Verband der Industrie- und Dienstleistungsknzerne in der Schweiz Fédératin des grupes industriels et de services en Suisse Federatin f Industrial and Service Grups in Switzerland 22 Nvember 2013 Internatinal Auditing and Assurance Standards Bard (IAASB) 529 5th Avenue, 6th Flr New Yrk, New Yrk 10017 United States f America Cmment Letter n Expsure Draft Reprting n Audited Financial Statements: Prpsed New and Revised Internatinal Standards n Auditing (ISAs) Dear Madam, dear Sir SwissHldings, the Swiss Federatin f Industrial and Service Grups in Switzerland, represents 57 Swiss grups, including mst f the cuntry s majr industrial and cmmercial enterprises. We very much welcme the pprtunity t prvide cmments t the cnsultatin n Internatinal Standards n Auditing (ISAs) cncerning the Reprting n Audited Financial Statements. We are a Preparers rganizatin s ur cmments are made in this cntext. Our respnse t yur questins, which are in the attached appendix, has been prepared in cnjunctin with ur member cmpanies. We thank yu fr the pprtunity t submit ur cmments n yur prpsal. Yurs sincerely SwissHldings Federatin f Industrial and Service Grups in Switzerland Michel Demaré Chair Christian Stiefel Directr Pstfach 402, 3000 Bern 7 Nägeligasse 13, 3011 Bern Tel. +41 (0)31 356 68 68 Fax +41 (0)31 352 32 55 sh@swisshldings.ch www.swisshldings.ch
SwissHldings 2 APPENDIX ANSWERS TO SPECIFIC QUESTIONS IN INVITATION TO COMMENT Key Audit Matters (KAM) Questin 1 D users f the audited financial statements believe that the intrductin f a new sectin in the auditr s reprt describing the matters the auditr determined t be f mst significance in the audit will enhance the usefulness f the auditr s reprt? If nt, why? As Preparers we accept that the extent f external auditrs wrk and challenges t us is nt dne justice in the current biler-plate pinin that is placed n ur member firms cnslidated financial statements. We cnsider, especially in the aftermath f the recent financial crisis, that this has cntributed t the expectatin gap that currently exists between the public and users views f the rle f external auditrs and that f the audit prfessin themselves. We cnsider that this has led t the increasingly vcal mvement fr mandatry rtatin f audit cmpanies which we generally d nt supprt. Therefre generally we are supprtive f a mve away frm the biler-plate audit pinin if this wuld reduce the pressure n the prpsals fr a ptentially cstly and disruptive change f external audit firms. Having said this we cnsider that the bjectives f such a cmmunicatin shuld be the fllwing: - assist users f the auditr s reprt in understanding areas that were the subject f significant auditr attentin in its audit strategy and its audit plan; - allw users f the auditr s reprt t better understand areas f significant auditr judgment in the audited financial statements. As a result the bjective f cmmunicating KAM shuld nt be t cmment n the financial statements r n the assessments made by the management f the audited entity. - Therefre the auditr shuld take int accunt, amng the areas f significant auditr attentin: the areas that the auditr identifies as presenting risks f material misstatement in the financial statements; the circumstances that required significant mdificatin f the auditr s planned apprach t the audit, including as a result f the identificatin f a significant deficiency in internal cntrl ver financial reprting; - Hwever, we believe it is necessary t avid any public disclsure f matters that wuld unnecessarily cast dubt n the financial statements if these d nt cntain any significant misstatements. The fllwing wuld be a surce f cnfusin fr users f financial statements: the mere disclsure f significant risks, withut mentining the existence f prcesses r actins t reduce these risks t an acceptably lw level; the public disclsure f a significant deficiency in internal cntrl, withut mentining the existence f internal r external cntrls r f crrective measures.
SwissHldings 3 T clarify the effect f KAM n the audit and t avid misunderstandings n the part f users f financial statements, ur member cmpanies wish t make the fllwing prpsals: - when the auditr decides t disclse the areas they have identified as presenting risks f material misstatement in the financial statements, the auditr shuld als be required t indicate hw they have addressed these risks in their audit strategy and audit plan (it is just an ptin, accrding t A12 f the applicatin material f prpsed ISA 701); - the auditr s reprt shuld clearly indicate, as prpsed (draft ISA 701.9.c), that the auditr s prcedures relating t KAM were designed in the cntext f the audit f the financial statements as a whle. Hwever, the reprt shuld als specify that the audit prcedures, as well as the scpe and timing f the audit, were designed taking int accunt the KAM, including the risks f material misstatement in the financial statements and, where apprpriate, significant internal cntrl deficiencies identified during the curse f the audit; - the descriptin f each KAM shuld systematically include an explanatin f their effect n the audit and nt, as prpsed (draft ISA 701.10a), t the extent the auditr cnsiders it necessary. Questin 2 D respndents believe the prpsed requirements and related applicatin material in prpsed ISA 701 prvide an apprpriate framewrk t guide the auditr s judgment in determining the key audit matters? If nt, why? D respndents believe the applicatin f prpsed ISA 701 will result in reasnably cnsistent auditr judgments abut what matters are determined t be the key audit matters? If nt, why? Fr ur respnse t questin 2 see 1 abve. Questin 3 D respndents believe the prpsed requirements and related applicatin material in prpsed ISA 701 prvide sufficient directin t enable the auditr t apprpriately cnsider what shuld be included in the descriptins f individual key audit matters t be cmmunicated in the auditr s reprt? If nt, why? Fr ur respnse t questin 3 see 1 abve. Questin 4 Which f the illustrative examples f key audit matters, r features f them, did respndents find mst useful r infrmative, and why? Which examples, r features f them, were seen as less useful r lacking in infrmatinal value, and why? Respndents are invited t prvide any additinal feedback n the usefulness f the individual examples f key audit matters, including areas fr imprvement. Fr ur respnse t questin 4 see 1 abve. Questin 5 D respndents agree with the apprach the IAASB has taken in relatin t key audit matters fr entities fr which the auditr is nt required t prvide such cmmunicatin that is, key audit matters may be cmmunicated n a vluntary basis but, if s, prpsed ISA 701 must be
SwissHldings 4 fllwed and the auditr must signal this intent in the audit engagement letter? If nt, why? Are there ther practical cnsideratins that may affect the auditr s ability t decide t cmmunicate key audit matters when nt therwise required t d s that shuld be acknwledged by the IAASB in the prpsed standards? Questin 6 D respndents believe it is apprpriate fr prpsed ISA 701 t allw fr the pssibility that the auditr may determine that there are n key audit matters t cmmunicate? a) If s, d respndents agree with the prpsed requirements addressing such circumstances? b) If nt, d respndents believe that auditrs wuld be required t always cmmunicate at least ne key audit matter, r are there ther actins that culd be taken t ensure users f the financial statements are aware f the auditr s respnsibilities under prpsed ISA 701 and the determinatin, in the auditr s prfessinal judgment, that there are n key audit matters t cmmunicate? If nt, why nt? Questin 7 D respndents agree that, when cmparative financial infrmatin is presented, the auditr s cmmunicatin f key audit matters shuld be limited t the audit f the mst recent financial perid in light f the practical challenges explained in paragraph 65? If nt, hw d respndents suggest these issues culd be effectively addressed? Questin 8 D respndents agree with the IAASB s decisin t retain the cncepts f Emphasis f Matter paragraphs and Other Matter paragraphs, even when the auditr is required t cmmunicate key audit matters, and hw such cncepts have been differentiated in the Prpsed ISAs? If nt, why? Ging Cncern Questin 9 D respndents agree with the statements included in the illustrative auditr s reprts relating t: a) The apprpriateness f management s use f the ging cncern basis f accunting in the preparatin f the entity s financial statements? b) Whether the auditr has identified a material uncertainty that may cast significant dubt n the entity s ability t remain a ging cncern, including when such an uncertainty has been identified (see the Appendix f prpsed ISA 570 (Revised))?
SwissHldings 5 In this regard, the IAASB is particularly interested in views as t whether such reprting, and the ptential implicatins theref, will be misunderstd r misinterpreted by users f the financial statements. See questin 10 belw fr ur respnse. Questin 10 What are respndents views as t whether an explicit statement that neither management nr the auditr can guarantee the entity s ability t cntinue as a ging cncern shuld be required in the auditr s reprt whether r nt a material uncertainty has been identified? Cncerning items 9 and 10 abve ur member cmpanies recgnize the value f assessing the apprpriateness f the use f the ging cncern basis f accunting. In this respect hwever we strngly supprt the NET assessment f ging cncern (ie ne that wuld take int accunt the mitigating actins that are being undertaken by the cmpany under review). Hwever, while the auditr shuld indicate that it has nt identified a material uncertainty that may cast significant dubt n the entity s ability t cntinue as a ging cncern, it is unclear which time perid is being cnsidered (eg fr assessing the ability t refinance maturing debt) and what principles wuld characterise a material uncertainty, ptentially resulting in negative effects n hw ur member cmpanies are perceived: - it must first be emphasized that there is n business withut risk and that cmpanies are rutinely facing, and increasingly facing, material uncertainties; - in this cntext: any pessimistic auditr judgment wuld be likely t affect the perceptin f the cmpany by third parties, r culd turn int a "self-fulfilling prphecy", with very damaging effects n ur member cmpanies and the ecnmy; we believe it is particularly relevant t require a statement that neither management nr the auditr can guarantee the entity s ability t cntinue as a ging cncern, whether r nt a material uncertainty has been identified. Therefre it is necessary t explicitly state in the financial reprting framewrks and in the text f the standard itself the principle that such material uncertainty relates t cases where the audited cmpany is facing a serius change in its financial psitin, which irreversably leads t the liquidatin f the cmpany (cncept f n realistic alternative t liquidatin mentined in draft ISA 570.A22). Indeed, it is nly under these cnditins that the cmpany shuld measure its balance sheet at the liquidatin value, and nt accrding t nrmal valuatin methds. In additin, when events and cnditins have the ptential t jepardize the ability t cntinue as a ging cncern, ur member cmpanies cnsider that it may be inapprpriate t publish the cmpany s plans t deal with these events and cnditins (as indicated in the draft ISA.21a). Indeed, the identificatin f these plans by the auditr makes sense, but their disclsure t the public may undermine their chances f success.
SwissHldings 6 Cmpliance with Independence and Other Relevant Ethical Requirements Questin 11 What are respndents views as t the benefits and practical implicatins f the prpsed requirement t disclse the surce(s) f independence and ther relevant ethical requirements in the auditr s reprt? Acceptable. Disclsure f the Name f the Engagement Partner Questin 12 What are respndents views as t the prpsal t require disclsure f the name f the engagement partner fr audits f financial statements f listed entities and include a harm s way exemptin? What difficulties, if any, may arise at the natinal level as a result f this requirement? Appears an acceptable prpsal. Other Imprvements t Prpsed ISA 700 (Revised) Questin 13 What are respndents views as t the apprpriateness f the changes t ISA 700 described in paragraph 102 and hw the prpsed requirements have been articulated? N particular cmment. Questin 14 What are respndents views n the prpsal nt t mandate the rdering f sectins f the auditr s reprt in any way, even when law, regulatin r natinal auditing standards d nt require a specific rder? D respndents believe the level f prescriptin within prpsed ISA 700 (Revised) (bth within the requirements in paragraphs 20 45 and the circumstances addressed in paragraphs 46 48 f the prpsed ISA) reflects an apprpriate balance between cnsistency in auditr reprting glbally when reference is made t the ISAs in the auditr s reprt, and the need fr flexibility t accmmdate natinal reprting circumstances? A standard rder fr items in the Audit Opinin wuld make sense. While ISA 720 is currently being revised, the draft standard n the auditr s reprt (ISA 700) prvides that the reprt refers t prcedures perfrmed n infrmatin that is nt included in the financial statements, but in dcuments cntaining r accmpanying audited financial statements. The illustrative auditr s reprts include a placehlder fr a sectin n Other Infrmatin and it is freseen that the elements f prpsed ISA 700 will be finalised when the revisin f ISA 720 is cmpleted, such that reprting n Other Infrmatin will cme int effect at the same time as the ther changes addressed by the prpsed ISAs.
SwissHldings 7 The inclusin f this paragraph shuld in n case cnstitute a blank cheque fr the cntents f the future ISA 720. It wuld be preferable t finalise and validate the cntents f ISA 720 befre cnsidering a reference t ISA 720 in ISA 700. An amendment t ISA 700 shuld be cnsidered nly upn final adptin f ISA 720. In any case, ur member cmpanies cnsider it essential t clarify the fllwing pints: - the nature f the dcuments cvered by ISA 720 shuld always be defined at natinal level. Als these dcuments shuld in n case include dcuments that are established by ur member cmpanies n a vluntarily basis (eg. sustainability reprt included in a dcument cntaining audited financial statements); and - when the infrmatin cntained in the dcuments is nt accunting infrmatin, the prcedures required by ISA 720 shuld nt exceed an infrmed reading and, in the auditr s reprt, an indicatin f the infrmatin that is identified as materially incnsistent with the audited financial statements.