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IAASB Auditor Reporting
Roundtable


  Improving the Auditor’s Report

  September 10, 2012

  New York, NY




                                   Page 1
Welcome and Introductory Remarks




             Prof. Arnold Schilder
              IAASB Chairman




                                     Page 2
Why Is the IAASB Suggesting Changes to the
Auditor’s Report?
• Reflections on today’s global economic challenges indicate that the
  auditor’s report could be more relevant and informative to users
    – Improved auditor reporting is essential to the continued relevance of
      the audit profession globally
    – Now is the time for change, but no clear agreement on what should
      be changed
• Increased complexity in financial reporting and global business
  activity has increased users’ need for more information
    – Audit is valued, but the auditor’s report could be more informative
    – Users, in particular investors, want more relevant and decision-useful
      information about the entity, the financial statements and the audit
• Important to now lay the foundation for the future of global auditor
  reporting and improved auditor communications
    – Creative solutions are needed to overcome challenges

                                                                               Page 3
IAASB’s Response

• Auditor Reporting #1 priority
   – IAASB progressing revisions to auditor reporting standards, and
     other standards as appropriate, on an accelerated basis
• Invitation to Comment (ITC) unanimously approved
   – Sets out the IAASB’s indicative direction and rationale, and
     describes the IAASB’s perspectives on value and impediments
• ITC includes illustrative auditor’s report
   – New sections on Going Concern, Auditor Commentary, and
     Other Information
   – Most relevant information positioned first (e.g., auditor’s opinion)
   – Further improvements to:
        Better explain an audit
        Enhance transparency

                                                                            Page 4
Exploring a Global Solution

Important to address differing perspectives on how best to
communicate audit results in a manner relevant to users, while
allowing for comparable auditor reports

                                            Consistency in pursuit of achieving easily
                                            recognizable and comparable global auditor’s
                                            reports




      Relevance to enhance usefulness
      of global auditor reports, and
      accommodate jurisdictions’ laws and
      regulations




                                                                                           Page 5
IAASB Auditor Reporting Project Status


                           Commencement of
     Research &             Standard Setting        Consultation on
                                                                             Next Steps
     Consultation                                 Indicative Direction

         Academic                                   Invitation to Comment:
         research                                  Improving the Auditor’s   Exposure Draft
       (2006 – 2009)           Project proposal              Report
                                                                              (June 2013)
                              (December 2011)              (June 2012)

    Review of national                                  Comments Due
     developments                                      (October 8, 2012)
       /initiatives
      (2009-2010)

                                                        Roundtables          Final Standards
                              Task Force and         NY, Brussels & KL
    Consultation Paper:       Subcommittee                                     (June 2014)
  Enhancing the Value of       Appointments            (September –
                                                      October 2012 )
    Auditor Reporting         (January 2012)
       (May 2011)




 Visit the Auditor Reporting Page at www.iaasb.org/auditor-reporting for updates


                                                                                               Page 6
What Do We Need from You?

• Your views will help inform the IAASB’s standard-setting
  proposals in a way that will best serve the public interest
• Broad overarching considerations include
   − Do the suggested improvements increase the value of the
     auditor’s report? Why or why not?
   − What are the potential merits and drawbacks of the suggested
     improvements? Are there other alternatives that could be
     considered?
   − What additional considerations, if any, should be made for audits
     of SMEs (e.g., emerging growth companies) and public sector
     entities?
   − Should consistency continue to be a primary objective in auditor
     reporting?

                                                                         Page 7
Today


• Three Sessions
  – Auditor Commentary – Dan Montgomery, IAASB Deputy Chair
  – Going Concern & Other Information – Bruce Winter, IAASB Member
  – Clarification & Transparency – Prof. Bill Kinney, IAASB Member
• For Each Session
  – Introduction
  – Panelist remarks to stimulate debate
  – Roundtable discussion

• Announcements
  – James Gunn, IAASB Technical Director



                                                                     Page 8
Auditor Commentary: Moving beyond Boilerplate




                Dan Montgomery
               IAASB Deputy Chair
                 Task Force Chair




                                                Page 9
Why an Auditor Commentary Section?

• Suggested new section aimed at improving communicative
  value of the auditor’s report
• Highlights matters that are, in the auditor’s judgment, likely
  to be most important to users’ understanding of the audited
  financial statements or the audit
• A vehicle for providing
   – A “roadmap” to help users better navigate complex financial reports
   – Additional context to the matters highlighted (e.g., explaining why the
     matter was important from an audit perspective or briefly describing the
     auditor’s procedures and findings)
   – Information about key judgments made by the auditor to provide more
     transparency regarding how the audit was conducted

                                                                           Page 10
More about Auditor Commentary


• Entity-specific information, the nature and extent of which
  is determined based on facts and circumstances of the
  particular engagement
• Leverages existing concepts of Emphasis of Matter and
  Other Matter paragraphs
• Required for public interest entities (includes all listed
  entities)
• Provided at the discretion of the auditor for other entities




                                                                 Page 11
What Could Be Addressed in Auditor Commentary?


• Areas of high risk of material misstatement
• Areas of significant management judgment, including the
  application of accounting policies
• Significant or unusual transactions
• Significant aspects of the audit scope and strategy
• Difficult or contentious matters identified during the audit
• Other matters discussed with those charged with
  governance/audit committee or required to be addressed
  by law or regulation



                                                                 Page 12
Auditor Commentary: Navigating a Way Forward

             Both value and impediments exist
          Essential to strike an appropriate balance




  ITC examples illustrate the concept of auditor commentary

                                                          Page 13
Auditor Commentary (AC): Discussion Questions

1. Is the concept of AC an appropriate response to the call
   for auditors to provide more information in auditor reports?
2. Do the illustrative examples of AC deliver the informational
   value sought? If yes, how might this information be helpful
   in decision making? If not, what aspects are not valuable,
   or what is missing?
3. Should an AC section be required for audits of all entities?
4. Are there unique considerations for audits of non-public
   entities, in particular audits of SMEs?
5. What risks and impediments exist to providing AC in the
   auditor's report? How might they be overcome?
 Adapted from ITC Questions for Respondents


                                                              Page 14
Auditor Commentary: Panelists




              Jack Ciesielski, CFA Institute
    Jeff Mahoney, Council of Institutional Investors
        Kristian Koktvedgaard, BusinessEurope
                   Bill Platt, Deloitte




                                                       Page 15
Auditor Commentary




              Roundtable Participants’
               Views and Reactions




                                         Page 16
Going Concern & Other Information: Making the
Implicit Explicit




                   Bruce Winter
          IAASB & Task Force Member




                                                Page 17
Why a Going Concern Section?

• The global financial crisis highlights the importance of timely
  financial reporting with an increased focus on entities’
  assessment of going concern and related disclosures
• Policy debates and proposals in response to the economic
  crisis, incl. EC proposals and UK Sharman report, suggest
  a need for transparency with respect to auditors’ work on
  going concern
• Respondents to 2011 IAASB consultation asked for
   – Clarification of the respective roles and responsibilities of management
     and the auditor regarding going concern
   – Auditors to report the outcome of their work effort regarding going
     concern

                                                                           Page 18
Going Concern: Suggested Improvements

• New reporting requirement for all auditor’s reports to
  include
   – A conclusion regarding the appropriateness of management's use of
     the going concern assumption; and
   – A statement regarding whether, based on the audit work performed,
     material uncertainties related to events or conditions that may cast
     significant doubt on the entity’s ability to continue as a going concern
     have been identified

• Makes explicit the auditor’s objectives and work effort
  required by the auditing standard (ISA 570)
• Language would be tailored based on the applicable
  financial reporting framework
                                                                                Page 19
Going Concern: Suggested Improvements

• New section is complemented by a new description of
  management’s responsibility with respect to going
  concern
• Similar to current audit requirements, when a material
  uncertainty has been identified that is adequately
  disclosed in the financial statements, the auditor would
  draw users’ attention to such disclosure




                                                             Page 20
More about Going Concern Improvements

• Is there sufficient clarity as to the meaning of material
  uncertainties about going concern to support explicit
  statements in the auditor's report?
• Is there merit in auditors describing their rationale as to
  why material uncertainties do not exist?
• Would it be desirable to disclose (possibly as part of
  Auditor Commentary) events or conditions that attracted
  significant audit attention even if the auditor concludes
  that no material uncertainties exist?




                                                                Page 21
Why a New Section on Other Information?

• Other Information
   – Includes financial and non-financial information (e.g., Management’s
     Discussion & Analysis (MD&A), Operating and Financial Review (OFR)
     Statements)
   – May address both historical and prospective information
• Overwhelming majority of respondents to 2011 IAASB
  consultation indicated that including a statement about the
  auditor’s responsibilities regarding other information i) would
  increase transparency or ii) was already local practice
• Strong support for some form of auditor conclusion with
  respect to other information


                                                                       Page 22
Other Information: Suggested Improvements and
Future Considerations

• New “Other Information” section required for all audits
  where relevant
• Statement as to whether, based on reading the other
  information, the auditor has identified material
  inconsistencies between the audited financial statements
  and other information
• Auditor also required to explicitly identify the other
  information that was read




                                                             Page 23
Going Concern & Other Information: Discussion
Questions 

1. Do the suggested auditor statements related to going
   concern and other information provide useful
   information to users?
2. What risks or impediments exist to providing these
   statements? How might they be overcome?
3. What are your views about the placement of the new
   sections in the auditor’s report?
4. Do you agree with the content and placement of the
   new description of management’s responsibilities with
   respect to going concern?
 Adapted from ITC Questions for Respondents




                                                           Page 24
Going Concern & Other Information: Panelists




              Anne Simpson, CalPERS
          Gary Kabureck, Xerox Corporation
                Mike Cook, Comcast
                Wayne Kolins, BDO




                                               Page 25
Going Concern & Other Information




               Roundtable Participants’
                Views and Reactions




                                          Page 26
Transparency & Clarification: Making the Audit
More Understandable




                  Prof. Bill Kinney
          IAASB & Task Force Member




                                                 Page 27
Why More Standardized Information about Audits?


• Respondents to 2011 IAASB consultation
   − Supported including additional information in the auditor’s
     report to further describe the auditor’s responsibilities
   − Suggested that clarifying certain technical terms would
     contribute to narrowing the expectations gap and improve
     auditor reporting
   − Highlighted the important role that management and TCWG
     play in the financial reporting process
• IAASB sees merit in more fully explaining the concept of
  a risk-based audit



                                                                   Page 28
Improvements Related to Transparency about the
Audit

• For all audits, required identification of engagement partner
  responsible for the audit
   − Proponents suggest this would provide engagement partner with greater
     sense of personal accountability
   − Already required in many jurisdictions
   − Possible impediments include a perceived reduction in firm responsibility
     and possible increased liability for engagement partner in certain
     jurisdictions, in particular the US
• Explicit statement about the auditor’s compliance with relevant
  ethical requirements
   − No specific identification of the applicable ethical code
• Information about the involvement of other auditors and an
  enhanced description of auditor’s responsibility in a group audit

                                                                                 Page 29
Improvements Related to Clarifying Communications
about the Audit
• Clarification of respective responsibilities of management
  and those charged with governance
• Fuller description about the auditor’s responsibilities
   – Emphasizes the auditor’s responsibilities relating to fraud, internal
     control, accounting policies, financial statement disclosures, and
     accounting estimates
   – Should an option be provided to streamline the content of the
     auditor’s report by moving the description of auditor’s responsibility
     elsewhere (e.g., NSS website)?
• Acknowledges and allows for variation in the description of
  the responsibilities of management and those charged with
  governance (e.g., directors) based on national laws or reg.


                                                                             Page 30
Transparency & Clarification: Discussion Questions 

 1. Should the auditor’s report identify the engagement partner
    responsible for the audit?
 2. What are your views with regard to disclosures about the
    involvement of other auditors? Why is this information critical
    to your decision-making process?
 3. Do the descriptions of the responsibilities of management /
    those charged with governance and auditors help your
    understanding an audit?
 4. Should the description of auditor responsibilities be permitted
    to be placed outside of the auditor’s report (e.g., a website)?
 5. What are your views on the revised format of the illustrative
    auditor’s report in the ITC, including ordering and placement?
 6. To what extent should consistency continue to be a primary
    objective in auditor reporting?
  Adapted from ITC Questions for Respondents

                                                                      Page 31
Transparency & Clarification: Panelists




                 Steve Buller, BlackRock
            Neri Bukspan, Standard & Poor’s
           Don McGovern / Diana Hillier, PwC




                                               Page 32
Transparency & Clarification




                Roundtable Participants’
                 Views and Reactions




                                           Page 33
Conclusion and Closing Remarks




              Prof. Arnold Schilder
                 IAASB Chairman




                                      Page 34

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Improving the Auditor's Report

  • 1. IAASB Auditor Reporting Roundtable Improving the Auditor’s Report September 10, 2012 New York, NY Page 1
  • 2. Welcome and Introductory Remarks Prof. Arnold Schilder IAASB Chairman Page 2
  • 3. Why Is the IAASB Suggesting Changes to the Auditor’s Report? • Reflections on today’s global economic challenges indicate that the auditor’s report could be more relevant and informative to users – Improved auditor reporting is essential to the continued relevance of the audit profession globally – Now is the time for change, but no clear agreement on what should be changed • Increased complexity in financial reporting and global business activity has increased users’ need for more information – Audit is valued, but the auditor’s report could be more informative – Users, in particular investors, want more relevant and decision-useful information about the entity, the financial statements and the audit • Important to now lay the foundation for the future of global auditor reporting and improved auditor communications – Creative solutions are needed to overcome challenges Page 3
  • 4. IAASB’s Response • Auditor Reporting #1 priority – IAASB progressing revisions to auditor reporting standards, and other standards as appropriate, on an accelerated basis • Invitation to Comment (ITC) unanimously approved – Sets out the IAASB’s indicative direction and rationale, and describes the IAASB’s perspectives on value and impediments • ITC includes illustrative auditor’s report – New sections on Going Concern, Auditor Commentary, and Other Information – Most relevant information positioned first (e.g., auditor’s opinion) – Further improvements to:  Better explain an audit  Enhance transparency Page 4
  • 5. Exploring a Global Solution Important to address differing perspectives on how best to communicate audit results in a manner relevant to users, while allowing for comparable auditor reports Consistency in pursuit of achieving easily recognizable and comparable global auditor’s reports Relevance to enhance usefulness of global auditor reports, and accommodate jurisdictions’ laws and regulations Page 5
  • 6. IAASB Auditor Reporting Project Status Commencement of Research & Standard Setting Consultation on Next Steps Consultation Indicative Direction Academic Invitation to Comment: research Improving the Auditor’s Exposure Draft (2006 – 2009) Project proposal Report (June 2013) (December 2011) (June 2012) Review of national Comments Due developments (October 8, 2012) /initiatives (2009-2010) Roundtables Final Standards Task Force and NY, Brussels & KL Consultation Paper: Subcommittee (June 2014) Enhancing the Value of Appointments (September – October 2012 ) Auditor Reporting (January 2012) (May 2011) Visit the Auditor Reporting Page at www.iaasb.org/auditor-reporting for updates Page 6
  • 7. What Do We Need from You? • Your views will help inform the IAASB’s standard-setting proposals in a way that will best serve the public interest • Broad overarching considerations include − Do the suggested improvements increase the value of the auditor’s report? Why or why not? − What are the potential merits and drawbacks of the suggested improvements? Are there other alternatives that could be considered? − What additional considerations, if any, should be made for audits of SMEs (e.g., emerging growth companies) and public sector entities? − Should consistency continue to be a primary objective in auditor reporting? Page 7
  • 8. Today • Three Sessions – Auditor Commentary – Dan Montgomery, IAASB Deputy Chair – Going Concern & Other Information – Bruce Winter, IAASB Member – Clarification & Transparency – Prof. Bill Kinney, IAASB Member • For Each Session – Introduction – Panelist remarks to stimulate debate – Roundtable discussion • Announcements – James Gunn, IAASB Technical Director Page 8
  • 9. Auditor Commentary: Moving beyond Boilerplate Dan Montgomery IAASB Deputy Chair Task Force Chair Page 9
  • 10. Why an Auditor Commentary Section? • Suggested new section aimed at improving communicative value of the auditor’s report • Highlights matters that are, in the auditor’s judgment, likely to be most important to users’ understanding of the audited financial statements or the audit • A vehicle for providing – A “roadmap” to help users better navigate complex financial reports – Additional context to the matters highlighted (e.g., explaining why the matter was important from an audit perspective or briefly describing the auditor’s procedures and findings) – Information about key judgments made by the auditor to provide more transparency regarding how the audit was conducted Page 10
  • 11. More about Auditor Commentary • Entity-specific information, the nature and extent of which is determined based on facts and circumstances of the particular engagement • Leverages existing concepts of Emphasis of Matter and Other Matter paragraphs • Required for public interest entities (includes all listed entities) • Provided at the discretion of the auditor for other entities Page 11
  • 12. What Could Be Addressed in Auditor Commentary? • Areas of high risk of material misstatement • Areas of significant management judgment, including the application of accounting policies • Significant or unusual transactions • Significant aspects of the audit scope and strategy • Difficult or contentious matters identified during the audit • Other matters discussed with those charged with governance/audit committee or required to be addressed by law or regulation Page 12
  • 13. Auditor Commentary: Navigating a Way Forward Both value and impediments exist Essential to strike an appropriate balance ITC examples illustrate the concept of auditor commentary Page 13
  • 14. Auditor Commentary (AC): Discussion Questions 1. Is the concept of AC an appropriate response to the call for auditors to provide more information in auditor reports? 2. Do the illustrative examples of AC deliver the informational value sought? If yes, how might this information be helpful in decision making? If not, what aspects are not valuable, or what is missing? 3. Should an AC section be required for audits of all entities? 4. Are there unique considerations for audits of non-public entities, in particular audits of SMEs? 5. What risks and impediments exist to providing AC in the auditor's report? How might they be overcome?  Adapted from ITC Questions for Respondents Page 14
  • 15. Auditor Commentary: Panelists Jack Ciesielski, CFA Institute Jeff Mahoney, Council of Institutional Investors Kristian Koktvedgaard, BusinessEurope Bill Platt, Deloitte Page 15
  • 16. Auditor Commentary Roundtable Participants’ Views and Reactions Page 16
  • 17. Going Concern & Other Information: Making the Implicit Explicit Bruce Winter IAASB & Task Force Member Page 17
  • 18. Why a Going Concern Section? • The global financial crisis highlights the importance of timely financial reporting with an increased focus on entities’ assessment of going concern and related disclosures • Policy debates and proposals in response to the economic crisis, incl. EC proposals and UK Sharman report, suggest a need for transparency with respect to auditors’ work on going concern • Respondents to 2011 IAASB consultation asked for – Clarification of the respective roles and responsibilities of management and the auditor regarding going concern – Auditors to report the outcome of their work effort regarding going concern Page 18
  • 19. Going Concern: Suggested Improvements • New reporting requirement for all auditor’s reports to include – A conclusion regarding the appropriateness of management's use of the going concern assumption; and – A statement regarding whether, based on the audit work performed, material uncertainties related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern have been identified • Makes explicit the auditor’s objectives and work effort required by the auditing standard (ISA 570) • Language would be tailored based on the applicable financial reporting framework Page 19
  • 20. Going Concern: Suggested Improvements • New section is complemented by a new description of management’s responsibility with respect to going concern • Similar to current audit requirements, when a material uncertainty has been identified that is adequately disclosed in the financial statements, the auditor would draw users’ attention to such disclosure Page 20
  • 21. More about Going Concern Improvements • Is there sufficient clarity as to the meaning of material uncertainties about going concern to support explicit statements in the auditor's report? • Is there merit in auditors describing their rationale as to why material uncertainties do not exist? • Would it be desirable to disclose (possibly as part of Auditor Commentary) events or conditions that attracted significant audit attention even if the auditor concludes that no material uncertainties exist? Page 21
  • 22. Why a New Section on Other Information? • Other Information – Includes financial and non-financial information (e.g., Management’s Discussion & Analysis (MD&A), Operating and Financial Review (OFR) Statements) – May address both historical and prospective information • Overwhelming majority of respondents to 2011 IAASB consultation indicated that including a statement about the auditor’s responsibilities regarding other information i) would increase transparency or ii) was already local practice • Strong support for some form of auditor conclusion with respect to other information Page 22
  • 23. Other Information: Suggested Improvements and Future Considerations • New “Other Information” section required for all audits where relevant • Statement as to whether, based on reading the other information, the auditor has identified material inconsistencies between the audited financial statements and other information • Auditor also required to explicitly identify the other information that was read Page 23
  • 24. Going Concern & Other Information: Discussion Questions  1. Do the suggested auditor statements related to going concern and other information provide useful information to users? 2. What risks or impediments exist to providing these statements? How might they be overcome? 3. What are your views about the placement of the new sections in the auditor’s report? 4. Do you agree with the content and placement of the new description of management’s responsibilities with respect to going concern?  Adapted from ITC Questions for Respondents Page 24
  • 25. Going Concern & Other Information: Panelists Anne Simpson, CalPERS Gary Kabureck, Xerox Corporation Mike Cook, Comcast Wayne Kolins, BDO Page 25
  • 26. Going Concern & Other Information Roundtable Participants’ Views and Reactions Page 26
  • 27. Transparency & Clarification: Making the Audit More Understandable Prof. Bill Kinney IAASB & Task Force Member Page 27
  • 28. Why More Standardized Information about Audits? • Respondents to 2011 IAASB consultation − Supported including additional information in the auditor’s report to further describe the auditor’s responsibilities − Suggested that clarifying certain technical terms would contribute to narrowing the expectations gap and improve auditor reporting − Highlighted the important role that management and TCWG play in the financial reporting process • IAASB sees merit in more fully explaining the concept of a risk-based audit Page 28
  • 29. Improvements Related to Transparency about the Audit • For all audits, required identification of engagement partner responsible for the audit − Proponents suggest this would provide engagement partner with greater sense of personal accountability − Already required in many jurisdictions − Possible impediments include a perceived reduction in firm responsibility and possible increased liability for engagement partner in certain jurisdictions, in particular the US • Explicit statement about the auditor’s compliance with relevant ethical requirements − No specific identification of the applicable ethical code • Information about the involvement of other auditors and an enhanced description of auditor’s responsibility in a group audit Page 29
  • 30. Improvements Related to Clarifying Communications about the Audit • Clarification of respective responsibilities of management and those charged with governance • Fuller description about the auditor’s responsibilities – Emphasizes the auditor’s responsibilities relating to fraud, internal control, accounting policies, financial statement disclosures, and accounting estimates – Should an option be provided to streamline the content of the auditor’s report by moving the description of auditor’s responsibility elsewhere (e.g., NSS website)? • Acknowledges and allows for variation in the description of the responsibilities of management and those charged with governance (e.g., directors) based on national laws or reg. Page 30
  • 31. Transparency & Clarification: Discussion Questions  1. Should the auditor’s report identify the engagement partner responsible for the audit? 2. What are your views with regard to disclosures about the involvement of other auditors? Why is this information critical to your decision-making process? 3. Do the descriptions of the responsibilities of management / those charged with governance and auditors help your understanding an audit? 4. Should the description of auditor responsibilities be permitted to be placed outside of the auditor’s report (e.g., a website)? 5. What are your views on the revised format of the illustrative auditor’s report in the ITC, including ordering and placement? 6. To what extent should consistency continue to be a primary objective in auditor reporting?  Adapted from ITC Questions for Respondents Page 31
  • 32. Transparency & Clarification: Panelists Steve Buller, BlackRock Neri Bukspan, Standard & Poor’s Don McGovern / Diana Hillier, PwC Page 32
  • 33. Transparency & Clarification Roundtable Participants’ Views and Reactions Page 33
  • 34. Conclusion and Closing Remarks Prof. Arnold Schilder IAASB Chairman Page 34

Notas do Editor

  1. Questions here are adapted from questions 3-7 of the ITC as follows:Q1 = Q3Q2 = Q4/ Q5Q3 = Q7 Q4 = Q7 Q5 = Q6For further probing :Q4. Do you agree that the matters to be addressed in Auditor Commentary should be left to the judgment of the auditor, with guidance in the standards to inform the auditor’s judgment? Why or why not? If not, what do you believe should be done to further facilitate the auditor’s decision-making process in selecting the matters to include in Auditor Commentary?Q6. What are the implications for the financial reporting process of including Auditor Commentary in the auditor’s report, including implications for the roles of management and those charged with governance (TCWG), the timing of financial statements, and costs? Q7. Do you agree that providing Auditor Commentary for certain audits (e.g., audits of public interest entities (PIEs)), and leaving its inclusion to the discretion of the auditor for other audits is appropriate? Why or why not? If not, what other criteria might be used for determining the audits for which Auditor Commentary should be provided?