Regional Conference of Northern Indian Regional Council of the ICAI At: Hotel The Park, New Delhi C.A. Sanjay Vasudeva Vice Chairman AASB, Vice Chairman DAAB
Presentation Overview : SA 700 (R); 705 (R); 706 (R) SA 701 Key Audit Matters SA720 (Revised) Impact of Digitisation 2
3 Audit Report Standards on Auditing 700 (R) 705 (R) 706 (R)
SA-700 (R) Forming an Opinion and Reporting on Financial Statements SA- 705 (R) Modifications to the Opinion in the Independent Auditor s Report 706 (R) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report These SAs are effective for audits of financial statements for periods beginning on or after April 1, 2018. Overview: Key Amendments (vis-à-vis Earlier SA 700 / 705 / 706 [w.e.f. April 1, 2011]) Details of changes in Auditor s Report 4
List of Standards on Auditing on Reporting: S.A. 700-799 Audit Conclusions and Reporting SA Name 700 Forming an Opinion and Reporting on Financial Statements 701 Communicating Key Audit Matters in the Independent Auditors Report. 705 Modifications to the Opinion in the Independent Auditor s Report 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report 710 Comparative Information Corresponding Figures and Comparative Financial Statements 720 The Auditor s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements 5
Relevant Announcements by ICAI on Reporting Standards I. Announcement on New / Revised Standards on Auditing (17-05-2016) I. Important Announcement on Revised Effective Date of SA 701 and Revised SAs 700, 705, 706 (01-04-2017) 6 The ICAI. vide Announcement dated 17 th May 2016 has notified various Revised Standards on Auditing as under: Revised SA 700, Forming an Opinion and Reporting on Financial Statements New SA 701, Communicating Key Audit Matters in the Independent Auditor s Report Revised SA 705, Modifications to the Opinion in the Independent Auditor s Report Revised SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report Revised SA 260, Communication with Those Charged with Governance Revised SA 570, Going Concern On 3 rd December, 2015 ICAI had issued Exposure Drafts of above Revised Standards on Auditing, for Comments from it s Members to be sent latest by January 18, 2016. After consideration of the suggestions/ comments from it s members, the ICAI has issued these standards [Effective for audits of financial statements for periods beginning on or after April 1, 2017]. The effective date/applicability of the above-mentioned Standards on Auditing be deferred by one year and consequently the said Standards shall now be effective/applicable for audits of financial statements for periods beginning on or after April 1, 2018 (instead of audits of financial statements for periods beginning on or after April 1, 2017 as was earlier decided
SA-700 / 705 / 706 (Revised) Key Amendments: Audit Report Presentation- Opinion Paragraph. Going Concern. [Mention in Management Responsibility Paragraph as well as Auditors Responsibilities Paragraph] Key Audit Matters [Refer SA 701] Under para Basis of Opinion ; a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit. Management Responsibility [new clauses] Auditors Responsibility [new clauses] 7
SA-700 / 705 / 706 (Revised) Auditor s Report Presentation: SA 700 Revised (wef 1-4-2018)] SA 700 (wef 1-4-2011)] Title Addressee Auditor s Opinion Basis for Opinion Going Concern Key Audit Matters Management s Responsibility Auditor s Responsibility Other Reporting Responsibilities Date, Place of Signature Title Addressee Introductory Paragraph Management s Responsibility Auditor s Responsibility Auditor s Opinion- Other Reporting Responsibilities Date, Place of Signature Unmodified Qualied EOM Unmodified Qualied EOM 8
SA-700 / 705 / 706 (Revised) Auditor s Report Presentation: Basis of Opinion: The auditor s report shall include a section, directly following the Opinion section, with the heading Basis for Opinion, that: (a) States that the audit was conducted in accordance with SAs (b) Refers to the section of the auditor s report that describes the auditor s responsibilities under the SAs; (c) Includes a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit, and has fulfilled the auditor s other ethical responsibilities in accordance with these requirements. The statement shall refer to the Code of Ethics issued by ICAI (d) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor s opinion. 9
SA-700 / 705 / 706 (Revised) Auditor s Report Presentation: Going Concern: Where applicable, the auditor shall report in accordance with SA 570 (Revised). Key Audit Matters For audits of complete sets of general purpose financial statements of listed entities, the auditor shall communicate key audit matters in the auditor s report in accordance with SA 701. When the auditor is otherwise required by law or regulation or decides to communicate key audit matters in the auditor s report, the auditor shall do so in accordance with SA 701. 10
SA-700 / 705 / 706 (Revised) Auditor s Report Presentation: Responsibilities of Management for the Financial Statements 11 This section of the auditor s report shall describe management s responsibility for: (a) Preparing the financial statements in accordance with the applicable financial reporting framework, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and (b) Assessing the entity s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to going concern. The explanation of management s responsibility for this assessment shall include a description of when the use of the going concern basis of accounting is appropriate. This section shall also identify those responsible for the oversight of the financial reporting process, when those responsible for such oversight are different from those who fulfill the responsibilities described as above. When the financial statements are prepared in accordance with a fair presentation framework, the description of responsibilities for the financial statements in the auditor s report shall refer to the preparation and fair presentation of these financial statements or the preparation of financial statements that give a true and fair view, as appropriate in the circumstances.
SA-700 / 705 / 706 (Revised) Auditor s Report Presentation: Auditors Responsibilities Shall state that the objectives of the auditor are to : (a) obtain reasonable assurance about whether the financial statement as a whole are free from material misstatement, whether due to fraud or error. (b) Issue an auditor s report that includes the auditor s opinion. State that reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists State that misstatements can arise from fraud or error, and either describe that they are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users or provide a definition or description of materiality in accordance with the applicable financial reporting framework. 12
SA-700 / 705 / 706 (Revised) Auditor s Report Presentation: Auditors Responsibilities Shall state that the auditor exercises professional judgment and maintains professional skepticism throughout the audit. The auditor shall describe that the auditor s responsibilities are : To identify and assess the risk of material misstatement To design and perform audit procedures responsive to those risks To obtain audit evidence that is sufficient and appropriate to provide basis for the auditor s opinion. To obtain an understanding of internal control relevant to the audit To evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. To conclude on the appropriateness of management s use of the going concern basis of accounting To evaluate the overall presentation, structure and content of the financial statements, including the disclosures. 13
SA-700 / 705 / 706 (Revised) Auditor s Report Presentation: Auditors Responsibilities State that the auditor communicates with those charged with governance regarding the planned scope and timing of the audit and significant audit findings, including any significant deficiencies identified in internal control. State that the auditor provides those charged with governance with a statement that the auditor has complied with relevant ethical requirements For all such entities for which key audit matters are communicated in accordance with SA 701, state that, from the matters communicated with those charged with governance, the auditor determines those matters that were of most significance in the audit. Note: The description of the auditor s responsibilities shall be located: 14 within the body of the auditor's report. Within an appendix to the auditor s report By a specific reference within the auditor s report to the location of such a description on a website of an appropriate authority
Standard on Auditing (SA) 701 Communicating Key Audit Matters in the Independent Auditor s Report 15
SA-701: Key Audit Matters Key Audit Matters Global Scenario Already embraced by 110+ countries Earlier adoption in Australia, Netherlands, South Africa and UK Position in the United States Shifting towards a Critical Audit Matters model Large filers by 30 June 2019 Other entities by 15 December 2020 Challenges identified Disclosure of sensitive information Deliberations and arguments with TCWG
SA-701: Key Audit Matters Need for ISA 701 Based on the indications of Academic Researches and Public Outreach programs, IAASB issued ISA 701, considering: Increasing Expectation of User s of FS to have insight of an audit. Need to enhance Quality of Audit & Relevance of Audit Increasing Complexities in Financial Reporting Framework
SA-701: Key Audit Matters Key Audit Matters Intended Benefits Increased communication between auditors, investors and those charged with corporate governance Enhanced user confidence in audit reports and financial statements Higher attention by management and preparers of financial statements to disclosures referencing the auditor's report Enhanced audit quality, transparency and increased information value Effective financial reporting in the public interest Auditor focus on matters to be reported which results in an increase in professional skepticism
SA-701: Key Audit Matters Applicability of SA 701 Applicable in case of audits of complete sets of general purpose FS. wef 1 st April, 2018.The FS should be: general purpose FS and complete set of FS. Standard mandatorily applicable in case of audits of listed entities. Standard also applicable in case of audits of unlisted entities in following situations: Where auditor decides to communicate KAM voluntarily or at the request of TCWG / Mgt. Where auditor is required by law or regulation to communicate KAM
SA-701: Key Audit Matters What are KAMs? Those matters which in the auditor s Professional Judgement, were of most significance in the audit of FS of the current period KAMs are selected from the matters communicated with TCWG Areas of higher RMM assessed or significant risks identified as per SA 315 Effect of significant events/ transactions on audit Significant auditor judgments relating to areas that involved significant management judgments
SA-701: Key Audit Matters Selection of KAM-Funnel Approach
SA-701: Key Audit Matters Most Significance in Audit Factors to consider Nature & extent of communication of the matter with TCWG. Importance of the matter to users understanding of FS. Nature of underlying accounting policy its complexity / subjectivity. Nature and materiality of corrected and accumulated uncorrected misstatements due to fraud / error related to the matter.
SA-701: Key Audit Matters Most Significance in Audit Factors to consider Nature & extent of audit effort needed to address the matter Nature & severity of difficulties faced by auditor in applying audit procedures, evaluating results of those procedures, and obtaining relevant and reliable evidence Severity of any control deficiency identified relevant to the matter Whether matter involved number of separate but related audit considerations
SA-701: Key Audit Matters How to Communicate the KAM? Using an appropriate sub-heading KAM the auditor shall describe each KAM with reference to the related disclosures and explain: Why the matter was considered to be one of the most significant ;and How the matter was addressed in the audit
SA-701: Key Audit Matters Separate Section for Reporting of KAM To be placed immediately below Basis for Opinion Section. To include preamble language If Material Uncertainty Related to Going Concern Section required as per revised SA 570, then immediately below that Section. Auditor needs to describe each KAM under appropriate sub-heading so that individual KAM are differentiated. If there is no KAM to communicate, KAM Section is still required where the auditor needs to include an affirmative statement to that effect.
SA-701: Key Audit Matters Auditor s Professional judgement in Presenting KAM Key Audit Matter how presented Order of presentation of individual KAM Order of Individual KAM : -relative importance of each KAM -based on auditor s judgment -corresponding to the manner in which such matters are disclosed in FS Number of KAM (No Ceiling By Standard) -complexity of the entity -nature of entity s business and environment -facts and circumstances of the audit engagement
SA-701: Key Audit Matters Description of Individual KAM Key Audit Matters Manner in which described in the Audit Report Adequacy of description of a KAM is matter of Professional judgement Description of each KAM should cover following 3 aspects: -reference to the related disclosures(if any) in FS -Why matter was considered to be one of most significance in audit and therefore determined as KAM -How the matter was addressed in the audit
SA-701: Key Audit Matters Description of Individual KAM In description of how the matter was addressed, auditor may cover following aspects: -auditor s response or approach to address the matter -A brief overview of procedures performed -An indication of the outcome of the auditor s procedures -Auditor s Key observations with respect to the matter
SA-701: Key Audit Matters Description and Rationale for Selection of KAM Key Audit Matters -How to describe and Rationale for selection In evaluating the description of a key audit matter and the rationale for its selection,the following be considered: Does the description identify the specific characteristics or audit issues that comprise the key audit matter? eg: -For goodwill, this may be the evaluation for impairment or the valuation for a particular acquisition -For deferred tax assets, this may be their recoverability -For valuation-related matters, this may be the specific assumptions that were of focus -For purchase price allocations for business combinations, this may be the focus on valuation of certain assets
SA-701: Key Audit Matters Description and Rationale for Selection of KAM Does the description complement what is described in the related disclosures in the financial statements without unnecessarily repeating those disclosures? Is it evident why this matter was significant to this audit?
SA-701: Key Audit Matters Circumstances where KAM should not be communicated Key Audit Matters -where not to be communicated There are 2 situations -Law or regulation precludes public disclosure about that matter; or -In extremely rare circumstances, the auditor determines that the matter should not be communicated because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication
SA-701: Key Audit Matters Circumstances where KAM Section required but no KAM will be communicated / described, thereunder There are three situations auditor determines there is no KAM auditor determines that a KAM should not be communicated due to restrictions in SA 701 and where there is no other KAM determined by him The only KAM determined is a matter giving rise to modified opinion or a material uncertainty related to going concern
SA-701: Key Audit Matters Interrelationship of KAM with Other Elements of Auditor s Report KAM V/s Modified Opinion Concepts of EOM and OM still exist in accordance with revised SA 706. EOM/OM paragraph cannot be used as a substitute for KAM. SA 706 expressly prohibits including under EOM / OM paragraph, a matter that has been determined as KAM Sometimes, a matter determined as KAM may also be, in auditor s judgment, fundamental to users understanding of FS. In such cases, auditor may highlight such matter by presenting it more prominently than other matters in KAM section (eg. as the first matter) or by including additional information in its description to indicate its importance to users understanding of FS
SA-701: Key Audit Matters Interrelationship of KAM with Other Elements of Auditor s Report KAM V/s Going Concern A Material Uncertainty related to Going Concern is by its nature KAM. However, it should be reported as per revised SA570and not under KAM.
SA-701: Key Audit Matters Communicating KAM not a substitute for Disclosures required in the FS as per the applicable financial reporting framework. Disclosures necessary to achieve fair presentation of the FS. Requirement of expressing modified opinion in accordance with revised SA 705. Requirement of reporting about material uncertainty relating to going concern in accordance with revised SA 570.
SA-701: Key Audit Matters Documentation in relation to KAM The auditor needs to document the following aspects: The matters that required significant auditor attention as determined in accordance with paragraph 9 and the rationale for auditor s determination as to whether or not each of these matters is a KAM in accordance with paragraph 10. Where applicable, the rationale for auditor s determination that there are no KAMs to communicate or that the only KAMs to communicate are those matters addressed by paragraph 15. Where applicable, the rationale for auditor s determination not to communicate a matter determined to be a KAM.
SA-701: Key Audit Matters Considerations while dealing with KAM Exercise best professional judgement Use lucid language as technical jargon may not be necessarily understood by all stakeholders Draft the KAM with utmost caution as it should clearly convey its meaning and intent Keep TCWG in the loop at an early stage KAM is an auditors' prerogative
Standard on Auditing (SA) 720 (R) The Auditor s Responsibility in Relation to Other Information in Documents containing Audited Financial Statements 38
SA-720 (R): Auditor s Responsibility for Other Information Need for Revision/ Major changes vs existing SA 720 : Broadening and clarifying the scope of Other Information Enhancing and strengthening auditor s work effort w.r.t. Other Information Providing transparency on auditor s work w.r.t. Other Information Requires separate section on Other Information in Annual Report ICAI had issued Exposure Draft on Standard on Auditing (SA) 720 (Revised) on January 4, 2017 (Last date for comments: February 20, 2017) Replaces existing SA 720 issued in 2009 / Based on revised ISA 720 issued in 2015. This SA does not apply to: Preliminary announcements of financial information; or Securities offering documents, including prospectuses. 39
SA-720 (R): Auditor s Responsibility for Other Information Requirements: Reading Other Information The auditor shall read the other information to identify material inconsistencies, if any, with the audited financial statements. The auditor shall make appropriate arrangements with management or those charged with governance to obtain the other information prior to the date of the auditor s report. If it is not possible to obtain all the other information prior to the date of the auditor s report, the auditor shall read such other information as soon as practicable. Material Inconsistencies If, on reading the other information, the auditor identifies a material inconsistency, the auditor shall determine whether the audited financial statements or the other information needs to be revised. 40
SA-720 (R): Auditor s Responsibility for Other Information Requirements: Material Inconsistencies Identified in Other Information Obtained Prior to the Date of the Auditor s Report When revision of the audited financial statements is necessary and management refuses to make the revision The auditor shall modify the opinion in accordance with SA 705 When revision of the other information is necessary and management refuses to make the revision The auditor shall communicate this matter to those charged with governance; and (a) Include in the auditor s report an Other Matter(s) paragraph describing the material inconsistency in accordance with SA 706; or (b) Where withdrawal is legally permitted, withdraw from the engagement 41
SA-720 (R): Auditor s Responsibility for Other Information Requirements: Material Inconsistencies Identified in Other Information Obtained Subsequent to the Date of the Auditor s Report When revision of the audited financial statements is necessary Follow the relevant requirements in SA 560 When revision of the other information is necessary and management agrees to make the revision The auditor shall carry out the procedures necessary under the circumstances When revision of the other information is necessary, but management refuses to make the revision The auditor shall notify those charged with governance of the auditor s concern regarding the other information and take any further appropriate action 42
43 2 IMPACT OF DIGITISATION
The future enters into us, in order to transform itself in us, long before it happens Rainer Maria Rilke
Digitization impact.. 45
Digitization driving the world to a new order Would there be airlines if Virtual Reality had its way.? Retail used to be point of sale business it is now called Amazon or Ali Baba or Flipkart. Taxis are called UBER Consumers of power now generate power and offer it to the national grids. (Consumers are now Producers) It is interesting that the businesses are no longer the same and revenue models are in fact dynamic. Point of Sale is now Direct to Consumer.
Digitization driving the world to a new order SOCIAL order change McDonalds - ordered on machine, pay by mobile phone and picked up the order delivered by machines. Coffee vending at airport- not a person around At airports there is self-checkins. Some say that in the next decade there would be more and more less employable people i.e their skills will not be relevant.
Digitization driving the world to a new order In India bills under GST regime, electronic invoices are being uploaded- accounting may be redundant. Documents are more textual i.e meta data, how would one audit. With digital payments, receipts are redundant. Application Program Interface (API) will change way businesses communicates with business. API is an integration tool for interacting with software application. Models of Investment will change - Amazon, Google, Tesla and SpaceX have shown accounting and auditing have to follow suit.
Digitization driving the world to a new order ROBOTS will probably be better at deciding the accounting treatment as variables will be many... While Businesses have digitally evolved fast there has been low investments in Accounting and Auditing. Education will now have to start from where it ended for us.
Impact on Accounting And Assurance 50
Digital Era & CA Profession Survey Report CAs understand that the digital future is coming fast & profession needs to get digital ready AI, big data, digital service delivery, cloud, internet of things will impact significantly accountancy profession Majority of respondents agreed to importance of data analytics into audit process
Digital Era & CA Profession Survey Report 47% agreed that guidance on cryptocurrency required & 54% on valuation of data for business combination and subsequent impairment testing Respondents echoed auditors required specialised technological skill set to be developed through appropriate training Huge impact of technology on business models as well as composition of audit teams
Audit Approach History and Technology Impact Auditors play a key role in contributing to credibility of financial statements In history of the audit professions, there have been shifts in how the audit was conducted Risk based audit approach has evolved over a period of time Technological change is occurring at a rapid pace Stakeholder expectations regarding use of technology are evolving
Data Analytics- Benefits, Challenges, Limitations 54
Data Analytics and Financial Statement Audit Quality of Audit can be enhanced by using data analytics. The application of professional skepticism and professional judgment is improved when the auditor has a robust understanding of the entity and its environment. Auditors can use analytics to Observe key trends and patterns Identify areas of key risks Greater coverage & better comfort on reporting
Data Analytics and Financial Statement Audit Analytics touch points in Audit Process-: Understanding The Business of the Entity Planning and Risk assessment Responding to Risk Reporting
Data Analytics and Financial Statement Audit
Data Analytics and the Financial Statement Audit Some areas in which data analytics are generally being used : Journal Entry testing and General Ledger Review Simulate control testing Connecting internal to external data
Data Analytics and Financial Statement Audit Challenges faced by Auditors Adequacy of ITGC controls Responding to deviations Providing reasonable assurancesample vs. entire population Role of Professional judgement Accuracy & Completeness of Data Received from third party
Data Analytics and Financial Statement Audit Limitations of Using Data Analytics Data Security and Privacy Data Acquisition Relevance of data to audit Over-reliance Reskilling audit team
Data Analytics and Standards on Auditing Existing SAs don t prohibit, nor stimulate the use of data analytics Mention about use of CAAT s,however do not address contemporary tools SAs need to be able to drive appropriate auditor performance Challenges in fitting audit evidence obtained from data analytics into current model of audit evidence
62 3 QUESTIONS & ANSWERS
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