Enhanced Audit Reporting – The profession in APAC calls for better awareness and education

September 7, 2018

Published: Confederation of Asian and Pacific Accountants (CAPA)

In the first quarter of 2015, the International Auditing and Assurance Standards Board (IAASB) released its new and revised auditor reporting standards. The most significant enhancement is the new requirement for auditors to communicate “Key Audit Matters” (KAMs), described by the IAASB as ‘those matters that the auditor views as most significant, with an explanation of how they were addressed in the audit’. This was reflected in a new auditing standard, ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report, and is mandatory for listed entities only. The IAASB also revised ISA 720, The Auditor’s Responsibilities Relating to Other Information, with an aim to clarify and increase the auditor’s involvement with “other information”, which the IAASB defined as ‘financial an non-financial information, other than the audited financial statements, that is included in an entity’s annual report’. Both the new and revised standards were effective for audits of financial statements for periods ending on or after 15 December 2016.

Numerous countries around the world, including several from the Asia-Pacific region, adopted and implemented the new and revised ISAs. We have since witnessed the first generation of the enhanced auditor’s report being produced and utilised by a wide range of stakeholders. Various groups within the profession, including the IAASB, have been engaging with the users of these reports to gauge its effectiveness and to invite comments for improvement.

Being and important development in auditing, and one that is sparking high interest in and around the profession, the Confederation of Asian and Pacific Accountants (CAPA) brought together leaders and representatives of professional accountancy organisations (PAOs) from 17 countries for discussions around enhanced auditor’s report (EAR) following the implementation of ISAs 701 and 720. These countries are in various stages of implementation and are broadly categorised as (1) those that have adopted with an implementation date aligned to the ISAs, (2) those that have adopted with a later effective date, and (3) those that are still considering adoption. The topic was discussed at a meeting with these PAOs, all of whom are members of CAPA, and the session was facilitated by Chun Wee Chiew, a board member of the IAASB and Head of Policy for ASEAN ANZ at ACCA.

CAPA members discussed the benefits of the EAR including the reporting of KAMs, and the hurdles to full realisation of these benefits. Many agreed that the reporting of KAMs has allowed audit reports to be specifically tailored to an entity thereby providing higher quality information and better transparency to investors and stakeholders about the audit that was performed. It therefore assists to demonstrate the positive value of an audit, which contributes to public trust, and in turn raises the profile of the profession. It has also led to management enhancing the associated disclosures with management and auditors regarding the matters subject to these disclosures.

Whilst these benefits were seen to prevail, some challenges were noted. Drafting and discussing KAMs may require additional resources which may lead to auditors having to charge a higher fee. Some expressed that the enhanced reports may be too complex for investors to understand, especially retail investors who are used to the old audit pass/fail template. Others raised the issue of client confidentiality over the amount of information that gets disclosed and linked to that, the worry that reporting KAMs may create liability exposures for the auditors. However, these challenges were seen as manageable rather than major negatives.

Certain members felt that it is still too early to determine if the reporting of KAMs will have sustained benefits because businesses need sufficient time to deal with the KAMs reported. Users of these enhanced reports may also need several years to observe and analyse the KAMs before they learn how to make full use of them to engage with the auditors and the businesses. In relation to this, members felt that the question of what other information might be useful to be included into these enhanced reports is something that will be worth revisiting in the near future.

On the question of whether the reporting of KAMs will continue to be relevant and beneficial to users, most agreed that it will remain useful well into the future. It was suggested that auditors will need to find ways to make reporting KAMs valuable such that they remain valid and are not reduced to “boilerplates”.

What key actions can the various stakeholders take to keep KAM reporting relevant and “fresh”? Prior to answering this question, members felt that there was a need to first ensure that countries are successfully adopting and implementing the new and revised standards. To this, it was suggested that continuous education of both the preparers and users of the EAR will be critical in ensuring the standards are being utilised properly to achieve good and valuable auditing and reporting.

CAPA members called for the IAASB and other bodies to continue to evaluate the experience of countries that have adopted the new and revised standards in EAR and to support countries that are in the process of adopting them. It was also suggested that PAOs work with international and regional organisations, like the International Federation of Accountants (IFAC) and CAPA, to advocate to regulators, audit committees and other relevant stakeholders to promote the advantages of EAR and how it can improve the business environment. This will in turn drive the demand for EAR and ensure that auditors maintain and improve the quality of reporting KAMs.

http://www.capa.com.my/enhanced-audit-reporting-the-profession-in-apac-calls-for-better-awareness-and-education/

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