THE NEW AUDITOR'S REPORT – THE REVISED ISA 700

Over the years, there have been concerns about the auditor’s report being pedestrian and not revealing much about the audit of an entity. The auditor’s report is more or less a ‘copy and paste’ report lacking any useful information to the users except for the opinion paragraph. Even the opinion paragraph is predictable these days. Hardly will you see a qualified opinion anywhere again, which makes you wonder what then happened to the big corporations that collapsed. With the emerging complexities and recent failures in the corporate world, users of financial statements are demanding more transparency and insight into the audit process. 

In a bid to address these issues, and to enhance the informative value of an auditor’s report, the International Auditing & Assurance Standard Board (IAASB) has developed new and revised

International Standards on Auditing (ISA). The IAASB believes these standards will further improve public confidence in the audit process and the financial statements churned out.

The new and revised standards include:

• ISA 700 (Revised) – Forming an opinion and reporting on financial statements.

• ISA 701 (New) – Communicating key audit matters in the independent auditor’s report

• ISA 705 (Revised) – Modifications to the opinion in the independent auditor’s report

• ISA 706 (Revised) – Emphasis of matters paragraphs and other matters paragraphs in the independent auditor’s report

• ISA 720 (Revised) – The auditor’s responsibilities relating to other information

• ISA 570 (Revised) – Going concern

• ISA 260 (Revised) – Communication with the charged with governance

WHAT ARE THE CHANGES IN THE AUDITOR’S REPORT?

The revision of the ISA 700 has changed the structure and content of the auditor’s report from what we are used to. The practice of ‘copy and paste’ for auditor’s report can no longer be carried on as the auditor’s report is now to be drafted addressing peculiar issues of an audit engagement. Following these new and revised standards, the auditor’s report on financial statements for periods ending on or after December 15, 2016 shall have the following notable changes:

• Opinion paragraph: The first paragraph of the auditor’s report shall now be the opinion paragraph. It will include the auditor’s opinion, and shall have the heading “Opinion.” The Opinion paragraph shall also: 

a) Identify the entity whose financial statements have been audited.

b) State that the financial statements have been audited.

c) Identify the title of each statement comprising the financial statements.

d) Refer to the notes, including the summary of significant accounting policies; and

e) Specify the date or period covered by each statement comprising the financial statements.

• Basis of Opinion paragraph: The next paragraph immediately after the opinion paragraph shall be the basis of opinion paragraph. Among other things, the basis of opinion paragraph will include:

a) The basis of the audit opinion (stating that the audit has been carried out in compliance with the International Standards on Auditing), 

b) Affirmative statements about the auditor’s independence and fulfilment of relevant ethical responsibilities.

c) A statement about the sufficiency and appropriateness of the audit evidence obtained.

• Going Concern paragraph: Where applicable, the auditor shall report on the going concern in accordance with ISA 570 (Revised). The standard requires enhanced auditor reporting when a material uncertainty related to a going concern exists.

• Key Audit Matters paragraph (Required for only Listed Entities): This is a new paragraph added to the auditor’s report as a result of the new ISA 701. The auditor is required to communicate key audit matters in the auditor’s report in accordance with ISA 701. Key Audit Matter (KAM) is defined in the ISA 701 as “those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. KAM are selected from matters communicated with those charged with governance”.

• Responsibilities for the Financial Statement paragraph: Under this section, the auditor will state (a) the responsibilities of management for the financial statements and (b) the auditor’s responsibilities for the audit of the financial statements as two sub-paragraphs.

• Other information paragraph: The auditor shall report on other information applicable for entities issuing annual reports, considering whether there is a material inconsistency between other information and the financial statements, and between other information and the auditor’s knowledge obtained in the audit. Other information refers to financial or non-financial information (other than financial statements and the auditor’ report thereon) included in an entity’s annual report. Examples of other information include the chairman’s statement, the director’s report etc.

• Name of the engagement partner (Required for Listed Companies): The name of the engagement partner must be disclosed in an additional sentence rather than the sign off. 

• Report on other legal and regulatory requirements: There should be another paragraph for other legal and regulatory requirements in the auditor’s report.

The revised ISA 700 clearly states that the first two paragraphs shall be the opinion paragraph and the basis of opinion paragraph. However, for the remainder of the report, the ISA 700 is not prescriptive about the sequence of the remaining paragraphs. The use of headings is however required.

These are the notable changes to the auditor’s report. These changes will come into effect for financial statement periods ending on or after December 15, 2016. 

Be on the lookout for more articles on this topic and the new and revised ISAs. 

Written by Abayomi Samuel