The Business Times

Changes 'to add colour and insight to audit reports'

ISCA event discusses today how proposals will apply in S'pore context

Published Tue, Oct 22, 2013 · 10:00 PM
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[SINGAPORE] Proposed changes in auditor reporting are expected to dramatically change the way external auditors reflect their opinions on companies' financial statements.

Among the key proposals are the provision of more information on how audits are performed - a new section will highlight the key audit matters that came up during the audit - and the audit opinion will be placed right at the beginning of the audit report to increase its prominence.

The aim is to provide greater transparency on what goes into an audit and to increase the usefulness of the audit report to users, building on the standard one-page document most audit reports are these days.

The Exposure Draft (ED), Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing, was released earlier this year by the International Auditing and Assurance Standards Board (IAASB); comments are being invited from the public until Nov 22.

The ED is the result of IAASB-organised consultations, which were based on research on user perceptions of auditor reports; the ED also responds to constituent feedback in the light of the global financial crisis and European Commission proposals on audit reform.

Fua Qiu Lin, the manager, and Kang Wai Geat, the deputy head of Technical Standards Development and Advisory Department at the Institute of Singapore Chartered Accountants (ISCA), lauded the proposed changes as "an important development in global auditor communication" in a jointly written article in the latest issue of ISCA's publication, IS Chartered Accountant.

They said: "Firstly, the new disclosures would no doubt add more colour and insight to the current binary report, shedding more light on critical entity-specific audit matters which would be of interest to users. Matters which are currently communicated only between auditors and those charged with governance are now brought to the table and presented in a public report.

"Secondly, the requirements for more disclosures result in renewed focus of the auditor on the key matters to be reported, which may help to increase professional scepticism and thereby improve audit quality. Providing greater transparency about the audit also improves the perception and visibility of audit quality, perhaps 'repairing' the damage done to the audit profession in the light of corporate scandals, and increasing the confidence that users have in the audit and in the financial statements."

Having a new "key audit matters" section is one of the more significant proposals in the ED. The IAASB had originally asked for an "auditor commentary" to highlight matters "likely to be most important to users' understanding of the audited financial statements or the audit". But feedback indicated that such a commentary would be too subjective as the onus would be on the auditor to determine the issues to be highlighted.

In response, the ED suggests that key audit matters be determined through the following criteria:

This section must be included in the auditor's report for listed companies; for non-listed companies, its inclusion is up to the auditor unless required by law.

Another key proposal is a new section which will contain the auditor's conclusion on the appropriateness of management's use of the going concern basis of accounting - a move that will involve management to a greater extent on this issue. Currently, management is not required to state the company's going concern unless material uncertainties have been identified.

Ms Fua and Mr Kang wrote: "These changes may also bring about an improvement in the quality of financial reporting. Key audit matters are required to make reference to the corresponding management's disclosure in the financial statements, so that users understand the management's and the auditor's perspectives on those matters raised. This would no doubt result in greater focus on high-quality disclosures as management would now be more mindful of their assumptions used, figures presented and related disclosures.

"The enhanced auditor's report will also lead to a more robust dialogue between auditors, management and those charged with governance, particularly on the key audit matters that will be communicated."

How these proposals will apply in the Singapore context will be discussed by the profession and other stakeholders today at an event organised by ISCA.

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