Auditor Reporting At a Glance July 2013-final.pdf

8/10/2019 Auditor Reporting At a Glance July 2013-final.pdf

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An illustrative auditors reportfor an audit of a listed entity s

consolidated financialstatements, showing the result

of the IAASBs propos als, isincluded as an Appendix.

The IAASB s proposed key enhancements to the auditors report

The auditors opinion on thefinancial statements is valued;however, in the wake of the globalfinancial crisis, many have called for

the auditors report to be moreinformative in particular, forauditors to provide more relevantinformation to users based on theaudit that was performed.

The Proposed ISAs respond to thatcall.

Key enhancements Prominent placement of the auditors opinion

and other entity-specific information in theauditors report

Auditor reporting on Key Audit Matters,required for audits of financial statements oflisted entities. Key audit matters are thosematters that, in the auditors judgment, wereof most significance in the audit of the currentperiod financial statements.

Auditor reporting on going concern, includinga conclusion on the appropriateness ofmanagements use of the going concern basisof accounting in preparing the financialstatements and a statement as to whether amaterial uncertainty that may cast significantdoubt on the entitys ability to continue as agoing concern has been identified

Auditor reporting on other information (to befinalized as part of the separate project torevise ISA 720, The Auditors ResponsibilitiesRelating to Other Information in DocumentsContaining Audited Financial Statements )

An explicit statement that the auditor isindependent of the entity and has fulfilledthe auditors other relevant ethicalresponsibilities, with disclosure of thesource(s) of those requirements

Disclosure of the name of the engagementpartner, required for audits of financialstatements of listed entities, with a harmsway exemption

Improved description of the responsibilitiesof the auditor and key features of the audit(together with provision for certaincomponents of this description to berelocated to an appendix to the auditorsreport, or for reference to be made to suchdescription on the website of anappropriate authority)


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What ISAs are changing and what are the expected benefits?

The Proposed ISAs represent asignificant change in practice, butenhanced auditor reporting isviewed as critical to the perceived

value of the financial statementaudit and thus to the continuedrelevance of the auditing profession.

The primary beneficiaries of theIAASBs work on auditor reportingwill be investors, analysts and otherusers of the auditors report and theaudited financial statements.

Proposed ISAs in the EDThe proposed ISAs included in the ED are:

Proposed ISA 700 (Revised), Forming anOpinion and Reporting on Financial

Statements

Proposed ISA 701, Communicating Key AuditMatters in the Independent Auditors Report (anew standard)

Proposed ISA 260 (Revised), Communicationwith Those Charged with Governance

Proposed ISA 570 (Revised), Going Concern

Proposed ISA 705 (Revised), Modification tothe Opinion in the Independent AuditorsReport

Proposed ISA 706 (Revised), Emphasis ofMatter Paragraphs and Other MatterParagraphs in the Indepen dent Auditors

Report Proposed Conforming Amendments to Other

ISAs

Expected benefitsBecause the auditors report is the keydeliverable addressing the output of the auditprocess, changes in auditor reporting may havepositive benefits to audit quality or usersperception of it. This in turn may increase theconfidence that users have in the audit and thefinancial statements, which is in the publicinterest.

In addition, the following benefits could berealized as a result of the Proposed ISAs:

Enhanced communicative value of theauditors report

Increased attention by management andthose charged with governance to thedisclosures in the financial statements towhich reference is made in the auditorsreport

Renewed focus of the auditor on mattersto be reported, which could indirectlyresult in an increase in professionalskepticism

Enhanced communications between theauditor and those charged withgovernance


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Feedback to the IAASB

The ED includes specific questionsfor respondents on key aspects ofthe proposals.

Responses to the ED will assist theIAASB in finalizing its proposedstandards in 2014.

Matters on which feedback issought Broadly, the IAASB is interested in feedbackregarding:

The appropriateness of the requirements andguidance in proposed ISA 701 addressing theauditors determination and communication ofkey audit matters, and the illustrativeexamples

The appropriateness of the requirements inproposed ISA 570 (Revised) addressingauditor reporting on going concern and there lated wording in the illustrative auditorsreports. The IAASB is particularly interested inviews as to whether such reporting, and thepotential implications thereof, will bemisunderstood or misinterpreted by users inlight of the auditors work effort under theISAs.

The overall form and content of the proposedauditors report , and the implications of otherproposals within the ED

The anticipated benefits and costs arising as aresult of the proposals, changes that will beneeded to implement them, and any significantforeseeable difficulties

Stakeholder perspectives The IAASB particularly welcomes views from:

Users, regulators and audit oversightbodies in relation to the overall form and

content of the auditors report and theanticipated benefits arising from theIAASBs proposals

Preparers and audit committees about theimplications of the Proposed ISAs on theprocesses to prepare and present thefinancial statements, including additionaleffort or costs that may be expected

Preparers, small and medium practices(SMPs) and other auditors of small- andmedium-sized entities (SMEs) aboutwhether the Proposed ISAs can beimplemented in a manner proportionate tothe size and complexity of the entity

Developing nations

Respondents in relation to potentialtranslation issues


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1 The sub-title Report on the Audit of the Consolidated Financial Statements is unnecessary in circumstances when thesecond sub-title Report on Other Legal and Regulatory Requirements is not applicable.

INDEPENDENT AUDITORS REPORT

To the Shareholders of ABC Company [or Other Appropriate Addressee]

Report on the Audit of the Consolidated Financial Statements 1

Opinion

In our opinion, the accompanying consolidated nancial statements present fairly, in allmaterial respects, ( or give a true and fair view of ) the consolidated nancial position of ABCCompany and its subsidiaries (the Group) as at December 31, 20X1, and ( of ) their consolidatednancial performance and their consolidated cash ows for the year then ended in accordancewith International Financial Reporting Standards (IFRSs).

We have audited the consolidated nancial statements of the Group, which comprise theconsolidated statement of nancial position as at December 31, 20X1, and the consolidatedstatement of comprehensive income, consolidated statement of changes in equity andconsolidated statement of cash ows for the year then ended, and notes to the consolidatednancial statements, including a summary of signicant accounting policies.

Basis for OpinionWe conducted our audit in accordance with International Standards on Auditing (ISAs). Ourresponsibilities under those standards are further described in the Auditors Responsibilities forthe Audit of the Consolidated Financial Statements section of our report. We are independentof the Group within the meaning of [ indicate relevant ethical requirements or applicable lawor regulation ] and have fullled our other responsibilities under those ethical requirements.(see Question 11) We believe that the audit evidence we have obtained is sufcient andappropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of mostsignicance in our audit of the consolidated nancial statements. Key audit matters are

selected from the matters communicated with [ those charged with governance ], but arenot intended to represent all matters that were discussed with them. Our audit proceduresrelating to these matters were designed in the context of our audit of the consolidated nancialstatements as a whole. Our opinion on the consolidated nancial statements is not modiedwith respect to any of the key audit matters described below, and we do not express anopinion on these individual matters.

The four specic topics and content presented below are purely for illustrative purposes. This sectionwould be tailored to the facts and circumstances of the individual audit engagement and the entity.

Accordingly, the IAASB has intentionally drafted these examples in a manner that illustrates that Key Audit Matters will vary in terms of the number and selection of topics addressed and the nature inwhich they may be described, and are intended to be consistent with the disclosures in the entitysconsolidated nancial statements.

Goodwill

Under IFRSs, the Group is required to annually test the amount of goodwill for impairment.This annual impairment test was signicant to our audit because the assessment process iscomplex and highly judgmental and is based on assumptions that are affected by expectedfuture market or economic conditions, particularly those in [ Countries X and Y ]. As a result, ouraudit procedures included, among others, using a valuation expert to assist us in evaluatingthe assumptions and methodologies used by the Group, in particular those relating to the

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forecasted revenue growth and prot margins for [ name of business lines ]. We also focusedon the adequacy of the Groups disclosures about those assumptions to which the outcome ofthe impairment test is most sensitive, that is, those that have the most signicant effect on thedetermination of the recoverable amount of goodwill. The Groups disclosures about goodwillare included in Note 3, which specically explains that small changes in the key assumptionsused could give rise to an impairment of the goodwill balance in the future.

Valuation of Financial Instruments

The Groups disclosures about its structured nancial instruments are included in Note 5.The Groups investments in structured nancial instruments represent [ x% ] of the totalamount of its nancial instruments. Because the valuation of the Groups structured nancialinstruments is not based on quoted prices in active markets, there is signicant measurementuncertainty involved in this valuation. As a result, the valuation of these instruments wassignicant to our audit. The Group has determined it is necessary to use an entity-developedmodel to value these instruments, due to their unique structure and terms. We challengedmanagements rationale for using an entity-developed model, and discussed this with [ thosecharged with governance ], and we concluded the use of such a model was appropriate. Ouraudit procedures also included, among others, testing managements controls related to the

development and calibration of the model and conrming that management had determinedit was not necessary to make any adjustments to the output of the model to reect theassumptions that marketplace participants would use in similar circumstances.

Acquisition of XYZ Business

As described in Note 2, in December 20X1, the Group completed the acquisition of XYZBusiness. XYZ Business was a division of a large private company. As of December 31, 20X1,the Group has completed the initial acquisition accounting on a preliminary basis. The Groupwill nalize the initial acquisition accounting during 20X2, and the amounts recorded as ofDecember 31, 20X1 could change. We focused on this transaction because it is material tothe consolidated nancial statements as a whole and the fact that values had not previouslybeen assigned to the division as a standalone operation. In addition, determining the

assumptions that underlie the initial acquisition accounting and the useful lives associatedwith the acquired intangible assets involves signicant management judgment given thenature of the [ name of industry ].

Revenue Recognition Relating to Long-Term Contracts

The terms and conditions of the Groups long-term contracts in its [ name of segment ] affectthe revenue that the Group recognizes in a period, and the revenue from such contractsrepresents a material amount of the Groups total revenue. The process to measure theamount of revenue to recognize in the [ name of industry ], including the determinationof the appropriate timing of recognition, involves signicant management judgment. Weidentied revenue recognition of long-term contracts as a signicant risk requiring specialaudit consideration. This is because side agreements may exist that effectively amend the

original contracts, and such side agreements may be inadvertently unrecorded or deliberatelyconcealed and therefore present a risk of material misstatement due to fraud. In addition totesting the controls the Group has put in place over its process to enter into and record long-term contracts and other audit procedures, we considered it necessary to conrm the termsof these contracts directly with customers and testing journal entries made by managementrelated to revenue recognition. Based on the audit procedures performed, we did notnd evidence of the existence of side agreements. The Groups disclosures about revenuerecognition are included in the summary of signicant accounting policies in Note 1, as wellas Note 4.


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2 Throughout the illustrative auditors reports in the Proposed ISAs, the term management may need to be replaced byanother term that is appropriate in the context of the legal framework in the particular jurisdiction. For example, thosecharged with governance, rather than management, may have these responsibilities.

3 Where managements responsibility is to prepare nancial statements that give a t rue and fair view, this may read:Management is responsible for the preparation of consolidated nancial statements that give a true and fair viewin accordance with IFRSs, and for such

Going Concern

The consolidated nancial statements of the Group have been prepared using the goingconcern basis of accounting. The use of this basis of accounting is appropriate unlessmanagement either intends to liquidate the Group or to cease operations, or has no realisticalternative but to do so. As part of our audit of the consolidated nancial statements, we haveconcluded that managements use of the going concern basis of accounting in the preparationof the Groups consolidated nancial statements is appropriate.

Management has not identied a material uncertainty that may cast signicant doubt onthe Groups ability to continue as a going concern, and accordingly none is disclosed inthe consolidated nancial statements of the Group. Based on our audit of the consolidatednancial statements of the Group, we also have not identied such a material uncertainty.However, neither management nor the auditor can guarantee the Groups ability to continue asa going concern.

Other Information

[ The illustrative wording for this section is subject to the IAASBs nalization of proposed ISA720 (Revised). The content of this section may include, among other matters: (a) a description

of the auditors responsibilities with respect to other information; (b) identication of thedocument(s) available at the date of the auditors report that contain the other informationto which the auditors responsibilities apply; (c) a statement addressing the outcome of theauditors work on the other information; and (d) a statement that the auditor has not audited orreviewed the other information and, accordingly, does not express an audit opinion or a reviewconclusion on it. ]

Responsibilities of [Management 2 and Those Charged with Governance or other appropriateterms] for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidatednancial statements in accordance with IFRSs, 3 and for such internal control as managementdetermines is necessary to enable the preparation of consolidated nancial statements that are

free from material misstatement, whether due to fraud or error. [ Those charged with governance ]are responsible for overseeing the Groups nancial reporting process.

Auditors Responsibilities for the Audit of the Consolidated Financial Statements

The objectives of our audit are to obtain reasonable assurance about whether the consolidatednancial statements as a whole are free from material misstatement, whether due to fraud orerror, and to issue an auditors report that includes our opinion. Reasonable assurance is a highlevel of assurance, but is not a guarantee that an audit conducted in accordance with ISAs willalways detect a material misstatement when it exists. Misstatements can arise from fraud orerror and are considered material if, individually or in the aggregate, they could reasonably beexpected to inuence the economic decisions of users taken on the basis of these consolidatednancial statements.

The remaining material in this section can be located in an Appendix to the auditors report (see paragraph 39 of proposed ISA 700 (Revised). When law, regulation or national auditing standardsexpressly permits, reference can be made to a website of an appropriate authority that contains thedescription of the auditors responsibilities, rather than including this material in the auditors report(see paragraph 40 of proposed ISA 700 (Revised)).

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As part of an audit in accordance with ISAs, we exercise professional judgment and maintainprofessional skepticism throughout the planning and performance of the audit. We also:

Identify and assess the risks of material misstatement of the consolidated nancialstatements, whether due to fraud or error, design and perform audit proceduresresponsive to those risks, and obtain audit evidence that is sufcient and appropriate toprovide a basis for our opinion. The risk of not detecting a material misstatement resultingfrom fraud is higher than for one resulting from error, as fraud may involve collusion,forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit in order to designaudit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the entitys internal control. 4

Evaluate the appropriateness of accounting policies used and the reasonableness ofaccounting estimates and related disclosures made by management.

Evaluate the overall presentation, structure and content of the consolidated nancialstatements, including the disclosures, and whether the consolidated nancial statementsrepresent the underlying transactions and events in a manner that achieves fair

presentation. Obtain sufcient appropriate audit evidence regarding the nancial information of the

entities and business activities within the group to express an opinion on the consolidatednancial statements. We are responsible for the direction, supervision and performance ofthe group audit. We remain solely responsible for our audit opinion.

We are required to communicate with [ those charged with governance ] regarding, amongother matters, the planned scope and timing of the audit and signicant audit ndings,including any signicant deciencies in internal control that we identify during our audit.

We are also required to provide [ those charged with governance ] with a statement thatwe have complied with relevant ethical requirements regarding independence, and tocommunicate with them all relationships and other matters that may reasonably be thought

to bear on our independence, and where applicable, related safeguards.

Report on Other Legal and Regulatory Requirements

[ The form and content of this section of the auditors report would vary depending on thenature of the auditors other reporting responsibilities prescribed by local law, regulation, ornational auditing standards. Depending on the matters addressed by other law, regulation ornational auditing standards, national standard setters may choose to combine reporting onthese matters with reporting as required by the ISAs (shown in the Report on the Audit of theConsolidated Financial Statements section), with wording in the auditors report that clearlydistinguishes between reporting required by the ISAs and other reporting required by law orregulation. ]

The engagement partner responsible for the audit resulting in this independent auditors reportis [ name ].

[ Signature in the name of the audit rm, the personal name of the auditor, or both, asappropriate for the particular jurisdiction ]

[ Auditor Address ]

[ Date ]

4 This sentence would be modied, as appropriate, in circumstances when the auditor also has responsibility to issue anopinion on the effectiveness of internal control in conjunction with the audit of the consolidated nancial statements.

Auditor Reporting At a Glance July 2013-final.pdf

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