IAASB developments

It is important that when studying Paper P7, Advanced Audit and Assurance, candidates remember that current issues is part of the syllabus, contained in section G. The description of this syllabus area is as follows: ‘Discuss the relative merits and the consequences of different standpoints taken in current debates and express opinions supported by reasoned arguments’.

One of the particular topics of current issues specifically mentioned in the syllabus is that of IFAC developments – IFAC being the International Federation of Accountants. In the context of auditing, this means that candidates should be aware of important projects that are being undertaken by the International Auditing and Assurance Standards Board (IAASB). This article aims to provide an overview of the more significant currently active IAASB projects.

Auditor Reporting

The main objective of this project is to enhance the communicative value and relevance of the auditor’s report through proposed revisions to ISA requirements that address its structure and content. The project will include revision of ISA 700, Forming an Opinion and Reporting on Financial Statements, and the revision of, or amendments to, related communication and reporting requirements relevant to audits, for example, the requirements of ISA 260, Communication with Those Charged with Governance.

The project began in 2006 when the IAASB commissioned several academic studies which looked into the perceptions of the users of the financial statements on the audit process and the value of the auditor’s report. These studies and the results of other work performed by the IAASB indicated a strong demand amongst user groups for a change in auditor reporting. Several further consultations followed, resulting in the IAASB deciding that revisions to ISA 700 and related ISAs was necessary, and the completion of the project by the end of 2014 is seen a high priority by the IAASB.

In May 2011, a Consultation Paper entitled Enhancing the Value of Auditor Reporting: Exploring Options for Change was issued, followed by an Invitation to Comment Improving the Auditor’s Report (ITC) in June 2012.

The ITC proposed significant changes to the format and content of the auditor’s report, including much more emphasis on going concern matters, improved discussion of matters of significance to the audit and better clarification of the responsibilities of management and of the auditor. The ITC featured a revised auditor’s report illustrating the application of the IAASB’s suggested improvements. Candidates are reminded that an article entitled Reporting on audited financial statements – significant changes proposed, written by a member of the examining team dealing specifically with the IAASB’s Invitation to Comment, was published in 2013 (see 'Related links').

During 2013 the IAASB deliberated on the comments that had been received on the ITC. Generally the feedback on the ITC was positive, but some respondents were concerned about the length of the proposed audit report, and many felt that while the enhanced contents of the report were beneficial to users of financial statements some of the content would be superfluous in the audit report of a non-listed entity.

Based on the lengthy discussions arising from comments made on the ITC an Exposure Draft, Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs), was released in July 2013. The proposed changes will affect not just ISA 700, but a whole suite of standards that are affected and one new ISA is proposed. A summary of the main proposals is given below:

  • Proposed ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report – this will be a new standard to establish requirements and guidance for the auditor’s determination and communication of key audit matters. Key audit matters, which are selected from matters communicated with those charged with governance, are required to be communicated in auditor’s reports for audits of financial statements of listed entities.
  • Proposed ISA 260 (Revised), Communication with Those Charged with Governance – Amended in respect of the required auditor communications with those charged with governance, including a proposed communication about the significant risks identified by the auditor.
  • Proposed ISA 570 (Revised), Going Concern – Amended to establish auditor reporting requirements relating to going concern, and to illustrate this reporting within the auditor’s report in different circumstances.
  • Proposed ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report – Amended to clarify how the new required reporting elements of proposed ISA 700 (Revised) are affected when the auditor expresses a modified opinion, and to update the illustrative auditor’s reports accordingly.
  • Proposed ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report – Amended to clarify the relationship between Emphasis of Matter paragraphs, Other Matter paragraphs and the Key Audit Matters section of the auditor’s report.

At the time of writing this article (April 2014), the IAASB has not confirmed when the new and amended ISAs will be issued, or their effective date. Certainly, when the new ISA requirements become effective, they will bring some very significant changes in auditor reporting, changes which the IAASB has been developing for almost eight years.

Audit Quality

The objectives of this project are to establish in the public interest an international framework that describes audit quality holistically, including:

  • the influences of input, output and context factors
  • stakeholders' varying perspectives on audit quality, and
  • the importance of relationships between auditors and other key participants in the financial reporting supply chain (ie management, those charged with governance, investors and regulators), which influence audit quality

The IAASB intends to develop a new framework on audit quality, and began to elicit public comment on this through the issuance in 2010 of a document entitled Audit Quality – an IAASB Perspective which was intended to provoke debate on the matter of audit quality. The paper begins with the following message: ‘The turbulent events of the global financial crisis have highlighted the critical importance of credible, high-quality financial reporting. They have also demonstrated the importance of considering the role of audit quality in the broader context of quality financial reporting. Achieving quality financial reporting depends on the integrity of each of the links in the financial reporting supply chain. As one of those links, the external audit plays a major role in supporting the quality of financial reporting around the world, whether in the context of the capital markets, the public sector or the private or non-public sector. It is an important part of the regulatory and supervisory infrastructure, and thus an activity of significant public interest. Audit quality is therefore a matter of high importance for the IAASB.’

This extract from the paper highlights that audit quality is seen as a key issue by the IAASB, and illustrates the role that the auditor has to play in maintaining the credibility of financial reporting, a matter which was much debated in the press around the time of the global financial crisis. The paper also states that: ‘Maintaining the quality and robustness of the ISAs is, and will remain, a core objective of the IAASB.’

In February 2014, the IAASB issued A Framework For Audit Quality – Key Elements That Create An Environment For Audit Quality. The Framework is not an ISA and does not contain specific requirements relating to the performance of an audit. It does not replace the existing IAASB documents ISQC1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements and ISA 220, Quality Control for an Audit of Financial Statements.

The IAASB expects that the Framework will generate discussion, and positive actions to achieve a continuous improvement to audit quality. The IAASB believes that such a Framework is in the public interest as it will:

  • encourage national audit firms, international networks of audit firms, and professional accountancy organizations to reflect on how to improve audit quality and better communicate information about audit quality
  • raise the level of awareness and understanding among stakeholders of the important elements of audit quality
  • enable stakeholders to recognize those factors that may deserve priority attention to enhance audit quality. For example, the Framework could be used to inform those charged with governance about audit quality and encourage them to consider their roles in enhancing it
  • assist standard setting, both internationally and at a national level. For example, the IAASB will use the Framework when it revises ISQC1 and the ISAs. It may also assist the International Ethics Standards Board for Accountants (IESBA) and International Accounting Education Standards Board (IAESB) in considering improvements to their authoritative pronouncements
  • facilitate dialogue and closer working relationships between the IAASB and key stakeholders as well as among these key stakeholders themselves
  • stimulate academic research on the topic, and
  • assist students of auditing to more fully understand the fundamentals of the profession they are aspiring to join.

The Framework is therefore considered by the IAASB to be provide some supplementary discussion on matters relating to audit quality of interest not just to auditors but to anyone interested in the issue of audit quality.


Candidates should be aware of current issues relevant to the IAASB’s projects, especially where they relate to examinable documents. The project on auditor reporting is likely to result in significant changes in the structure and content of the audit report, and the project on audit quality should ultimately achieve increased confidence in the rigour of the audit process. Both of these IAASB initiatives should work to reduce the expectation gap and enhance the credibility of the auditor's opinion.

Written by a member of the Paper P7 examining team