Improving the Auditor s Report Mark Davies Chair, AASB Eric Turner Principal, CICA
Agenda 1. Objectives of this webinar 2. Background to the Invitation to Comment 3. Values and impediments model 4. Evaluation of the IAASB s suggested improvements 5. Reporting flexibility the building blocks approach 6. Questions and comments 7. Providing input 2
1. Objectives of this webinar Inform you about the IAASB suggested improvements to the auditor s report and the related objectives Provide the opportunity for you to provide input to the AASB Encourage you to respond to the IAASB 3
2. Background to the Invitation to Comment Why is the IAASB issuing an ITC? What are the IAASB s suggested improvements? Who would be affected by the IAASB s changes? Why should Canadians care about this? 4
Background: Why is the IAASB issuing an ITC? Feedback from May 2011 consultations indicate change is needed Response to global financial crisis (provide more information about audit and the entity) Increase informational content of auditor s report To increase audit quality 5
Background: What are the IAASB s Suggested Improvements? Conclusion on the appropriateness of management s use of the going concern assumption; explicit statement as to whether material uncertainties in relation to going concern have been identified Additional information about the financial statements and the audit, referred to as Auditor Commentary Statement re consistency between the audited financial statements and other information containing the financial statements Transparency about the audit, clarify the respective responsibilities of the auditor, management, and those charged with governance (TCWG) Prominent placement of the auditor s opinion and other entity-specific information Flexibility for jurisdictions to tailor certain requirements for different entities, with common elements required for all entities 6
Background: Who would be affected by the IAASB s changes? Auditors Preparers Who is affected? Users Investors Bankers Regulators TCWG, including Audit Committees 7
Background: Why should Canadians care about this? Potential changes may: Affect the financial reporting process Impact the relationship between auditors, management, and TCWG Result in different reporting for different entities Result in additional cost for preparers and auditors Affect length of the auditor s report 8
Impediments 3. Values and impediments model Used to consider suggested improvements to auditor s report CONSIDERATION OF VALUE AND IMPEDIMENTS HIGH OPTIONS THAT ARE LEAST LIKELY TO BE PURSUED OTHER OPTIONS THAT MAY BE PURSUED OPTIONS THAT ARE LESS LIKELY TO BE PURSUED OPTIONS THAT ARE MOST LIKELY TO BE PURSUED LOW Value (in terms of users) HIGH 9
Values and impediments model: Examples of values and impediments Values Provides useful information Provides tailored, nonboilerplate language Enhances transparency about the audit Reduces the expectations gap Impediments Results in auditor going beyond the current scope of the audit, increasing costs Inability to operationalize the option Blurs lines between management s primary responsibility for the financial statements vs. the auditor s role 10
IAASB s Suggested, Preliminary Independent Auditor s Report Opinion Basis for Opinion Going Concern Use of Going Concern Assumption Material Uncertainties Related to Events or Conditions that May Cast Doubt on the Company s Ability to Continue as a Going Concern Auditor Commentary Matters Important to Users Understanding of the F/S or the Audit [e.g., Outstanding Litigation, Involvement of Other Auditors, etc..] Other Information Respective Responsibilities of Management, TCWG, and the Auditor Responsibility of Management and TCWG for the Financial Statements Management s Responsibilities Relating to Going Concern Auditor s Responsibility Report on Other Legal and Regulatory Requirements Signature, name of engagement partner, etc. 11
4. Evaluation of the IAASB s suggested improvements Going concern Auditor commentary Other information Form and structure 12
Evaluation of IAASB s suggested improvements: Going concern Opinion Basis for Opinion Going Concern Use of Going Concern Assumption Material Uncertainties Related to Events or Conditions that May Cast Doubt on the Company s Ability to Continue as a Going Concern Auditor Commentary Matters Important to Users Understanding of the F/S or the Audit [e.g., Outstanding Litigation, Involvement of Other Auditors, etc..] Other Information Respective Responsibilities of Management, TCWG, and the Auditor Responsibility of Management and TCWG for the Financial Statements Management s Responsibilities Relating to Going Concern Auditor s Responsibility Report on Other Legal and Regulatory Requirements Signature, name of engagement partner, etc. 13
Evaluation of IAASB s suggested improvements re going concern: Objectives Clear and timely financial reporting to users of the financial statements (recent global financial crisis) Respond to EC proposal for an affirmative statement regarding going concern in the auditor s report Clarify the respective roles and responsibilities of management and the auditor regarding going concern Report the outcome of audit work regarding going concern 14
Evaluation of IAASB s suggested improvements re going concern: Suggested Improvements Auditor s conclusion on the appropriateness of management s use of the going concern assumption Explicit statement by the auditor as to whether material uncertainties in relation to going concern have been identified Description of management s responsibilities related to going concern Provide additional information when no material uncertainty exists, but certain events or conditions have been identified that may cast doubt on the entity s ability to continue as a going concern Note: existing standards require an Emphasis of Matter paragraph when management s use of the going concern assumption is appropriate, but a material uncertainty exists 15
Polling Question 1 The auditor s report should include an explicit conclusion on the appropriateness of management s use of the going concern assumption. a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 16
Polling Question 2 Readers will misinterpret any conclusion or statement in the auditor s report relating to going concern. a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 17
Polling Question 3 Assuming that the IAASB requires auditor s reports to include statements and conclusions relating to going concern, these requirements should apply to all entities. a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 18
Evaluation of IAASB s suggested improvements: Auditor Commentary Opinion Basis for Opinion Going Concern Use of Going Concern Assumption Material Uncertainties Related to Events or Conditions that May Cast Doubt on the Company s Ability to Continue as a Going Concern Auditor Commentary Matters Important to Users Understanding of the F/S or the Audit [e.g., Outstanding Litigation, Involvement of Other Auditors, etc..] Other Information Respective Responsibilities of Management, TCWG, and the Auditor Responsibility of Management and TCWG for the Financial Statements Management s Responsibilities Relating to Going Concern Auditor s Responsibility Report on Other Legal and Regulatory Requirements Signature, name of engagement partner, etc. 19
Evaluation of IAASB s suggested improvements re Auditor Commentary: Objectives Enhance informational value of the auditor s report to assist in investment and fiduciary decision-making Provide more pertinent information in the auditor s report about the financial statements the audit 20
Evaluation of IAASB s suggested improvements re Auditor Commentary: Suggested framework Based on existing concepts of Emphasis of Matter and Other Matter paragraphs Threshold is matters that are likely to be most important to users understanding of the financial statements Focus on providing information about key audit matters that are unrelated to specific areas of the financial statements Allow flexibility for auditor to include, in the auditor s judgment, information that is deemed to be most relevant to users understanding of these important matters 21
Evaluation of IAASB s suggested improvements re Auditor Commentary: Matters to include Auditors may consider the following matters, at a minimum, in determining whether to include Auditor Commentary: Areas of significant management judgment Significant or unusual transactions Matters of audit significance 22
Evaluation of IAASB s suggested improvements re Auditor Commentary: Values Auditors can provide Roadmap to the Financial Statements Additional context to matters highlighted by management (why important from audit perspective, audit procedures performed, conclusions reached) Explanation about the audit of entity, including key judgments made Users may Better understand management s aggressiveness/ conservatism in financial reporting Better assess the quality of the financial reporting 23
Evaluation of IAASB s suggested improvements re Auditor Commentary: Impediments Roles of Management, TCWG, and the auditors could become blurred Auditor s opinion might become diluted Increased cost for auditors and preparers: Additional quality control processes & time Additional dialogue between management, TCWG and the auditor Delayed release of financial statements because of a more iterative process to finalize the auditor s report 24
Evaluation of IAASB s suggested improvements re Auditor Commentary: Illustrative examples Reference to a single disclosure in the financial statements (first example) Summarize the key points regarding disclosures in the financial statements and other information (second example) Combine a reference to the financial statement disclosures with a description of certain audit procedures and a conclusion (third example) Focus on matters related to overall audit strategy (fourth and fifth examples) 25
Polling Question 4 Auditor Commentary should draw attention to a financial statement note (see example 1 in illustrative auditor s report). a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 26
Polling Question 5 Auditor commentary should summarize key matters in management s disclosures (see example 2 in illustrative report). a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 27
Polling Question 6 Auditor commentary should describe certain audit procedures relating to financial statement disclosures and include a conclusion from the auditor (see example 3 in illustrative report). a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 28
Polling Question 7 Auditor commentary should include information about the audit strategy (see example 4 in illustrative report). a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 29
Polling Question 8 The concept of auditor commentary is an appropriate response to the call for auditors to provide more information to users through the auditor s report. a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 30
Polling Question 9 Assuming that the IAASB requires auditor s reports to include auditor commentary, these requirements should apply to all entities in Canada. a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 31
Evaluation of IAASB s suggested improvements: Other information Opinion Basis for Opinion Going Concern Use of Going Concern Assumption Material Uncertainties Related to Events or Conditions that May Cast Doubt on the Company s Ability to Continue as a Going Concern Auditor Commentary Matters Important to Users Understanding of the F/S or the Audit [e.g., Outstanding Litigation, Involvement of Other Auditors, etc..] Other Information Respective Responsibilities of Management, Those Charged with Governance (TCWG), and the Auditor Responsibility of Management and TCWG for the Financial Statements Management s Responsibilities Relating to Going Concern Auditor s Responsibility Report on Other Legal and Regulatory Requirements Signature, name of engagement partner, etc. 32
Evaluation of IAASB s suggested improvements re other information: Objective Increase transparency about the auditor s work and responsibilities re. other information Other information is financial and non-financial information which is included, either by law or regulation or custom, in a document containing audited financial statements and the auditor s report thereon 33
Evaluation of IAASB s suggested improvements re other information: Suggested Improvements Require the auditor s report to include a statement regarding whether, based on reading the other information, the auditor has identified material inconsistencies between the other information and the audited financial statements The specific other information read by the auditor would be explicitly identified Consistent with audit procedures required by CAS 720 34
Polling Question 10 The auditor s report should include an explicit statement regarding whether, based on reading the other information, the auditor has identified material inconsistencies between the other information and the audited financial statements. a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 35
Polling Question 11 Assuming that the IAASB requires auditor s reports to include a statement regarding other information, these requirements should apply to all entities in Canada. a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 36
Evaluation of IAASB s suggested improvements: Form and structure Opinion Basis for Opinion Going Concern Use of Going Concern Assumption Material Uncertainties Related to Events or Conditions that May Cast Doubt on the Company s Ability to Continue as a Going Concern Auditor Commentary Matters Important to Users Understanding of the F/S or the Audit [e.g., Outstanding Litigation, Involvement of Other Auditors, etc..] Other Information Respective Responsibilities of Management, Those Charged with Governance (TCWG), and the Auditor Responsibility of Management and TCWG for the Financial Statements Management s Responsibilities Relating to Going Concern Auditor s Responsibility Report on Other Legal and Regulatory Requirements Signature, name of engagement partner, etc. 37
Evaluation of IAASB s suggested improvements re form and structure: Objectives Making the auditor s opinion more prominent within the auditor s report Emphasizing matters most important to users 38
Evaluation of IAASB s suggested improvements re form and structure: Suggested improvements Prominent location for the auditor s opinion Explicit reference to the notes to the financial statements Include a Basis for Opinion paragraph close to the auditor s opinion for clean and modified opinions Prominent placement for new sections related to entityspecific matters (Going Concern, Auditor Commentary, and Other Information) before the sections of the auditor's report that include more standardized language Consistency in the ordering of elements within the auditor s report 39
Polling Question 12 The IAASB s suggested form and structure of the auditor s report give the appropriate emphasis to matters of most importance to users. a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 40
5. Reporting flexibility the building blocks approach Common elements required in all auditor s reports Flexibility to tailor certain requirements by national standard setters and/or policymakers in different jurisdictions 41
Reporting flexibility: Objectives Build an enhanced global foundation for auditor reporting Accommodate existing and evolving changes in corporate and auditor reporting in various national environments 42
Reporting flexibility: Considerations Many of the users who are calling for change are users of listed and public interest entities Demands for Auditor Commentary have come primarily from institutional investors and analysts evaluating financial statements of listed entities Consistency of reports versus relevance to users 43
Reporting flexibility: Canadian context Are the suggested changes appropriate for all types of entities in Canada? Canadian listed entities Large Market Cap Small Market Cap Cross-listed entities Small-medium sized entities Not for profit entities Public Sector entities 44
Polling Question 13 There should be different reporting requirements depending on the type of entity. a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 45
Polling Question 14 Assuming the IAASB s suggested improvements are made, they should apply for all listed companies, including small market cap companies. a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 46
Polling Question 15 It is critical for Canadian cross-listed entities that Canadian auditor reporting requirements not be significantly different from PCAOB auditor reporting requirements a) Strongly agree b) Agree c) Neither agree nor disagree d) Disagree e) Strongly disagree f) Don t know 47
6. Questions and Comments 48
7. Providing input Respond to IAASB Consultation Paper by Oct 8, 2012 Send comments to AASB staff eric.turner@cica.ca 49