Is the proposed new auditor’s report suitable for all entities?

Under current reporting standards all entities receive essentially the same standardized auditor’s report. But that is likely going to change under International Auditing and Assurance Standards Board (IAASB) proposals.

Under current reporting standards all entities receive essentially the same standardized auditor’s report. But that is likely going to change under International Auditing and Assurance Standards Board (IAASB) proposals. The question is: does one size fit all?

A key feature of the IAASB’s Invitation to Comment (ITC), Improving the Auditor’s Report, is an auditor’s report containing more information about the financial statements and audit of an entity. A longer report may enhance audit quality but it will also potentially increase costs for both auditors and preparers. So a key question the IAASB is asking is whether its suggested improvements are appropriate for entities of all sizes and types and in both the public and private sectors, including small- and medium-sized entities (SMEs).

Canadian standard setters and policymakers will need to answer this same question as they consider whether to adopt future international reporting standards. They may need to consider the following:

  • Smaller public companies – A distinctive feature of the Canadian public issuer market is the large proportion of small public companies. There are approximately 2,000 public issuers with market capitalization and total assets under $10 million. Canadian securities regulators have already recognized that some of their requirements should not apply to certain public companies, for example relating to corporate governance for entities listed on the TSX Venture Exchange.
  • Cross-listed companies – There are approximately 350 Canadian companies that are registered and report with the US Securities and Exchange Commission (SEC). Many auditors of these entities conduct their audits in accordance with both Canadian generally accepted auditing standards and US Public Company Accounting Oversight Board auditing standards. The auditor is currently able to issue a single report that refers to both sets of standards. Potential significant divergence of the reports under the two sets of auditing standards could be problematic for auditors and confusing to stakeholders.
  • Not-for-profit organizations (NFPOs) – Many NFPOs have an audit requirement under legislation and may have spending restrictions imposed by their members or contributors. Often smaller NFPOs are not able to easily pass on additional costs to others.
  • Small and medium sized private enterprises –They generally do not have a legal requirement to have their financial statements audited. However, many are audited as a result of a contractual requirement, for example with a lender or significant minority shareholder. Often, these parties, including owner-managers, have access to information other than the financial statements and may not need additional information in the auditor’s report.
  • Public sector entities – Some auditors of government entities already provide more information in their auditor’s reports than is provided by auditors in the private sector, so the IAASB proposals may not cause them great concern. But this may not be the case for all public sector entities such as some government NFPOs.

Given the broad spectrum of sizes and types of entities, it is not clear that the expected benefits of a longer report will outweigh the expected costs in every case. And if they don’t, what should the auditor’s report look like in these cases?

Keep the conversation going…this topic has been generating a lot of offline discussion lately; isn’t it time to broaden the discussion?  Email me directly.

Eric

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada

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