South Africa and the world recently saw one of the most significant changes in the audit sector with the International Auditing and Assurance Standards Board’s (IAASB) recent project to improve the current audit report by enhancing its communicative value. The expected benefits of the revised standards are an increase in the transparency and informational value of the auditor’s report.
The audit report, as we know it, was standardised and provided very little information to the users’ of the financial statements about the issues that were of concern to the auditor during the audit. But this has changed with the new audit reporting standards, which became effective for financial periods ending on or after 15 December 2016.
While the manner in which audits will be performed will not change, communications with those charged with governance (TCWG) and documentation of significant auditor judgements will become more important during the audit process.
These measures are expected to increase the users’ perception of audit quality and increase the confidence of the users of the financial statements, in the audit process as well as the audited financial statements.
The most notable modification to the new audit report is the change in format. The audit opinion is now at the beginning of the report to emphasise its prominence. ISA 700 Forming an Opinion and Reporting on Financial Statements prescribes that the first section of the audit report includes the “Opinion” paragraph directly followed by the “Basis of Opinion” paragraph.
The descriptions of the auditors’ responsibilities is enhanced and an affirmative statement is included about the auditors’ independence and compliance with the relevant ethical requirements.
The new auditor’s report includes enhanced reporting on a company’s ability to continue as a going concern. The responsibilities of management with regards to going concern is now clearly stated in the audit report and the report allows for specific commentary about the entity’s ability to continue as a going concern.
The most significant change to how and what is communicated in the auditor’s report, is the introduction of ISA 701 Communicating Key Audit Matters in the Independent Auditor’s Report. This applies to the audits of complete sets of financial statements of listed entities or when required by law or regulation. Currently, the Council for Medical Schemes is the only regulator who has announced the requirement to include key audit matters (KAMs) in the auditor’s report. It is likely that more regulators will adopt this in the near future.
Key audit matters and their impact
Although the auditor has the ultimate responsibility to implement the changes, the introduction of KAMs may affect other stakeholders as well.
Management will need to ensure that all disclosures in the financial statements are adequate and complete. The KAMs may now make reference to such disclosures in the financial statements. Should the KAM refer to disclosure, TCWG and the auditor should be aware of the fact that the KAM should not include new information and should merely refer to information already disclosed in the financial statements.
King IV, launched in November 2016, recommends that the audit committee discloses significant matters considered in relation to the annual financial statements and how these were addressed by the committee.
The inclusion of KAMs would require considerable attention and effective communication between the more senior members of the audit team and TCWG.
To ensure that all relevant stakeholders realise the benefits of these revised standards, preparers, TCWG and Registered Auditors’ should familiarize themselves with the requirements of the new standards and the South African Auditing Practice Statement (SAAPS3).
Discussions should be held with your auditor earlier on to determine the expected increase in cost for your engagement if they are required to disclose KAMs in their audit report.