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Audit Reports: A Genuine Change. Storyboard for. …clear thinking. By completing this module you will be able to: Describe the entities to which the revised ISA (UK and Ireland) 700 requirements apply
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Audit Reports: A Genuine Change Storyboard for
By completing this module you will be able to: Describe the entities to which the revised ISA (UK and Ireland) 700 requirements apply Explain the types of additional reporting auditors are likely to make in their reports on the financial statements of these entities List the likely difficulties associated with the new auditor reporting requirements Describe how developments in the UK interact with developments internationally At the end, you can visit useful Internet sites on a “Web Ride” Lecturer: Katharine Bagshaw Learning time: approx. 15 minutes How to use this learning module? - Click on "Help" in the Table of Contents (TOC) Audit reports: A genuine change Photo of author
Investors, standard-setters, regulators and governments are all seeking improvements to audits There have been many recent proposals e.g. mandatory auditor rotation, the prohibition of non-audit services and changes to auditor reporting The UK’s Financial Reporting Council is the first body to finalise proposals on auditor reporting Other bodies are likely to follow suit internationally Who is asking for different audit reports? Graphic: [an investment analyst]
Revised ISA (UK and Ireland)700 applies to all audits for accounting periods beginning on or after 1/10/12 But most changes affect auditors of listed entities – i.e. entities required, or choosing voluntarily, to report on how they have applied the UK Corporate Governance Code, or explain why they have not This includes all companies, wherever they are incorporated, with a premium UK listing of equity shares, and Irish incorporated companies with a primary or secondary listing of equity shares on the Irish Stock Exchange Potential problems for some companies that voluntarily report partial compliance with the Code Which companies are affected? Graphic: [London stock exchange]
Auditors of entities required to, or voluntarily reporting, compliance with the UK Corporate Governance Code must: describe the risks that had the greatest effect on the overall audit strategy, the allocation of audit resources and the engagement team’s focus explain how they applied materiality in planning and performing the audit provide an overview of the scope of the audit, showing how it addressed risk and materiality considerations The new requirements (1 of 4) Graphic: [a set of hurdles]
Auditors of these entities are now also required to make certain statements by exception where: there are material inconsistencies between the audited financial statements and the other information in the annual report information in the annual report is: - apparently materially incorrectbased on the auditors’ knowledge acquired in the course of the audit - materially inconsistent with the auditors’ knowledge acquired in the course of the audit - otherwise misleading The new requirements (2 of 4) Graphic: [a megaphone]
Material inconsistencies include situations in which: mandatory statements that annual reports are fair, balanced and understandable are inconsistent with the auditors’ knowledge acquired in the course of the audit descriptions of audit committee work in the annual report do not appropriately address matters communicated by auditors to audit committees If information communicated by auditors to audit committees is missing from annual reports, auditors are required to provide it in the audit report The new requirements (3 of 4) Graphic: [a jigsaw missing a piece]
Changesare based on Oct 2012 changes to the UK Corporate Governance Code affecting the responsibilities of boards, audit committees and auditors: The new requirements (4 of 4)
Will the same issues be reported year after year? Will too many issues be reported ‘just in case’? Significant risks in highly subjective and sensitive areas such as the valuation of complex financial instruments, may not necessarily have as much impact on the audit as routine areas, such as inventory valuation Risks having the greatest impact on the audit Graphic: [road sign: ! hazard ]
...an explanation of how the auditor applied the concept of materiality in planning and performing the audit As a minimum, materiality for the financial statements as a whole must be reported Application material and examples disclose materiality and performance materiality for current and prior years, at group and component levels, and the relationship between the two Materiality Graphic: [a haystack]
Explanations of risks, materiality and audit scope must be described: to enable users to understand their significance in the context of the audit as a whole, and not as discrete opinions on separate elements – i.e. no piecemeal opinions in a manner relevant to the circumstances of the audited entity, not generalised points expressed in standardised language – i.e. no boilerplate in a manner that complements the description of relevant issues as described in the audit committee report - i.e. no duplicated or original reporting The quality of reporting Graphic: [a clear crystal]
No! European Commission - proposals for the audit of public interest entities include enhanced auditor reporting IAASB – Jul 2013 ED on auditor reporting proposes reporting on ‘Key Audit Matters’ for listed entities and on going concern issues for all entities PCAOB – Aug 2013 ED on auditor reporting proposes reporting on ‘Critical Audit Matters’ Are we alone in making these changes? Graphic: [EU flag]
The notes to this module detail many of the examples that have been given. They cover matters such as: revenue recognition the impairment of fixed assets and goodwill accounting for legal claims the recognition and measurement of deferred tax assets the valuation of structured financial instruments The audit report on Vodafone’s 2013 consolidated financial statements was the first report prepared (early) under the new regime – page 88 www.vodafone.com/content/annualreport/annual_report13/downloads/vodafone_annual_report_2013.pdf Are there any example reports? Graphic: [Vodafone logo]
Many ‘significant’ risks for audit purposes will not necessarily warrant reporting, but deciding which ones to exclude will be hard As with any change, the first few years will be the hardest More partner and senior manager time likely to be needed and more engagement with the client and the audit committee There will be additional costs for auditors and clients and lawyers are likely to be involved Will the changes make any difference to what firms do? Graphic: [bags of money]
In the first few years, there will be added value - matters newly reported by auditors will be read with interest New-style audit reports may be double the size of older reports - Vodafone’s 31 Mar 2013 audit report has more than double the number of words than the prior year report Auditors will try to ensure that this additional material continues to add value year on year Time will tell if the changes made are what the investors in whose name they have been made actually wanted Will those who called for change be satisfied? Graphic: [a large pile of papers ]
The key things to remember from this module are: ISA 700 applies to all entities, but the new para 19A requirements only apply to entities applying the UK Corporate Governance Code Some entities that apply the Code voluntarily may need to consider whether and how they do so in future The objective of the new requirements is to enhance the communicative value of audit reports to investors Similar changes are being made internationally Summary Graphic: [standard summary graphic]
Please select the correct answer(s) and then click on “Submit” Which of the following statements are true? The main objectives of the new ISA (UK and Ireland) auditor reporting requirements are to: Provide additional information about the audited entity where directors fail to provide it in the annual report Enhance the communicative value of audit reports by reducing their length Enhance the communicative value of audit reports by eliminating the need for certain types of qualified audit report by means of additional disclosures concerning the risks having the greatest impact on the audit Enhance the communicative value of audit reports to investors Question 1
Please select the correct answer(s) and then click on “Submit” Which of the following statements are true? The new ISA (UK and Ireland) 700 reporting requirements include a requirement for auditors of: Some entities to report on the risks having the greatest impact on audit strategy, resources and effort Some entities to report key audit matters, materiality and audit scope Some entities to report on critical audit matters, materiality and audit scope All entities to report on significant audit matters, materiality and audit scope Question 2
Please select the correct answer(s) and then click on “Submit” To which entities do the new requirements ISA (UK and Ireland) 700 auditor reporting requirements apply in respect of: - risks having the greatest impact on audit strategy, resources and effort; - materiality; - audit scope? The audit of all UK entities The audit of all UK listed entities UK companies with a Premium listing of equity shares and certain Irish companies only Entities required, or choosing voluntarily, to report on how they have applied the UK Corporate Governance Code, or explaining why they have not Question 3
You have finished this module and acquired a basic understanding of the issues associated with the recent important changes to audit reports If you answered all of the questions in the Quiz correctly, you can print out your personal certificate by clicking on the link Thank you for your attention! Finish Graphic: [standard finish graphic]
