The Auditor's Report: A Time for Change?
Comments from
March 2008
ACCA welcomes the opportunity to comment on the above. ACCA is the largest and fastest-growing global professional accountancy body with over 122,000 members and 325,000 students in 170 countries.
We aim to offer the first choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. ACCA works to achieve and promote the highest professional, ethical and governance standards and advance the public interest.
We believe that the APB should aim to adopt, without significant variation, the International Standards on Auditing (ISAs) that deal with reporting so that they become mandatory in the UK and Ireland at the same time as all Clarified ISAs do so internationally. Changes in law should be reflected in existing pronouncements so as to promote appropriate reporting from the date on which that becomes necessary. Given that accounting reference periods may be much shorter than a year, a degree of urgency is advisable.
Our further comments are structured as answers to the specific questions set out in the Discussion Paper. Our answers recognise the overriding importance of international conformity but do not anticipate any changes that might be made by the IAASB in finalising the related ISAs. Our views are further driven by the need to seek an appropriate balance between the need to address 'expectation gap' issues and brevity, which is an important aspect of clear reporting.
Amending the auditor's report to reflect changes to company law.
1 Should the auditor's report, as illustrated on pages 19 to 21, make reference to the directors' responsibility under section 393 of CA 2006 to be satisfied that the financial statements give a true and fair view?
Yes: this is very important and outweighs the need for brevity.
2(a) Is it helpful for the auditor's report to describe the auditor's responsibilities under CA 2006 to report certain matters by exception?
Yes: so that users are in no doubt.
2(b) If you believe it is helpful to describe the auditor's responsibilities with respect to matters reported on by exception in the auditor's report, do you also believe that, where appropriate, it would be helpful for the auditor's opinion to explicitly state that there is nothing to report in respect of those matters on which they report by exception?
No: an explicit statement would give too much emphasis to matters that are secondary to the opinion.
Other possible changes to the auditor's report
3 Should the auditor's report be split into two parts as envisaged by ISA 700 (Revised)?
Yes: for international conformity and ease of use.
4(a) Should the auditor's report describe the directors' responsibilities with respect to the preparation of the financial statements?
Yes: this is very important and outweighs the need for brevity (but see our answer to 4(b)).
4(b) If you believe it is necessary for the auditor's report to describe the directors' responsibilities, do you prefer the wording prescribed by ISA 700 (Revised) (Example 1) or would you prefer the wording used in Example 2?
It is important that the APB adopts the wording of ISA 700 when finalised. There has been considerable development in the IAASB's approach to the responsibilities of management and those charged with governance and the preconditions of an audit. A standard setter for auditing cannot legitimately define such responsibilities but where national law does not address such matters (not the case in the UK and Ireland ) some mechanism has to be found to communicate to users the preconditions of an audit. An appropriate international solution could even remove the need for any explicit reference to the director's responsibilities in law.
Subject to the above, we prefer Example 1.
5 Is it necessary for the auditor's report to contain a detailed description of the auditor's responsibilities if such information is publicly available?
Yes: until an appropriate mechanism exists to make sure that 'publicly available' is as accessible as the report for all users. Such an approach would also have to be sanctioned by ISAs.
There is currently more scope for communication of expectation gap material, risk management (Bannerman) and even information on the capabilities of the specific audit firm through, for example, website disclosure; but more experience is needed (for example of the use of transparency reports) to determine whether and when that could be generally feasible.
6 Should the auditor's report refer to the auditor's responsibility to comply with APB's Ethical Standards?
No: it is currently implicit in compliance with auditing standards. Reference to ethical standards in the UK and Ireland might raise questions from users at the time when the APB adopts ISAs that no longer need the modifier '(UK and Ireland)'.
7 Should auditors be required to state in their report, where it is appropriate, that there are no matters that they wish to emphasise?
No: a positive opinion of this nature is qualitatively different to the absence of emphasis of matter. The IAASB is making more formal the approach by which auditors may refer to other matters in their report (not just required emphasis) and international conformity will remain important.
8(a) Do you think that there should be a positive statement in the auditor's report concerning the adequacy of accounting records?
No: as we explained in our answer to 2(b) above, ' an explicit statement would give too much emphasis to matters that are secondary to the opinion'.
8(b) If not will the steps proposed by the APB to:
(i) require auditors to make a statement that they have nothing to report in connection with their duty to consider the adequacy of the accounting records; and
(ii) provide additional standards and guidance for auditors with respect to their responsibility with respect to adequate accounting records, address the problem that the AQF is seeking to resolve?
We do not support the inclusion (whether by positive or negative opinion) of such matters, which are secondary to the main opinion. There remain issues of interpretation of the law as well the overlap between 'accounting records' and 'internal control' which we suggest require resolution before inclusion could be contemplated. We would not like debate on a wholly UK and Ireland issue to detract from reaching an acceptable international position on auditor reporting in relation to internal control.
9(a) Should the auditor's report describe the auditor's responsibility with respect to a listed company's Corporate Governance Statement?
Yes: this is important and outweighs the need for brevity.
9(b) If you believe that the responsibility should be described in a different way to Example 2 please provide your suggested description?
Example 2 is acceptable.
9(c) Please indicate, stating your reasons whether you believe that the standard wording “We are not required to consider whether the board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group's corporate governance procedures or its risk and control procedures” (which has been omitted from Example 2) should be included in the auditor's report?
The wording may be omitted: we are persuaded in this by the fact that such reporting is established and the omission benefits brevity. We could be persuaded otherwise by specific research and would suggest (as set out in our response to question 5 above) that there is currently more scope for communication of such expectation gap and risk management material through making it publicly available.
10 Should the auditor's report describe the auditor's responsibilities in relation to “Other Information” in the Annual Report?
Yes: given the increasing role of other information (in its widest sense), in particular in the annual reports of Irish and UK listed companies, it is important that users are clear on what has come within the scope of the auditor's work. The wider issue of international conformity should not be ignored, nor the prospect of multiple assurance reports by the auditor, or others, where annual reports incorporate sustainability information.
11(a) Which of the example auditor's report do you prefer? Please provide the reasons for your choice?
11(b) If you would prefer a different approach to these examples please provide your suggested unmodified auditor's report? (Alternatively, indicate those elements of an auditor's report that you would like to see included in an unmodified auditor's report.)
Although we have answered questions above on certain aspects of content, we do not express an overall preference between these examples; nor do we feel that it is appropriate to set out an alternative. The examples differ in the principal features they embody, but are most easily categorised by their overall length. As set out in our general comments above, we recognise the overriding importance of international conformity and would support, if necessary, a report that was not ideal in terms of length or content in the UK and Ireland (although it must, of course, comply with the law).
Including company specific information within the auditor's report
12 Do you agree with the view of the IAASB expressed in the Exposure Draft of ISA 706 (Revised and Redrafted) that the widespread use of Emphasis of Matter paragraphs diminishes the effectiveness of the auditor's communication of such matters?
Our response to the IAASB on this exposure draft did not disagree with this view but neither did we identify a direct link between the view and the proposed approach in ISA 706. There are arguments that more frequent use of such paragraphs enhances users' understanding of such circumstances. Conversely, if a paragraph is perceived as being 'usual in such circumstances' auditors may be more likely to judge the matter to be of fundamental importance. In the long term, the function of auditors emphasising matters could be overtaken by enhanced emphasis in financial reporting.
The development of narrative reporting (and sustainability reporting, if the latter can be regarded as separate) has undoubtedly increased the demands of users for auditor-originated comment on performance. The reporting company has scope to develop means for communicating such comments outside of the auditor's report, but we do not address that further in this response.