Auditing and Assurance bulletin highlights disclosures in the audit of financial statements

This new bulletin provides guidance for practitioners on addressing financial statement disclosures more effectively. This will be critical as you prepare for the standards changes taking place in 2017.

Addressing disclosures is an integral part of the audit. A new Auditing and Assurance Bulletin discusses recent revisions to standards to enhance audit quality in this area.

Reflecting amendments to international standards now adopted in Canada and tentatively effective in 2017, the bulletin, Addressing Disclosures in the Audit of Financial Statements, is intended to promote good practice in the auditing of financial statement disclosures. It highlights that in many areas of the audit, the auditor treats disclosures in the same way as classes of transactions and account balances in the application of requirements. This means an auditor must pay attention to disclosures throughout the audit.

Addressing disclosures has become more complex as disclosures themselves have evolved to provide more qualitative information and as business models and entity transactions have become more complex.

The bulletin suggests that to enhance audit quality in the disclosures area, the auditor should:

  • give appropriate attention to disclosures early in the audit process
  • appropriately take into account how management prepares the information in disclosures (which means recognizing that information in disclosures may come from within or outside the general and subsidiary ledgers)
  • recognize the unique challenges of disclosures when identifying and assessing the risks of material misstatements and when evaluating misstatements
  • consider disclosures in light of the auditor’s knowledge of the entity and audit evidence obtained during the audit

Acknowledging the above, in my view, the two big challenges in addressing disclosures are:

  • how much audit evidence about disclosures is necessary to support the auditor’s opinion
  • how to determine materiality of disclosures

Audit evidence for disclosures

The bulletin indicates that various CAS establish requirements and provide guidance about obtaining audit evidence for the wide variety of disclosures in financial statements, for example, for items such as litigation and claims, accounting estimates and related-party transactions. The bulletin also provides guidance on evaluating misstatements in disclosures. Misstatements in disclosures can be as important to users as misstatements of line items in the financial statements. In fact, users often place heavy emphasis on particular disclosures.

Materiality of disclosures

There is limited guidance on materiality in the bulletin. One of the likely reasons for this is that the bulletin was issued prior to the finalization of the International Accounting Standards Board (IASB)’s Practice Statement: Application of Materiality to Financial Statements, which provides guidance to assist management in applying the concept of materiality to financial statements prepared in accordance with IFRS, including presentation and disclosure. The final practice statement will be useful to auditors in applying materiality to disclosures.

Keep the conversation going

The bulletin will be important reading for auditors performing audits in 2016 and preparing for the changes taking place in 2017. Let me know how useful it is in dealing with this topic.

Post a comment below or email me directly.

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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