Dramatic changes to the auditor’s report will affect companies large and small (but is it worth it?)

Proposals by the International Auditing and Assurance Standards Board (IAASB) for radical changes to the auditor’s report are designed to increase the information value of the report.

Proposals by the International Auditing and Assurance Standards Board (IAASB) for radical changes to the auditor’s report are designed to increase the information value of the report. But are the benefits to users worth the extra cost?

The auditor’s report is the primary means the auditor uses to communicate with an entity’s stakeholders. The IAASB’s exposure draft (ED) would move the auditor’s report away from a standardized one-page report to one that is longer and more entity specific. The ED proposes to require auditors to shine the light on the audit to management, the audit committee and external users by requiring the auditor’s report to include, among other things:

  • discussion of those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of a listed entity;
  • statements as to the appropriateness of management’s use of the going concern basis of accounting in the preparation of the entity’s financial statements, and whether there are material uncertainties that may cast significant doubt on the entity’s ability to continue as a going concern;
  • a statement describing the auditor’s responsibilities with respect to other information included in a document that contains the audited financial statements, or accompanies the audited financial statements and the auditor’s report thereon;
  • disclosure of the engagement partner name for audits of financial statements of listed entities; and
  • enhancements to the description of the responsibilities of management, the auditor and those charged with governance.
The IAASB ED has been two years in the making. It was preceded by a consultation paper in 2011 and an invitation to comment in 2012. Throughout, the Auditing and Assurance Standards Board (AASB) consulted extensively with Canadian stakeholders. So far, Canadian views (and the AASB’s) have been mixed to say the least.

Canadians have only recently been getting used to the auditor’s report that came into force in 2010, and many are not ready for further changes. Some are concerned about the added cost for auditors, management and the audit committee in terms of additional time required to discuss and reach agreement on what goes into the auditor’s report. Others support the auditor providing more transparency about what has been discussed with the auditor committee, but are concerned that auditors will not provide useful information, for example because of liability concerns, resulting in a longer but more boilerplate report.

The AASB shares many of these concerns, particularly with respect to including statements about going concern in the auditor’s report, which the AASB believes run the risk of being misinterpreted, thereby increasing the expectation gap rather than reducing it.

Now that the detailed proposals from the IAASB are available, Canadians need to take a closer look. What is on the table is significant. This is because, up to now, the AASB has adopted IAASB auditing standards as Canadianstandards with only minor amendments. But are there particular circumstances in Canada that necessitate a different approach? Yes, Canada has many small listed entities that have limited resources and are more sensitive to increased costs, but can the IAASB’s proposals work for them too?

With Europe, the United Kingdom and the United States all likely to move to this new type of reporting, what are the implications if Canada does not go there too? How will other countries perceive the quality of auditing in Canada? Will it bring into question the AASB’s whole approach to adoption of international standards? Lofty questions for sure.

Clearly, the AASB will need to balance concerns raised about the IAASB proposals with the potential consequences to its adoption approach if it does not adopt the auditor reporting proposals. The AASB will be consulting on the IAASB’s ED in the summer and fall and developing a response to the IAASB by the comment deadline of late November.

Keep the conversation going….learn about the IAASB ED and have your say. Let me know what you think about the IAASB’s proposals and the importance of Canada’s auditor reports being consistent with global standards.

Post a comment below; or 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

Highlights

Gain practical organizational insights and learn from industry experts at this annual event for not-for-profit financial leaders.