Enhancing the Value of Auditor Reporting Exploring Options

Enhancing the Value of Auditor Reporting: Exploring Options for Change Auditor Reporting: Working Group’s Update to the IAASB December 2011

Key Question • The WG views the calls for change in the responses to the CP and the work of others as sufficient to commence an IAASB project on auditor reporting on a priority basis. –Does the IAASB agree? 2

Outline • Introduction and Background • Respondents to IAASB CP • Key Messages Received • Working Group Recommendations and Considerations • Recommended Scope and Objectives • Feedback from CAG Working Group • Possible June/ September 2012 Discussions 3

Introduction and Background Changing Landscape • Financial reporting requirements are increasingly complex • Relevance and usefulness of auditor reporting are being challenged, particularly for listed entities • Users are demanding additional, and more precise information about the audit, the entity and its audited financial statements • Exploration for change in auditor reporting and overall role of auditor by many groups 4

Introduction and Background Options for Change in IAASB CP Change within the current entity reporting model and scope of the financial statement audit · · · Format and structure of the standard auditor’s report The auditor’s responsibility in relation to other information in documents containing audited financial statements – ISA 720 Auditor commentary on matters significant to users’ understanding of the audited financial statements, or of the audit Change to the entity reporting model Corporate governance reporting model Change involving other assurance and related services Assurance or related services on other information or matters not within the scope of the current financial statement audit 5

IAASB CP: Who Responded? Category of Respondent No. Percentage Investors and Analysts 6 7% Those Charged with Governance (TCWG) 3 4% Regulators and Audit Oversight Bodies 12 15% National Standard Setters (NSS) 6 7% Accounting Firms 10 12% Public Sector Auditors 7 9% Preparers 4 5% Member Bodies and Other Professional Organizations 29 35% Individuals 5 6% Total 82 100% 6

Key Messages Received • Now is the time for change – Broad support for several options, but no clear path, or explicit solution to change provided – Type of change necessary would likely require a holistic approach • Audit is valued, but communicative value auditor’s report lacks – Users want more relevant and decision-useful information about the entity and the audit • Mixed views on nature and extent information to be included of additional 7

Key Messages Received (cont. ) • Build on, and learn from experiences of others (i. e. , NSS, FRC, PCAOB) in prioritizing suggestions for change – Take into account prior attempts at improving communicative value of the auditor’s report – Balance goal of meeting users’ needs against finding a global solution that is practical and achievable • Broad and flexible solutions needed to accommodate the initiatives of others (France, EC, FRC, PCAOB, IASB, IIRC) 8

Key Messages Received (cont. ) • Cautionary advice to IAASB – Retain pass/ fail – Avoid more boilerplate language – Discrete roles for management, TCWG and auditors – Scalable solution for SMEs and non-public entities • Mixed views on needs for, and meaning of consistency across entities • Explore options to educate users about the audit and the auditor’s role 9

Working Group Recommendations • A project should be commenced immediately. . . • … with an intentionally broad scope. . . • … aimed at meeting the information needs of users. • It should take into account the emerging developments of others … • … and with the objective of developing a revised auditor reporting standard that can be applied globally. • Developments in corporate governance and demand for assurance beyond the audit also need to be monitored. • Proactive coordination with others needed to effect a more holistic approach to change. 10

Additional WG Considerations • No need for more outreach or consultation at this time • Need for IAASB to lead, or at least significantly influence, the debate on auditor reporting • Periodic updates or deliverables demonstrate progress on the project to 11

Recommended Project Scope • Improve content and structure of auditor’s report in the overall context of increasing the relevance of auditor communications • Maintain the current scope of the audit – no change to fundamental role of auditor • Explore changes to ISA 260 as a step towards enhanced corporate governance reporting • Close collaboration with other IAASB initiatives and projects (e. g. , ISA 720, IASB Liaison) 12

Recommended Objectives for the Project • Enhance communicative value of the auditor’s report by: – Clarifying and expanding on technical terms used, including going concern – Improving transparency about the audit process – Providing auditor insights about key aspects of the audit, the entity and the entity’s financial statements • Determine the common and essential matters about the audit that should be communicated to users, while accommodating evolving national financial reporting regimes 13

Additional Auditor Insights? Statement about Responsibilities of TCWG? Auditor’s Responsibility for Other Info? Association with Other Information or Portions of it? Association with Reports of TCWG? Mandatory EOM or OM Paragraphs? Auditor’s Responsibility for Going Concern? Other Reporting Responsibilities? Statement about Auditor Independence? Auditor’s Responsibility for Fraud? Auditor’s Responsibility for Disclosures? Jurisdiction Flexibilities? All Entities? Listed Entities? A “Building Blocks Approach” Core elements of the Auditor’s Report under ISA 700: Opinion Paragraph and Basis for Opinion – Placement? Description of Management and Auditor’s Responsibilities – Placement? 14

Fundamentals of the Project • Targeted outreach with users as thinking develops • Cost-benefit / impact analyses • Coordinate with others to: – Monitor/determine need for more holistic approach to change – Eliminate unnecessary differences in auditor reporting requirements – Take into account their successes and overcome common challenges (e. g. , prioritization, cost benefit) • Linkage with other IAASB projects and initiatives (SWG, ISA 720, IASB Liaison, Disclosures, AQ) 15

Feedback from the CAG Working Group • Broad support for the project proposal • Coordination with PCAOB, EC, FRC essential • Meeting the information needs of users: – Changes to the auditor’s report may help but… – Financial reporting standards may need to change – Management has primary responsibility to disclose information relevant to users’ decision-making – Reporting internally to TCWG will also help • Put forth formal proposals expeditiously – Be mindful of how quickly others may progress 16

Proposed Timetable Period Focus April 2012 • Deliberation of issues – March • Exploration of different proposals in relation to: 2013 • Wording in revised illustrative auditor’s report(s); and • Revised requirements in ISAs as appropriate • Dialogue with stakeholders June 2013 • Issuance of ED or CP or both December • Final Standard(s) 2014 17

Possible June/ September 2012 Discussions • Narrow the path to changing auditor’s report • Actively consider and leverage proposals of others (e. g. , EC, FRC, PCAOB) to: – Determine core elements that are suitable for a global auditor’s report under ISA 700 – Develop criteria for requiring EOM paragraphs – Determine revisions to, and placement of, descriptions of auditor’s responsibilities and clarification of terms – Explore changes related to going concern 18

Possible June/ September 2012 Discussions • Explore options to provide additional auditor insight about matters that are factual in nature – Areas of significant audit risk – Unusual transactions • Reconcile various approaches to providing additional information about the entity (i. e. , directly from auditor vs. from TCWG) • Coordinate and provide status updates on other relevant activities (e. g. , education publication, ISA 720 and SWG) 19

Matters for IAASB Consideration • Does the Board agree that there is sufficient support to commence a project on auditor reporting on a priority basis? • What perspective(s) would the IAASB offer to an incoming TF on the: – Completeness of options and issues presented in the PP – Options for change that should NOT be further explored – Proposed future activities (strategy and prioritization) – Timing of response to calls for change, milestones and outputs 20

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