On January 15, 2015, the International Auditing and Assurance Standards Board (IAASB) announced that it had released revised standards on the content of the auditor’s report. The IAASB’s standards apply to financial statement audits performed under the International Standards on Auditing (ISAs) – which govern most audits performed outside the United States. While the IAASB’s new reporting standards do not affect audits of financial statements included in SEC filings, the PCAOB, which writes the standards for those audits, has a similar initiative underway.
In its overview of the new standards, the IAASB states that its objective is to increase confidence in the audit and the financial statements. The IAASB believes that its changes to auditor reporting will –
Enhance communications between investors and the auditor and between the auditor and those charged with governance.
Increase attention by management and those charged with governance to the disclosures in the financial statements to which reference is made in the auditor’s report.
Renew the auditor’s focus on the matters be communicated in the auditor’s report, “which could result indirectly in an increase in professional skepticism.”
Under the new IAASB standards, auditors of listed companies will be required to include in their opinions a section discussing key audit matters (KAMs). KAMs are those matters that, in the auditor’s judgment, were of most significance in the audit of the financial statements. The auditor’s description of a KAM must include discussion of why the matter was considered to be one of the most significant in the audit; how the matter was addressed in the audit; and reference to the related financial statement disclosures. Audit reports for listed companies will also be required to disclose the name of the engagement partner (with an exemption for situations in which disclosure would put the engagement partner “in harm’s way”).
In addition to the listed company requirements, all audit reports prepared under the ISAs must include –
Enhanced auditor reporting on going concern, including a description of the respective responsibilities of management and the auditor for the going concern determination, and a separate section, under the heading “Material Uncertainty Related to Going Concern,” when a material uncertainty exists regarding going concern.
An affirmative statement about the auditor’s independence and fulfillment of relevant ethical responsibilities.
An enhanced description of the auditor’s responsibilities and the key features of an audit.
The new IAASB auditor reporting standards will take effect for audits of financial statements for periods ending on or after December 15, 2016.
Comment: As discussed in the September 2013 Update, the PCAOB has also proposed changes to the auditor’s report, including a requirement that the report discuss "critical audit matters" (CAMs). CAMs would be those matters addressed during the audit that, in the auditor’s judgment, involved the most difficult, subjective, or complex judgments or posed the most difficulty in obtaining sufficient appropriate audit evidence or in forming an opinion on the financial statements. The PCAOB has indicated that it intends to revise and republish its proposals during 2015. Since the new IAASB requirements and the PCAOB’s proposals are conceptually similar, the PCAOB may seek to conform its requirements to the ISAs when it re-formulates its proposal. In any event, it appears virtually certain that the days of the boilerplate, standardized audit opinion are drawing to a close, both in the U.S. and abroad.