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30 Apr. 2015

AUASB invites comments on Exposure Draft 01/15 – enhancements to auditor reporting

The Australian Auditing and Assurance Standards Board (AUASB) proposals seek to revise and amend a number of existing Australian Auditing Standards and to introduce one new Auditing Standard, so as to align to recent changes by the International Auditing and Assurance Standards Board (IAASB) aimed at promoting enhanced auditor reporting throughout the world.  The proposed new and revised Auditing Standards lay the foundation for the future of global auditor reporting and improved auditor communications.

1. The proposed revised Auditing Standards are:

  • ASA 700 Forming an Opinion and Reporting on a Report
  • ASA 705 Modifications to the Opinion in the Independent Auditor’s Report
  • ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
  • ASA 570 Going Concern
  • ASA 260 Communicating with Those Charged with Governance

2. The proposed new Auditing Standard is:

  • ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report

3. The proposed conforming amendments to Auditing Standards resulting from the above changes affect the following Auditing Standards:

  • ASAs 210, 220, 230, 510, 540, 580, 600 and 710.

The most notable enhancement is the new requirement for auditors of financial reports of listed entities to communicate "Key Audit Matters" i.e. those matters that the auditor views as most significant, with an explanation of how they were addressed in the audit. The AUASB has also taken steps to increase the auditor’s focus on going concern matters, including disclosures in the financial report, and add more transparency in the auditor’s report about the auditor’s work.

The introduction of Key Audit Matters for listed entities is a significant enhancement that will change not only the auditor's report, but more broadly the quality of financial reporting, and therefore, the informative value to investors and other key stakeholders, such as analysts and other users of the auditor’s report on the audited financial statements.

Other key enhancements for all audits include:

> The Opinion section is required to be presented first, followed by the Basis for Opinion section, unless law or regulations prescribe otherwise.

> Voluntary communication of key audit matters (KAM) on audits of entities that are not listed.

> Enhanced auditor reporting on going concern (GC), including:

  • Description of the respective responsibilities of management and the auditor for GC;
  • A separate section when a material uncertainty exists, and is adequately disclosed, under the heading “Material Uncertainty Related to Going Concern” (previously included in an Emphasis of Matter paragraph); and
  • New requirement to challenge the adequacy of financial report disclosures for so-called “close calls” in view of the applicable financial reporting framework when events or conditions are identified that may cast significant doubt on an entity’s ability to continue as a GC.

> Affirmative statement about the auditor’s independence and fulfilment of relevant ethical responsibilities, and the identification of the relevant ethical requirements applicable within Australia.

Enhanced description of the responsibilities of the auditor and key features of an audit, together with the provision that certain components of this description may be presented in an appendix to the auditor’s report.

The implementation of the proposed new and revised auditor reporting standards will represent a significant change in practice, with collaboration needed by all participants in the financial reporting supply chain, in order to ensure that the objectives of enhanced auditor reporting are realised.

The remaining changes in the pipeline are the revision of ISA/ASA 720 (auditor’s responsibilities for other information), the Disclosures project, and consequential changes to the special purpose reporting standards (ISA/ASA 800 series).  Further tranches of AUASB exposure drafts are expected to be issued in May and July of this year, with the ISA/ASA 800 series due in early 2016.

Consistent with the equivalent ISAs, the new and revised Australian Auditing Standards will be effective for audits of financial statements for periods ending on or after 15 December 2016.

In addition to the new and revised ISAs, the IAASB has publicised the Auditor Reporting Toolkit which provides helpful information on the new enhancements to auditor reporting.

Please forward any comments on ED 01/15 to by no later than 30 June 2015.