Australia has adopted its version of an international accounting standard which requires audit reports to include detailed disclosure by auditors of “key audit matters” and how they were addressed in the audit.
For listed entities, this will be a mandatory requirement for reporting periods ending on or after 15 December 2016. Auditors may also consider making similar disclosures for financial reports of other entities.
Given this significant change to audit reports, entities should consider the impact of these changes when preparing their current financial reports. For example, the fact that a matter is not public information because it is properly withheld under continuous disclosure obligations of the entity will not preclude its disclosure as a key audit matter when the enhanced audit report standard is introduced.
These changes have been implemented for several years in other jurisdictions, including the UK. Early adopters of the measures in Australia include ASX Limited.
Reporting of key audit matters
Under the enhanced disclosure requirements auditors will include in the audit reports what they consider to be key audit matters.
Auditing standard ASA701 Communicating Key Audit Matters in the independent auditor’s report describes key audit matters as “those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial report for the current period. Key audit matters are selected from matters communicated with those charged with governance.”1
A section of the audit report must describe each key audit matter. It should include a reference to the related disclosure, if any, in the financial report and must address:
- why the matter was considered to be of most significance in the audit and therefore determined to be a key audit matter; and
- how the matter was addressed in the audit.2
There will be very limited exclusions from the requirement of the auditor to make such disclosures, such as where law or regulation precludes public disclosure.
ASA701 describes all other exceptions as “extremely rare circumstances”, having regard to whether adverse consequences to the entity or the public outweighs the public interest benefits of communicating the matter. For example, the fact that a matter is not public information because it is properly withheld under continuous disclosure obligations of the entity does not of itself preclude disclosure as a key audit matter. ASA701 highlights that communication by the auditor with management and those charged with governance helps to inform the auditor’s judgment, including whether it is appropriate to encourage management to make public disclosure in relation to the matter.3