The International Auditing and Assurance Standards Board (IAASB), the audit profession's peak global standard setter, has just released a blueprint for the most significant changes to the audit profession's communication with investors in decades.

The proposals include a new standard, ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report and a number of revisions to existing ISAs, including ISA 700, Forming an Opinion and Reporting on Financial Statements.

The exposure draft has been years in the making and is the result of the IAASB's outreach with investors and other key stakeholders. But what does this really mean for investors and what can they expect from the proposed changes?

Far from being an end point, a new set of auditor reporting standards will mark the beginning of the most challenging part of this journey - implementation. While offering much promise, the IAASB's proposals are a stretch for a profession which has already undergone extensive regulation and re-regulation in recent times.

The crux of the draft standards is that auditors would no longer solely attest to a company's financial report, but they would take on the role of providing their own narrative on key matters in the audit. In adopting this change, the IAASB essentially provides a blank canvas within the audit report. The value and effectiveness of these changes for investors will depend on how that canvas is painted - a fundamental shift and challenging undertaking for auditors who are handed the palette and brush.

Enhanced auditor reporting could go toward addressing expectation gaps related to the audit role from both sides: providing more accessible insights into the work of auditors, and an enhancement in the role itself. At the same time, in removing the simplicity of the current binary form audit report - which provides a 'yes' or 'no' on the financial statements - there is a risk that misaligned expectations could be exacerbated. Once again, the proof will be in the pudding, or on how the additional narrative space within the audit report is used.

A recent enquiry of the UK Competition Commission into the UK statutory audit market highlighted the importance of shareholder engagement in the appointment of auditors. Enhancing auditor reporting may serve to enable a greater degree of engagement, and could see firms competing to provide in their report more relevant, understandable and clearer information for shareholders.

The auditor's core role, their opinion on financial statements, comes attached to significant legal and professional accountabilities. There is a precision in the language used within current standardised auditor reports that could be impacted by introducing a more freeform model. Auditors will face the challenge of balancing their accountabilities whilst also presenting reports that are not only informative, but which bridge from often technical language to communicate in a way that is accessible to a diverse range of stakeholders.

The audit profession in Australia has already begun field testing the draft standards. To be at this point is a mark of the auditing profession's strength. As firms in Australia complete their 2013 June year-end audits, there is already a swelling of activity that anticipates how the exposure drafts would apply, and what potential issues and practical complications could arise.

This is a clear effort by IAASB to enhance how investors are informed and a genuine step forward. The ultimate measure of this shift will be the value investors place on these enhancements. With the consultation period set to close on 22 November 2013, I urge the profession to use this time to focus on how to overcome the challenges and how to enhance auditor reporting toward the needs and perspective of those using the reports.

Originally published in The Accountant

This guidance has been prepared by Staff of the International Auditing and Assurance Standards Board (IAASB) to highlight considerations that may be of assistance to audit firms as they plan their field testing of proposed ISA 701. This document is not intended to be prescriptive in terms of an approach to field testing.

This summary provides an overview of the IAASB’s July 2013 Exposure Draft, Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing. An illustrative auditor’s report for an audit of a listed entity’s consolidated financial statements, showing the result of the IAASB’s proposals, is included as an Appendix.

The International Auditing and Assurance Standards Board (IAASB) today released proposals to enhance the future auditor’s report. The IAASB’s Exposure Draft, Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs), responds to calls from investors, analysts, and other users of audited financial statements in the wake of the global financial crisis for the auditor to provide more relevant information in the auditor’s report based on the audit that was performed.

“We expect the proposed new and revised standards will result in substantive changes to how auditors contemplate and approach communication to users of their reports—the beneficiaries of a financial statement audit,” explained Prof. Arnold Schilder, IAASB Chairman. “These changes are critical to the perceived value of the financial statement audit and thus to the continued relevance of the auditing profession.”

The IAASB’s deliberations on the proposed new and revised ISAs were informed by international research, two public consultations, stakeholder outreach including three public roundtables held in 2012, and the 165 responses to the June 2012 Invitation to Comment: Improving the Auditor’s Report. “The signals from these inputs were clear: Change is essential. There is support for the IAASB’s direction, and for a global solution. Challenges exist, but they can be overcome,” added Prof. Schilder.

The Exposure Draft includes a new proposed ISA titled Communicating Key Audit Matters in the Independent Auditor’s Report. This proposed ISA directs auditors of financial statements of listed entities to communicate in their report those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements. “The intended outcome of this proposal is more informative audit reports, with information about the audit of the financial statements that is unique and more specific to the entity that has been audited,” noted James Gunn, IAASB Technical Director.

Among other enhancements, the IAASB is also proposing requirements for auditors to include specific statements about going concern in their reports, to make an explicit statement about the auditor’s independence from the audited entity and, for listed entities, to disclose the name of the engagement partner in the auditor’s report. The Exposure Draft includes example reports that illustrate the application of the proposed new and revised ISAs in various circumstances.

How to Comment
The IAASB invites all stakeholders to respond to this Exposure Draft, which includes specific questions for respondents on key aspects of the proposals and highlights areas of focus for various stakeholders in responding to the Exposure Draft. To access the Exposure Draft and submit a comment, visit the IAASB’s website at www.iaasb.org. Comments on the Exposure Draft are requested by November 22, 2013.

About the IAASB
The IAASB develops auditing and assurance standards and guidance for use by all professional accountants under a shared standard-setting process involving the Public Interest Oversight Board, which oversees the activities of the IAASB, and the IAASB Consultative Advisory Group, which provides public interest input into the development of the standards and guidance. The structures and processes that support the operations of the IAASB are facilitated by the International Federation of Accountants (IFAC).

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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The International Auditing and Assurance Standards Board (IAASB) today released its Post-Implementation Review—a Report that highlights the results of the IAASB’s efforts to learn whether the clarified International Standards on Auditing (ISAs) are being consistently understood and implemented in a way that achieves the IAASB’s goals in clarifying and revising them. 

The Report summarizes feedback from those most directly involved in the audit process in jurisdictions that have implemented the clarified ISAs. It describes the IAASB’s process in summarizing the comments and identifies the main themes that have emerged.

“I am pleased to note the many informative and useful comments received in response to the post-implementation review,” said IAASB chairman Prof. Arnold Schilder. “The IAASB issued the clarified ISAs in 2009 as an essential input to audit quality, and the IAASB is committed to their continuous improvement. The Report, therefore, is an important input to the IAASB’s planning process, both in the short term and in the context of its 2015–2019 strategy deliberations.”

Input was received from independent audit inspection bodies, other regulators, and audit committee members, and from the larger accounting firms, smaller practices, and International Federation of Accountants (IFAC) member bodies.

The post-implementation review is the second phase of the IAASB’s efforts to monitor the implementation of the clarified ISAs. The report on the first phase of IAASB’s work, undertaken in 2009 and 2010, was published in November 2010.

About the IAASB
The IAASB develops auditing and assurance standards and guidance for use by all professional accountants under a shared standard-setting process involving the Public Interest Oversight Board, which oversees the activities of the IAASB, and the IAASB Consultative Advisory Group, which provides public interest input into the development of the standards and guidance. The structures and processes that support the operations of the IAASB are facilitated by the International Federation of Accountants (IFAC).

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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Listen to the podcast below. See the June 2013 meeting page for additional materials, including meeting highlights, agenda papers, and full audio recordings.

This report highlights the findings of the IAASB’s efforts to learn whether the clarified ISAs are being consistently understood and implemented in a way that achieves the IAASB’s goals in clarifying and revising them. The report summarizes the feedback from those most directly involved in the audit process in jurisdictions that have implemented the clarified ISAs. It also describes the IAASB’s process in summarizing the comments and identifies the main themes that have emerged.