WHAT HAS CHANGED ABOUT THE AUDITORS’ REPORT?

Over the years, companies have grown in leaps and bounds and so also have the complexities of these companies. Financial reporting is also becoming more complex with more room for estimates and management judgements. To effectively assure users and shareholders of the truth and fairness of these financial statements, the International Audit and Assurance Standards Board (IAASB) has come up with changes to make the auditors’ report a useful guide for shareholders. 

Before now, the auditors’ page carries less weight beyond the opinion paragraph. It fails to reveal the underlying challenges of the company identified during the audit exercise. With increasing company failures and near-failures, the auditors’ report has been revamped to show more than just the opinion paragraph.

So what are the changes in the auditors’ report? What do you need to know about the new auditors’ report? Well, quite a lot.

• The format has been changed – the paragraphs have been rearranged

• New paragraphs have been added.

WHAT ARE THE 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 requires the Opinion paragraph and the Basis of Opinion paragraph to be the first two paragraphs. The remaining paragraphs can be arranged as desired. The new auditors’ report will come into effect for financial statement periods ending on or after December 15, 2016. 

In subsequent posts, I will dive into the changes in more details. 

Do you enjoy this article? Kindly share and comment. Do not for get to send in your questions, views, suggestions and corrections.

Written by Abayomi Samuel