – Chartered Independent Board Member, France
10. Pierre Rodocanachi – Vice-chair of the Supervisory Board and Audit Committee member, Vivendi S.A.
11. Carlos Soria – Chairman of the Audit Committee, La Seda de Barcelona Group and Corporación Químico– Farmacéutica Esteve
12. Pascale Vandenbussche – Secretary General, European Confederation of Institutes of Internal Auditing (ECIIA)

During a recent outreach trip to South Africa, IAASB Chairman Prof. Arnold Schilder was a guest on CNBC Africa's "Closing Bell South Africa" program, where he discussed the new and revised auditor reporting standards and their importance to stakeholders.

The World Economic Forum has ranked South Africa’s auditing and reporting standards #1 in the world in its Global Competitiveness Index for 2014-2015.  

"Auditor reporting in the future will become much more informative to outside users that so far didn't hear anything from the auditor except the final conclusion, the auditor's opinion," Prof. Schilder told CNBC Africa. "In the future, you will see five, six pages with unique information coming from the auditor about the audit and that's very relevant to users of that information." 

The objective of the project was to focus auditors on addressing disclosures throughout the audit process by:

• Enhancing the requirements in various ISAs to drive changes in the auditor’s approach and improve consistency in practice to more specifically address disclosures, in particular qualitative disclosures. 
• Clarifying the auditor’s work effort in relation to disclosures by providing additional guidance to assist auditors in better applying the requirements relating to disclosures.

El Consejo de Normas Internacionales de Auditoría y Aseguramiento^® (IAASB^®) ha publicado la Norma Internacional de Auditoría ^TM (NIA^TM) 720 (revisada), Responsabilidades del auditor relacionadas con otra información en documentos que contienen estados financieros auditados. Las revisiones pretenden aclarar y aumentar la participación del auditor en "otra información" —definida en el estándar como información financiera y no financiera, diferente a los estados financieros auditados, que figura en los informes anuales de las entidades.

"El informe anual es un documento indispensable para los inversores. En el interés público es importante que el auditor lleve a cabo una ‘lectura inteligente’ de un informe anual -a partir del conocimiento adquirido en la auditoría- y realice determinados procedimientos para garantizar la consistencia del informe anual con los estados financieros auditados", explicó el profesor Arnold Schilder, Director del IAASB.

El estándar incluye igualmente nuevos requerimientos relacionados con el informe de auditoría sobre otro tipo de información, que complementan los cambios resultantes de los estándares nuevos y revisados para los informes de auditoría emitidos a principios de este año. Paralelo a aquellos estándares, la NIA 720 (revisada) entrará en vigor para auditorías de estados financieros correspondientes a periodos terminados el 15 de diciembre de 2016 o en adelante.   

"Los documentos consultados y considerados por el auditor, y los resultados del trabajo de auditoría correspondiente a estos documentos serán ahora transparentes para los usuarios de los informes de auditoría", explicó Kathleen Healy, Directora Técnica del IAASB. "Al articular específicamente cuáles son las responsabilidades del auditor frente a otro tipo de información, como por ejemplo que la opinión del auditor no cubre esta información, se proporcionará a los usuarios el contexto adecuado sobre el cual considerar el informe anual de una entidad". El estándar busca igualmente abarcar las dificultades prácticas que pueden surgir cuando una parte de esta otra información (o su totalidad) no se encuentra disponible en la fecha del informe de auditoría y, bajo estas circunstancias, recomienda comunicaciones adicionales en los informes del auditor para las entidades cotizadas.

Se encuentran actualmente disponibles el documento de los Fundamentos de las Conclusiones preparado por el personal técnico, el cual explica la lógica del IAASB frente a sus decisiones, y el documento At a Glance, que explica los cambios principales en la NIA actual.

Acerca el IAASB
El IAASB desarrolla normas y guías de auditoría y aseguramiento para uso de todos los contadores profesionales, bajo un proceso compartido de emisión de normas que involucra al Consejo de Supervisión del Interés Público (PIOB), el cual supervisa las actividades del IAASB, y del Grupo Consultivo Asesor del IAASB, el cual genera aportes de interés público para el desarrollo de normas y guías. Las estructuras y los procesos que soportan las operaciones del IAASB son facilitados por la Federación Internacional de Contadores^® (IFAC^®).

Acerca de la IFAC
La IFAC es la organización global para la profesión contable, dedicada a servir el interés público a través del fortalecimiento de la profesión y contribuir en el desarrollo de economías internacionales sólidas. La IFAC se compone de 175 miembros y asociados en 130 países y territorios, representando aproximadamente a 2,5 millones de contadores en la práctica pública, la educación, el gobierno, la industria y el comercio.

The IAASB has continued its extensive outreach program contemplated in its five-year Strategy for 2015–2019: Fulfilling Our Public Interest Mandate in an Evolving World. It has compiled a detailed listing of its outreach activities for the period January 1, 2015 – April 29, 2015. 

Listen to the podcast below. See the March 2015 Meeting page for additional materials, including meeting highlights, agenda papers, and full audio recordings.

This publication, Auditor Reporting – Illustrative Key Audit Matters, has been prepared by the IAASB’s Auditor Reporting Implementation Working Group. The publication is intended to illustrate how the concept of Key Audit Matters (KAM) may be applied in practice in accordance with ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report.