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ISA 701 applies to listed entities and provides for possible wider applications, such as voluntary reporting of KAM by non-listed entities. This evolution should be recognised and embraced as an opportunity rather than a burden by SMPs, as it is a clear demonstration of the value of an audit, irrespective of whether an entity is listed or not
—Brendan Murtagh, ACCA member and IAASB board member

The IAASB proposals towards improving auditor reporting are a welcome step in the right direction, but some tensions remain. Consistency and convergence of existing and upcoming initiatives in this field are crucial, revealed an expert roundtable organised in Brussels by the FRC and ACCA

FRC and ACCA logos

In July 2013, the International Auditing and Assurance Standards Board (IAASB) published far reaching proposals to make auditors’ reports more informative in an exposure draft entitled Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs). The proposals follow from earlier consultations in 2011 and 2012, which were developed after research into user perceptions of auditor reports and following-up the global financial crisis, which triggered key questions linked to the quality and effectiveness of auditing, professional judgment and scepticism, as well as relevance of audit and trust in the audit profession.

In light of the ongoing debate on audit reform that is currently taking place at EU level, it is very important to ensure consistency of the various upcoming proposals on the issue. With this in mind, the Financial Reporting Council (FRC) and ACCA (the Association of Chartered Certified Accountants) recently jointly hosted an informed roundtable discussion in Brussels for interested parties to discuss, first-hand with the leadership of the IAASB and experts from EU institutions, regulators, the business community, leading investors, as well as the auditing and accountancy profession, the IAASB proposals to improve auditor reporting transparency and how to make this a reality in the European market. 

Professor Arnold Schilder

The event started with a presentation by Professor Arnold Schilder, Chairman of the IAASB, of why change was needed, the background to the IAASB proposals and an overview of its content. He indicated that 'the proposed improvements represent a significant change in practice, but they are critical to the continuing perceived value of the audit and relevance of the profession. Now is the time to begin thinking about how to prepare for the future to help ensure success, from the point of view of both practitioners and users.'

Discussions revealed the importance of the issue and its international dimension, as illustrated by the number of other existing initiatives in this area, such as the ones from the US PCAOB, the UK’s FRC, and the European Commission. Most speakers highlighted the need for consistency, convergence and harmonisation, while recognising that a lot of effort was being made in order to make that happen.

There was a general feeling that whereas things are moving in the right direction, there remain however a number of areas of tension. For instance, the IAASB proposals* clarify what information should come from which source, but businesses reiterated a strong concern that the auditor should not provide original information about the company. Investors expressed doubts regarding the accountability and transparency of the audit, essentially because they felt excluded from the audit process and real findings, and hoped that the IAASB proposals will introduce a more enlightened audit report. They welcomed the introduction of the new 'Key Audit Matters' (KAM)*, but warned that improved disclosures should not become standardised and boilerplate year after year, they should remain meaningful and tailored to companies’changing circumstances.

Presentation panel

The scope of application and the role of national regulators were also discussed. There were some further questions around KAM and their interrelationship with 'emphasis of matter' and the new section on 'going concern', and ordering of key paragraphs. Is it clear what a KAM is? Some asked whether we need more guidance, while some said the more guidance you have, the more constraints there are.

Brendan Murtagh, ACCA member and IAASB board member provided a Small and Medium size Practice (SMPs) angle to the debate, explaining that 'ISA 701 applies to listed entities and provides for possible wider applications, such as voluntary reporting of KAM by non-listed entities. This evolution should be recognised and embraced as an opportunity rather than a burden by SMPs, as it is a clear demonstration of the value of an audit, irrespective of whether an entity is listed or not.'

Marek Grabowski, Director of Audit Policy, FRC, concluded: 'Despite the remaining tensions, we are definitely moving in the right direction. Most key IAASB proposals are expected to have positive benefits on audit quality and users’ perceptions, and will hopefully increase users’ confidence in the audit and financial statements, while renewing the auditor’s focus on matters to be reported. However, there will be no perfect answer, we will have to explore, and accept that to some extent, this is going to be experimental, and will not be based on strong practice in some areas. It is described as a golden opportunity for the profession, a part of that is about taking some risk and giving it a go.' 

* The IAASB proposals include: 

  • Opinion preferably first
  • New section to address Key Audit Matters - The proposals aim at clarifying what information should come from which source - for example, information about the entity is more appropriately disclosed by the audit committee and information about the audit is more appropriately disclosed by the auditor. The objectives of the proposals for Key Audit Matters are for the auditors to communicate the matters that, in their professional judgement, were considered of the most significance in the audit of the financial statements; what constitutes a ‘Key Audit Matter’ will be left to the auditor’s professional judgement.
  • New section to address Going Concern-  since the financial crisis, and the EU proposals on audit reform, there has been a heightened attention on the issue of going concern.
  • New section to address Other Information when such information is presented with the audited financial statements
  • Other suggested improvements to enhance transparency or clarify responsibilities including Statement about independence and other ethical responsibilities; Naming of the engagement partner (listed entities); Improved description of auditor responsibilities and key features of the audit.