As the number of countries using or
committed to using international audit standards (IAS) has passed 100, IAASB
Chair Arnold Schilder said it is of the utmost importance to completely reform the
current pass/fail auditor report on financial statements to make it more useful
to investors and to other users of financial statements. In recent remarks
to the Pan African Federation of Accountants, the Chair noted that a key and
radical innovation to the auditor’s report is the introduction of key audit
matters, which the PCAOB proposed reform refers to as critical audit matters. The objective of this new standard is that auditors
will communicate publicly those matters that, in the auditor’s judgment, were
of most significance in the audit of the financial statements. This will be
required for the audits of financial statements of listed entities; with the
Board encouraging wider applicability
established by law or regulation or on a voluntary basis.
Key
audit matters would be selected from what the auditor has communicated with the
audit committee, and based on the auditor’s judgment about what of those
communications is most relevant to external users of the financial statements.
It is of the essence of key audit matters that they are relevant to readers of
financial statements, reasoned the IAASB Chair, adding that they must not
and should not be boilerplate, but rather be tailor-made to that specific audit.
The key audit matters also should not
include original information that
management should disclose, continued the Chair, but it is expected that the one will stimulate the
other. Key audit matters will often refer to specific disclosures in the
financial statements.
In the U.K., where the Financial Reporting
Council has mandated a similar proposal, there are over 80 examples, and key
audit matters often deal with complex issues such as the valuation of goodwill,
the valuation of financial instruments, or tax provisions.
While
acknowledging that the proposed innovation in auditor reporting is a radical change, Chairman Schilder said that
it would make the auditor’s work more
transparent and relevant to users. It would also stimulate public debate and
analysis on what auditors’ reports are most helpful. He also conceded that it
would be a difficult change for auditors, who lack a tradition of communicating
to the public anything more than their overall conclusion.
But,
the Chair is encouraged by auditors who have done or tested this already. They tell the
Board that the engagement partner
and team often will have an intuitive assessment of the areas of most significance
or difficulty. He mentioned that the
auditor’s report on Rolls Royce in the U.K. is seen as a best-in-class example.
Auditors are proud of what they now are stimulated to do, and what they can
demonstrate regarding their expertise, quality and relevance. He pledged that
the IAASB will work hard to finalize soon the standards and guidance to stimulate and assist
this important breakthrough.