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New audit reports bring greater transparency for users
New international audit report requirements now apply to financial statements for periods ended on or after 31 December 2016 and bring significant changes in format and content to make them more relevant to users.
Various research papers and market surveys have shown that the users of audit reports increasingly expect more informative and less general reports with more information about the company and audit process.
In response to this, a number of changes have been made to International Standards on Auditing (ISAs) relating to the auditor's report, aimed at providing greater transparency of information on the financial health of companies. The changes apply to any company that has audited financial statements.
These changes are now being implemented in the accounting standards of many countries around the world. For example, in Brazil the accounting standard dealing with the new auditor's report is almost an exact transcription of the International Standard. The European Union has introduced similar requirements from 2017.
The standards have been applied by some countries for some time, for example in the UK since 2013. However, it should be noted that UK standards include specific matters that are not included in the International Standards on Auditing in order to comply with UK financial market regulations, such as a requirement to include the materiality used in the auditor's report.
It is also important to note that although the standard for drafting the auditor's opinion has been modified and the report format reorganised, there is no change in the requirement to report on audit scope.
Main changes
The principal change in the new auditor's report relates to the main auditing issues (PAAs). Listed entities are obliged to include a paragraph in their reports on this topic, and other companies may also want to do this.
PAAs are matters that are, according to the professional judgment of the auditor, the most significant in the audit of the financial statements. These may be similar to the issues communicated to those responsible for corporate governance, such as:
- events or transactions that significantly affect the financial statements
- areas that involve significant management judgment
- areas with a high risk of relevant error
As one of the major objectives of the new auditor's report is to bring more transparency, it is important that PAAs are specific to each company, are based on fact, and include sufficient detail to inform the decisionmaking of the users of the financial statements, as well as providing relevant, clear, concise and comprehensible information, free of technical jargon. However, the standards identify two situations where a PAA may not be disclosed:
- when the law or regulation prohibits the public disclosure of the matter
- in extremely rare cases, where the negative consequences of such disclosure could outweigh the benefits of communication in the public interest (using the auditor's judgment)
Other changes for all companies
While inclusion of PAAs in the auditor’s report is only mandatory for listed companies, other changes affect audit reports for all companies, regardless of size:
- auditors’ reports have been reordered so that the opinion is the first section of the report
- the auditor should draw a conclusion about the company’s operational continuity and whether or not there are significant doubts about its ability to operate
- sections dealing with management and auditor responsibilities have also been reviewed
The new report should also include an explicit statement of the auditor's independence in relation to the relevant ethical principles and compliance with other applicable requirements of the Code of Ethics, a description of the work performed by the auditor and their conclusions.
All of these reporting changes will have an impact on the relationship between the auditors, the company’s management and its corporate governance bodies, requiring greater interaction.
For more information, contact:
Djalma Soares
PP&C Auditores Independentes, Brazil
T: +55 11 3883 1600
E: ds.soares@ppc.com.br
www.ppc.com.br
