What's next in audit reforms?

Auditors will need to challenge the adequacy of disclosures for 'close call' situations

The International Auditing and Assurance Standards Board has issued sweeping reforms aimed at increasing the usefulness and transparency of auditors’ reports. These changes have been taken into the Australian standards, effective from 15 December last year. So why the change?

By Jessie Wong and Len Jui

Over the 30 years of its existence, the standard unqualified auditor’s report has become a collection of boilerplate warnings to “better manage” auditors’ exposure to litigation. But in the aftermath of the global financial crisis, investors have started to question why they did not receive earlier warnings of corporate failures. The value of the audit and role of auditors is now a topic of global debate. Investors want auditors to assist in navigating increasingly complex financial statements, to point out areas where the auditor’s work was focused. Users want to know: “Just what is it that keeps an auditor awake at night?”

What’s involved?

Under the new regime, auditors will have to provide more meaningful insights into the audit through customised disclosures, which will open up communication between auditors and investors.

The auditor’s opinion will now be presented first, followed by the Basis for Opinion section. A new section, mandatory for listed entities, will summarise key audit matters (KAM) which, in the auditor’s judgment, are the most significant. Auditors are also now required to include a separate section – Material Uncertainty Related to Going Concern – when there is uncertainty about the entity’s ability to continue in its current form, and management has made adequate disclosures regarding this matter. 

Auditors will also need to challenge the adequacy of disclosures for “close call” situations. These occur when events or conditions that cast significant doubt on the entity’s ability to continue as a going concern have been identified, but based on the audit evidence obtained, the auditor concludes no material uncertainty exists. 

Auditors are also required to include an independence statement declaring that they have fulfilled their ethical responsibilities. An enhanced description of the auditor’s responsibilities and key features of an audit will also be included.

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What’s next?

While international audit networks will update their global audit methods to ensure they meet these new requirements for audit reports, it’s a different story for local member firms. There is flexibility for national standard setters to take into account national differences to determine how they will adopt these new standards at the local level. 

Engagement teams will have to be trained on the new standards. The nature of Key Audit Matters (KAM), in particular, brings about new challenges to auditors from a training standpoint. 

"Congratulations! It's a standard."What qualifies as a KAM will be unique to each engagement. The auditor will need to consider what constitutes a potential KAM early in the audit planning stages, to ensure enough thought goes into identifying these matters during the actual conduct of the audit. 

Importantly, auditors must recognise the need for greater transparency. This, in turn, should boost the professional scepticism brought to bear in conducting the audit.

The process of determining the KAM list will involve not only key members of the engagement team, but closely working with other supporting functions within the firm such as technical and risk-management areas.

Auditors are expected to have increased communication with management and audit committees, particularly in relation to the inclusion of KAM in the report. Auditors must help their clients understand what the key matters are, how were they addressed in the audit, and the way in which they will be reported. This may spark some lively discussions with management and those charged with governance over corresponding disclosures in financial statements. 

These additional procedures will probably add to time pressures in completing the audit and issuing the report on schedule.

Responding to these changes is an urgent task for the profession. The intended benefits will only be realised if all participants collaborate, and being ill-prepared will result in wasted costs. Successful implementation, however, will boost the reputation of the auditing profession and increase the capital market’s perception of the value of an audit. This is not about changing for the sake of change, but a reply to real needs we can no longer ignore.

Jessie Wong is a partner KPMG China –Professional Practice Audit
Len Jui is KPMG Asia-Pacific lead – Public Policy & Regulatory Affairs, and a partner KPMG China – Partner-in-Charge of Professional Practice Audit (mainland)

Read next: Infographic: Why are auditors raising uncertainty on going concern?

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