Enhancements in auditors’ reporting
This article was first published in the Salient Point Volume 4, 2016. Re-published with permission from Baker Tilly TFW.
Written by Susan Foong
In the past, the auditor’s opinion on financial statements has been either that the financial statements give a true and fair view of financial position and financial performance with regard to applicable accounting standards, or not.
This is no longer the case. New auditor reporting standards will kick in soon – effective for audits of financial statements for periods ending on or after 15 December 2016 – that require auditors to provide greater insights into the audits performed.
For listed companies, auditors will state Key Audit Matters. These might include significant risk areas, major transactions during the year that required extensive auditing efforts, or issues involving key management judgements and accounting estimates with high estimation uncertainty.
Auditor reports for all entities – including public and private companies, businesses and charities – will also see changes such as the auditor’s opinion being presented first, followed by the Basis for Opinion. The auditor report must now also explicitly state the auditor’s independence of the entity and that relevant ethical requirements have been met.
Going Concern and Other Information
Other enhancements that will affect all types of entities are auditor reporting on “Going Concern” and “Other Information”.
Going concern will be given more visibility in the auditor’s report and will include descriptions of the management and auditor’s responsibilities in relation to going concern in the report. If there is material uncertainty related to going concern, it will be highlighted separately.
The consistently revised auditing standard on going concern (SSA 570) requires auditors to evaluate whether the financial statements provide adequate disclosures, where events or issues that may cast significant doubt on the company’s ability to continue as a going concern have been identified, even if the auditor concludes that no material uncertainty exists.
The auditor’s report will also feature a new separate section titled “Other Information” (OI) as stipulated in the revised SSA 720 The Auditor’s responsibilities relating to Other Information.
OI refers to financial or non-financial information (other than financial statements and the auditor’s report thereon), included in an entity’s annual report. As annual reports increasingly provide significant information and disclosures, the SSA 720R was issued to specify appropriate responsibilities of the auditor: The auditor will consider whether there is a material inconsistency between the OI and the financial statements as well as the auditor’s knowledge obtained from the audit.
This will be included in a separate section in the auditor’s report under the heading “Other Information”.
While the SSA 720R relates specifically to auditor’s responsibilities relating to OI, more communication is expected between the auditor, management and those charged with governance in order to meet the requirements. It may also result in changes in practices with respect to the preparation and finalisation of the OI.
We would strongly advise management to plan early to ensure OI is finalised and provided to auditors for them to carry out the procedures required in relation to OI by the date of the auditor’s report. Sufficient time should also be factored in to enable the management to discuss and correct any inconsistencies identified by the auditor.
Listed companies that are unable to provide all of the OI to the auditors in time may find that their auditor’s reports will identify and report the parts of OI which will only be obtained by the auditors after the date of the auditor’s report.
OI obtained after the date of the auditor’s report would still be required to be read and considered by the auditor. If there are uncorrected material misstatements identified, steps will need to be taken by management to correct the OI and inform stakeholders of the revision. If necessary corrections are not made, the auditor would need to consider steps to bring the material misstatements to the attention of the users of the financial statements.
Auditor’s report on OI – are Charities affected?
Charities are similarly impacted by the new auditor’s OI reporting requirements.
As with other entities, the auditor’s report for charities will also have a separate section titled “Other Information” stipulated in the revised SSA 720. Charities’ management should relook their timeline and schedules for preparation and issuance of the charity’s annual report and hold early discussions with their auditors to:
- Identify which documents comprise the charity’s annual report, thus forming the OI.
- Agree on when the final version of the annual report will be made available to the auditor to ensure sufficient time for discussion and potential correction of material inconsistencies identified by auditor.
For OI not ready by the date of the auditor’s report, charities should work with auditors to ensure that such OI will be made available to the auditor for them to complete their procedures before issuance of the OI.
This is to prevent situations where management of the charity needs to correct the OI and inform the charity’s stakeholders of the revision after the annual report has been issued.