The single most important document released by auditors is the auditor’s report, which appears in the audited annual financial statements.
The so-called new and revised auditor reporting standards are effective for audits of financial statements for periods ending on or after 15 December 2016; in essence, 31 December 2016 financial year-ends. Although the audit opinion as such does not change, the auditor’s report has been enhanced to improve its communicative value and to provide more entity-specific and audit-specific information about the audit that has been performed.
The main changes
- The revised audit report will begin with the audit opinion – currently it appears well down in the audit report. This will immediately be followed by a section wherein the auditor describes the basis for opinion.
- The auditor is required to make an affirmative statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit and that the auditor has fulfilled his/her other ethical responsibilities in accordance with these requirements.
- Introduced into the audit report is a section on key audit matters (KAM). The auditor will communicate those matters that, in the auditor’s professional judgment, were the most significant in the audit of the financial statements of the current period. KAM are mandatory for listed entities and in those instances where required by law or regulation. For all other audits it is voluntary.
- Enhanced reporting on going concern:
– The auditor’s report will provide a description of management’s responsibilities in terms of assessing the entity’s ability to continue as a going concern and the auditor’s responsibilities pertaining to management’s use of the going concern basis of accounting.
– If the auditor concludes that a material uncertainty exists, this is to be reported in a separate section of the auditor’s report called “Material Uncertainty Related to Going Concern”.
- Enhanced description of the auditor’s responsibilities in the audit of financial statements and key features of the audit.
- Improved communication between the auditor and those charged with governance, as well as providing a basis for investors to further engage with the governance custodians in the entity (e.g. the board of directors and the audit committee).
- Increased focus by management and those charged with governance on disclosures in the financial statements.
- Enhanced focus by the auditor on items to be reported on. This should sharpen the “professional scepticism” of the auditor.
- More transparency should flow from this as the informational value of the audited financial statements should improve.
It is worth noting that these new requirements are not intended to change the scope of the audit.
Your relationship with your auditor will probably be more robust but it will enhance the quality of the audit and your understanding of the audit process.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.