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.