THE AUDIT REPORT

Summary
Literature review
Types of audit reports and respective new
ISAs
Case study
Key audit matters
Going concern
Other changes to the audit report

Literature review
The audit report:
lengthy history
subject to change over time and across
nations
informational value for users and impact on
users decisions
changes could increase its worth

Market research in auditing

Sample of Spanish listed firms - qualified
opinion and unqualified opinion => returns
did not differ => qualified audit report did
not provide relevant information to
investors

Market research in auditing

Going concern audit opinions - impact on
loan officers => smaller loans offered to
firms in Great Britain
Spanish financial institutions - banks
assess the riskiness of the loan request by
the type of the audit report expressed by
the auditor

Types of audit reports

unmodified report ISA 700
modified report
with emphasis of matter (when the financial statements
show a true and fair view but there is something that
needs to be brought to the atention of the user by an
additional paragraph) ISA 706
with modified opinion (when the financial statements do
not fuly show a true and fair view or the auditor has not
obtained suffient appropriate evidence to make a
conclusion) ISA 705

CASE STUDY
Why change the audit report now?
Foundation of global auditor reporting
Improved auditor - management
communication
Essential to the continued relevance of the
audit profession globally
Audit is valued but could be more informative
Users want more relevant information about the
entity and the financial statement audit

Expected benefits of the new

auditors report
Enhanced communication among auditors,
investors and those charged with governance
(TCWG);
Increased attention by management to
disclosures in the financial statements;
Increased focus of the auditor on matters that
need to be disclosed;
Increased audit quality or users perception of
audit quality.

Main changes to the auditors

report
Key audit matters
Going concern
Other changes
Effective Date: Audits of financial
statements for periods ending on
December 2016.

What are the key audit matters

(KAMs)?
those matters that in the auditors
professional judgement were of most
significance in the audit of the financial
statements of the current period;

Determining KAM
The auditor is required to consider:
Areas of higher assessed risks of material
misstatement, or significant risks identified;
The effect on the audit of significant events or
transactions that occurred during the year.
The auditor determines which were of the most
significance in the audit of the financial
statements of the current period and therefore are
KAM.

Description of a KAM
Why the matter was considered to be one
of most significance in the audit and
therefore determined to be a KAM;
How the matter was addressed in the
audit; and
Reference to the related disclosure(s).

No. Source

Stakeholder Support the Additional comments

class
introduction
of KAM

Accounting
firm

PWC

Yes

- the reporting of key audit matters should achieve:

insight that is relevant to users understanding of the financial statements;
focuss on the most significant matters.

KPMG

Accounting
firm

Yes

- We are not supportive of including original information about an

entity in the auditors description of a KAM because it is the role of
management and those charged with governance to provide information
about the entity to users.
- IAASB should clarify that an auditor is not required to communicate a
KAM when he is precluded from reporting the matter by laws, regulations
or other professional standards.

Deloitte Accounting
firm

Yes

- it will enhance the usefulness of the auditors report because responds to

the call from users of the auditors report for more transparency, more
meaningful and useful information.

EY

Yes

describing KAMs will enhance the usefulness of the auditors report

through providing greater transparency into important areas where the
auditor devoted the most time and attention and had substantive
discussions with those charged with governance.

Accounting
firm

No. Source

Stakeholder
class

ACCA

Member Body Yes

we support the concept because it is a focused to meet the

diverse demands of stakeholders, particularly institutional
investors and financial analysts.

FAP Federation
of
Accounting
Professions
Thailand

National
Auditing
Standard
Setter

Yes

- this new section could add value to the audit opinion and
helps increase the publics trust in the audit;

EAIG
European
Audit
Inspection
Group

Regulator

Yes

Support
the Additional comments
introduction of
KAM

- users may not be able to find information relevant to their

economic decisions due to information overload.
It provides a positive incentive for management to enhance
the quality of information disclosed.

Conclusions regarding KAM

One of the most important changes;

Will improve the utility of the auditors report by delivering higher clearness into important areas
where the auditor spent most time and consideration;
May be challenges in revealing the information (misunderstandings with the customers about
what key audit matters to comprise in the report of audit, the customers might motivate that
information is sensitive and consequently, the jeopardy of shading the role of the auditor and the
role of management is high)
investors might fiind out about the risks the company faces if the auditor comments on some key
audit matters, which could have unforeseen market consequences
communication of original information regarding a company might lead to breaches in
confidentiality.
There are also concerns about the fact that the auditor will have the tendency of reporting the
same issues one year after another.
the expected increase in efforts and costs associated with such reporting.

Conclusions regarding KAM

cont.

problems like auditors being publicly challenged for their decisions,

auditors overcomment for fear of not reporting
there is the view that generally stakeholders prefer a simple certification that an audit has been
conducted to established standards, rather than a longer audit report.
as long as some users support the fact that these KAMs should be presented only for listed
companies, others wonder why, if they are requirements appreciated as best praxis, are not
demanded for all companies, rather than being limited to listed companies
this new part in the report of audit could lead to some difficulties due to information overload. In
addition, some stakeholders may not be able to find information relevant to their economic
decisions.

Going concern
When it is determined that managements utilisation of going concern
basis of accounting is appropriate there are four broad conclusions that
can be reached by the auditor if material uncertainty exists:
1.no uncertainty exists;
2.a circumstance that may raise considerable incertitude about an
entitys capacity to carry on as a going concern has been detected but
it is determined that a material uncertainty does not exist;
3.a material uncertainty exists and is suitably commented in the
financial statements;
4.a material uncertainty exists and the disclosure from the financial
statements is improper.

Going concern - cont

The first, the third and the forth scenarios matters should
be disclosed in the going concern part of the report of
the auditor or in the basis of opinion, in particular
situations.
The second scenario may represent a key audit matter.

No. Source

Stakeholder Support the Additional comments

class
introduction
of GC

PWC

Accounting
firm

Yes

There should be a requirement for all preparers of financial statements to

provide an explicit explanation of the rationale for their going concern
conclusion.

KPMG

Accounting
firm

Yes

Practice today relating to the nature and extent of disclosures by entities

varies significantly. Therefore, including guidance that such
circumstances may meet the criteria of a key audit matter may result in
having the auditor include original information about the entitys
operations, liquidity, business risks and future plans. Our view is that this
issue could be overcome if the IASB were to introduce specific disclosure
requirements that address the scenario described above.

Deloitte Accounting
firm

Yes

DTTL supports the auditor addressing matters relating to going concern

where the applicable financial reporting framework, laws, or regulations
include appropriate assessment and disclosure requirements for
management to apply in preparing the financial statements. In the absence
of such requirements DTTL doesnt believe it is appropriate for the
auditor to be the original provider of information about going concern
matters.

No. Source

Stakeholder Support the Additional comments

class
introduction
of GC

EY

Accounting
firm

Yes

We are concerned that the suggested conclusions (i.e., we have

concluded that managements use of the going concern basis of
accounting in the preparation of the financial statements is
appropriate and we also have not identified such a material
uncertainty) could result in misunderstanding or confusion by
users. They may misinterpret a statement as expressing more than
simply a conclusion on the basis of accounting used to prepare the
financial statements.

ACCA

Member
Body

Yes

There is potential for user misunderstanding, but this is not an

insurmountable problem. It should be addressed by education of,
and communication with, users. The IAASB should be prepared to
take a lead in such matters.

FAP Federation of
Accounting
Professions
Thailand

National
Auditing
Standard
Setter

Yes

We understand that the users may not be aware how long of the
period of assurance is. Hence, we suggest that the IAASB adds
some information regarding the period covered by the going
concern matters mention in the auditors report for identification of
material uncertainty (12 months) from the financial reporting date.

EAIG
European
Audit
Inspection
Group

Regulator

Yes

We agree that the auditor can only report on the facts that have
been identified during the audit and cannot provide a guarantee on
the outcome of future events. A statement on inherent limitations
regarding future developments and events could be helpful to users
in this regard.

Conclusions regarding GC

Is a better encountering of the needs of the stakeholders

some users do not think that the auditors should be the authentic providers of
information about going concern matters.
The statements are open to misjudgements and also confusing for the stakeholders
which are not very informed, especially regarding material incertitudes. Certainly, user
misunderstanding is not an overwhelming problem. It should be addressed by
education and communication with users,
in the present the management is not demanded under IFRS to make a precise
afirmation that it has prepared the financial statements on the basis of going
concern. The auditors think that this may mislead stakeholders regarding the roles of
the auditor and the management regarding going concern.
Moreover, certain auditors think that the requests will increase the cost of the audit
due to the fact that preapring precise statements in the report of the auditor will
require the implication of senior audit staff and quality control reviewers.

Other changes
the opinion of the auditor requested to be presented first
statement regarding independence and other ethical
duties
naming the engagement partner (listed entities only)
enhanced description of auditor responsibilities and
basic characteristics of the audit
required identification section when those charged with
governance are separate from management

Final conclusions

the modifications brought to the reporting audit should boost the quality of audit, improve the audit worth to
stakeholders and enhance the accuracy of disclosures the company supplies in the public reports.
improve the efficiency of the cooperation between those charged with governance, auditors and
management in the reporting of financial statements proceedings
the supplementary disclosures from the report of audit are going to be efficient if they do not create
misunderstandings which might discredit the trust in the audit.
the stakeholders believe that the new audit report is both more understandable and of greater value than
the old report, the foreseen results are encouraging.
there are both advantages and disadvantages rgarding the improved audit report, but in the end, the
advantages prevail
the communication between auditors and users of financial statements will be refined.
Stakeholders will be better able to identify the degree of responsibility that both management and the
auditor assume for the financial statements.
There is still space for subsequent convergence in the suggestions available now and all the interested
parties should be struggling in order to achieve that target
Ultimately, the victory of the new auditor report will hang on efficient implementation.
The way into accomplishing a common model worldwide for the report of audit is not unbeatable and
smaller than it was before.
All standard setters, stakeholders and regulators are encouraged to to their best to touch woldwide
alignment.

THANK YOU!
Enaida Luca