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Proposed Pronouncements on the Auditor's Report issued for comment by the International Federation of Accountants

Comments from ACCA
March 2004

 

Executive Summary

The Association of Chartered Certified Accountants (ACCA) welcomes the opportunity to comment on the proposed Pronouncements on the Auditor's Report issued for comment by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC): ISA 700 (Revised) The Independent Auditor's Report on a Complete Set of General Purpose Financial Statements (the proposed revised ISA 700 ), ISA 200 Objective and General Principles Governing an Audit of Financial Statements (the proposed ISA 200), Amendment to ISA 210 Terms of Audit Engagements and Conforming Amendments.

While it would have been preferable to issued exposure drafts dealing with modified reports as well as unmodified reports, ACCA recognises that IAASB wishes to meet the needs of major stakeholders, for whom the timeliness of change to ISA 700 is important.

We are broadly in agreement with the proposed revised ISA 700 and the other amendments in the proposed pronouncements. In particular, we welcome the introduction of a two-part report allowing auditors to separate national legal and regulatory reporting requirements from the report on the financial statements. This will be welcomed in particular in the European Union as it facilitates comparison of reports issued in different countries.

We generally support the increased standardisation of wording and its updating following the issue of the �Audit Risk' ISAs. Our comments draw attention, nevertheless, to certain difficulties in the detail of the wording, not least in relation to disclosure in the auditor's report of the responsibilities of management.

 

Comments on �Significant Proposals'

We comment below on matters referred to in the Explanatory Memorandum issued with the proposed pronouncements as �Significant Proposals'. A further section of our comments deals with other issues.

Guidance on Forming the Auditor's Opinion at the Conclusion of the Audit

We agree that the process of forming the opinion on the financial statements is important and welcome the expansion of guidance material in paragraphs 8 to 12. Paragraph 9 sets out four matters which the auditor should consider. In our view, this consideration should be identified as an essential procedure through the use of bold type.

The IAASB will be aware of the fact that the Auditing Practices Board (APB) in the United Kingdom has issued a separate standard on the overall review of financial statements. Given the decision to deal separately in ISAs with modified and unmodified reports, and the potential for duplication of material, we suggest that consideration be given to the creation of a separate ISA for the overall review of financial statements. This could be done during the development of the proposed revised ISA 701 Modifications to the Independent Auditor's Report .

The Applicable Financial Reporting Framework

We welcome the inclusion of material dealing with the applicable financial reporting framework. This acknowledges the need for suitable criteria as set out in the International Framework for Assurance Engagements.

We are aware of the existence of different views as to whether the terms �give a true and fair view' and �present fairly, in all material respects� are equivalent. The issue has become of increased importance as the proposed pronouncements include considerable discussion of applicable financial reporting frameworks and the possibility that it may be necessary to depart from a specific requirement in the framework in order to achieve the objective of fair presentation.

There are complex legal, accounting and auditing issues involved and we do not believe that they are capable of resolution in the relatively short treatment in the proposed pronouncements. Nevertheless, a balance has to be struck between comprehensive exposition and usability and we are satisfied that, overall, the right balance has been achieved.

Supplementary Information Included With the Financial Statements

Reference is made to the fact that the auditor's responsibilities with respect to unaudited supplementary information are consistent with those described in ISA 720 Other Information in Documents Containing Audited Financial Statements . No amendment is proposed, however, to that ISA.

As the proposed revised ISA 700 introduces several requirements which could apply equally to the information dealt with in ISA 720, we recommend amending ISA 720 as a minimum by inserting a cross-reference to the proposed revised ISA 700.

Ideally, we would prefer to see supplementary and other information dealt with together and in a consistent manner. We also suggest that the IAASB provides guidance on the considerations arising from the presentation on the Internet of audited financial statements and supplementary and other information. This should address issues such as a possible inability to refer to page numbers to identify the financial statements. In this regard we draw attention to the United Kingdom APB Bulletin 2001/1 The Electronic Publication of Auditor's Reports .

Date of the Auditor's Report

We agree with the clarification proposed to the dating of the auditor's report. As it is envisaged that other reporting responsibilities (paragraphs 40 to 43) may be dealt with in a separate section of a single report, there may be a need for a different date to be used in relation to such matters. Guidance should be provided as to whether this is permitted.

The proposed revised ISA 700 notes that �In some jurisdictions, law or regulation may prescribe when the audit is considered to be completed. In such circumstances, the auditor uses this date as the date of the auditor's report.' We recommend that, in such circumstances, the ISA should require a statement as to the date which would have been used had this not been the case. A similar issue arises in jurisdictions where the date disclosed for signing a report must be the date that the report is physically signed. Users are entitled to have appropriate disclosure, or else they may inadvertently assume that the date of the report is determined in accordance with paragraph 44. It would also be appropriate to alter the bold text of paragraph 44 to give recognition to the fact that it applies only where law or regulation does not prescribe a different date.

Conducting the Audit in Accordance With ISAs and National Standards

We agree in general with the proposals clarifying the auditor's performance and reporting responsibilities in those circumstances where ISAs and relevant national auditing standards are both applied.

We are concerned, however, that guidance in paragraph 54, which is intellectually correct, may prevent the use of ISAs in certain jurisdictions, or introduce inconsistency whereby ISAs would be used except where circumstances arise to bring conflict with national standards. We believe that the example used in the paragraph (of national requirements precluding an emphasis of matter paragraph) would be better addressed by an expansion of the report to explain that, in that respect, the auditor had been unable to comply with a specific ISA. This would provide users with almost all the benefits of an audit in accordance with ISAs, together with a clear disclosure that a scope limitation prevented their full application.

Other Reporting Responsibilities

We agree with the introduction of a two-part report allowing auditors to separate national legal and regulatory reporting requirements from the report on the financial statements. This will be welcomed in particular in the European Union, where otherwise it would be difficult to compare reports issued in different countries.

Wording of the Auditor's Report

We generally support the increased standardisation of wording and its updating consequent upon the issue of the �Audit Risk' ISAs. There are, however, particular problems in attempting to mandate disclosure in relation to the responsibility of management.

The wording required by paragraph 25 deals only with the core of management's relevant responsibilities. There are jurisdictions in which management is required to, or voluntarily decides to, disclose its responsibilities outside the auditor's report. We accept that, nevertheless, disclosure in the auditor's report is still appropriate. Guidance should be provided, however, as to whether auditors are allowed to cross-refer to an extended statement outside their report and to make it clear that such a cross-reference will not, on its own, be enough to comply with paragraph 25.

There are also problems associated with using the proposed revised ISA 700 in relation to reports for entities other than commercial enterprises. Although drafted generically, we can envisage circumstances where the wording will not be sufficient to encompass all the relevant responsibilities. Guidance should be provided to make it clear that expansion to accommodate specific client circumstances is permitted.

Paragraph 14 provides guidance that consistency in the elements, the layout, and the wording of the auditor's report promotes credibility in the global marketplace. Although bold text requires the inclusion of each element, the proposed revised ISA 700 does not contain any requirements relating to the order of presentation of the elements. We believe that the order of presentation of the elements set out in the proposed revised ISA 700 is appropriate and recommend that it be made mandatory, except where it is in conflict with national law or regulation.

 

Other Issues

Reasonable assurance

The issue of the International Framework for Assurance Engagements has brought about a change in the way assurance engagements are categorised. This new categorisation, into reasonable assurance engagements and limited assurance engagements, has increased the focus on the meaning of the word �reasonable' in the context of assurance.

The text dealing with reasonable assurance in the proposed amendment to ISA 200 is largely unchanged, except for the addition of a sentence at the end (paragraph 21) that: �Further, an audit opinion does not assure the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity.'

The proposed revised ISA 700 refers to reasonable assurance in paragraph 30 as follows:

�The auditor's report should describe the scope of the audit by stating that the audit was conducted in accordance with ISAs and explain that those standards require that the auditor plan and perform the audit to obtain reasonable, but not absolute, assurance whether the financial statements are free from material misstatement, whether due to fraud or error.'

It is inconsistent to refer generally in ISAs to the term �reasonable assurance' but to report by reference to �reasonable, but not absolute, assurance'. We suggest redrafting paragraph 30 to avoid this wording as the alternative approach, to remain consistent, would involve replacing all relevant references to �reasonable assurance' in IAASB pronouncements with the words � reasonable, but not absolute, assurance '.

Consideration should also be given to extending the wording of the auditor's report to include the amended wording of paragraph 21 of the proposed amendment to ISA 210.

Reference to fraud or error

The reference in paragraph 30 to �whether due to fraud or error' is a change from the extant ISA 700, which does not draw attention to fraud and error in this way. The intention of this change is not addressed in the Explanatory Memorandum, nor is there any clarification in the guidance material in the proposed revised ISA 700. Although the words are used once in paragraph 2 of ISA 315 Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement , we would not expect users of reports to be familiar with that document. The wording could be present for several entirely different reasons and we are not convinced, therefore, that users will gain any useful information from the text as it is proposed.

ISAs currently treat �reasonable assurance' as a concept relating to the financial statements taken as a whole and to the w hole audit process (paragraph 17 of the proposed ISA 200). Some parties consider that this treatment should be refined so as to communicate better to users the inherent limitations of an audit in the context of fraud (as set out in ISA 240 (Revised) The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements ). Until the IAASB has addressed that issue, it seems inappropriate to use the words � whether due to fraud or error' and we recommend that they be eliminated from the proposed report.

Auditor's name and address

Paragraphs 48 to 50 are not precise. In addition to requiring that a report be signed, paragraph 48 should require that the name of the auditor or audit firm be disclosed.

Paragraph 50 requires that �The report should name a specific location, ordinarily a city, in the jurisdiction where the auditor practices.' Although the paragraph is preceded by a heading � Auditor's Address' , the paragraph itself does not specify that the location named should actually be where the auditor practices. For example, an auditor in Kansas could name the city of New York , as that is a � specific location, in the jurisdiction where the auditor practices'. In addition, f or many auditors, reference to a city will be inappropriate and we do not believe that this should be a bold type requirement.

We suggest redrafting paragraph 50 as follows :

�The report should name the specific location where the auditor practices. The name should ordinarily be that of a town or city, although a more precise location may be disclosed.'

We also suggest that auditors should be encouraged to disclose a specific URL where users of their reports may find further information, such as the transparency report currently proposed for use within the European Union.

Conformity with ISAE 3000

International Standard on Assurance Engagements 3000 (Revised) Assurance Engagements Other Than Audits or Reviews of Historical Financial Information deals with the content of an assurance report. We believe that the reporting aspects of that document are well considered and properly reflect the approach in the International Framework for Assurance Engagements .

We recommend a review of the proposed revised ISA 700, therefore, to ensure that it is consistent with ISAE 3000 in those aspects where divergence is not necessary. For example, ISAE 3000 requires disclosure of the name of the firm or the practitioner (see our comment above).

Paragraph 50 of ISAE 3000 is particularly relevant in this regard as it provides for expansion of the report to include other information and explanations that are not intended to affect the practitioner's conclusion but which may be significant to the needs of the intended users.

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