The new auditor reporting standard

Stakeholder consultation influenced the Canadian auditor reporting standard: here’s how.

If you have anything to do with the world of auditing, you’ve likely been watching the development of the new auditor reporting standard for some time.

The standard is international by birth via the International Auditing and Assurance Standards Board (IAASB) and approved by the IAASB in 2015. As with all International Standards on Auditing (ISA), the standard went through an extensive process before it was approved as a Canadian Auditing Standard (CAS) by Canada’s Auditing and Assurance Standards Board (AASB) in April 2017.

BACKGROUND

This auditor reporting standard has wide implications for practitioners in Canada, as well as more than 110 other countries that also adopt ISA. It represents a step change in the information content of the auditor’s report by better describing what an audit is and what an auditor does. It also includes the ability to provide further transparency in the reporting of key audit matters.

“It adds a level of transparency that audit report users aren’t used to,” says Darrell Jensen, AASB chair and managing partner of risk management for EY LLP. “Users of the auditor report will now have additional insights into the role of the auditor, management and activities related to other information. We believe that the public will benefit from this level of transparency.”

Fred Pries, AASB vice-chair and an associate professor in the department of management at the University of Guelph in Ontario, says, “Canadian companies increasingly operate in an international environment. It’s important that our audit reports are consistent with other countries to maintain capital market efficiency.”

CHALLENGES LIKE NEVER BEFORE

Despite the benefits Canadian stakeholders are expected to gain, the road to adoption was not without its bumps.

Canada has been fortunate when adopting ISA as CAS for the most part, with the standards meeting the requirements of our environment. But in the case of auditor reporting, specific aspects of the Canadian environment needed to be taken into account. Canadian capital markets are highly integrated with the US and many of Canada’s largest public companies are listed in both countries.

In addition, there are many small public companies that will be affected. “Regulators raised their hand to note the potential burden of implementing the standard on smaller entities,” says Pries. “We wanted to strike the right  balance between adding incremental effort to the financial reporting process while avoiding what could perhaps become boilerplate language in describing key audit matters in the auditor’s report.” The AASB relies on feedback from stakeholders for high-quality standards, making quality consultation critical. “It was very clear to me that as the project progressed there was an evolution in our stakeholders’ understanding of this standard’s implications,” says Jensen. “So we had to stay close to our stakeholders during the whole process.”

“There were not only more but also deeper discussions on this project,” says Pries. “We opened the consultation process up beyond just the technical auditor because of the many hands that touch the auditor’s reports — those who use them, those who create them and those who regulate certain parts of the financial reporting equation.” With the AASB’s 2016-2021 strategic plan focused on greater consultation with stakeholders, the work that went into the auditor reporting standard over the years was a factor in setting this goal.

By refining and broadening its consultation process — both for this project and others in the future — the AASB can ensure its stakeholders have more opportunities to share ideas early in a standard’s development process.

A MADE-FOR-CANADA SOLUTION

In April 2017, the AASB approved the auditor reporting standards. In the end, says Jensen, we found an appropriate middle ground among our stakeholders by initially making key audit matter reporting optional unless required by law or regulation. Implementation of the key audit matter reporting component of the standards will evolve in the future in response to implementation of similar requirements in the US, and as a result of research into the impact of key audit matter reporting on smaller public companies.

IMPLEMENTATION

Quality implementation of the new standard, which comes into effect in 2018, is top of mind for the AASB. To help with this, the board provided an early draft of the standard to the Chartered Professional Accountants’ provincial bodies to support development of educational material despite ongoing final deliberations. And as with anything new, it takes time for things to fall into place.

“It’s incredibly important to keep an open and transparent dialogue in the first year of implementation,” says Jensen. “Auditors, audit committees and management will need to work together closely on initial implementation. While this will be easier with key audit matter reporting being optional, there will still be work to do related to certain going-concern close-call matters and determining which information, such as annual reports, will be available before an auditor issues a report.”

In addition, the AASB is working closely with CPA Canada to develop implementation guidance. Jensen says that the years succeeding initial implementation will be “much easier for everyone.”