Reporting in an ISA audit

Why is it important?

The changes were made in response to calls from investors and other users of audited financial statements for more informative and relevant audit reports. They also wanted greater transparency about the nature of the auditor’s work, with enhanced auditor reporting being seen to be critical to the perceived value of financial statement audit.

The new and revised reporting standards are intended to provide a foundation for future global auditor reporting as well as to accommodate evolving national financial reporting regimes. They seek to strike a balance between a need for greater comparability and consistency in auditor reporting globally and the needs of users of audited financial statements for more relevant information. 

Requirements and challenges

What changes are applicable to all audits?

ISA 700 (Revised) sets out the requirements and layout of the auditor’s report. The first section of the auditor’s report is now the auditor’s opinion.

Within the new basis of opinion paragraph, the auditor now needs to include 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. This statement needs to identify the jurisdiction of origin of the ethical requirements or refer to IESBA’s Code of Ethics for professional accountants [ISA 700 (Revised).28(c)].

There is an enhanced description of the auditor’s responsibilities.  

What are the reporting requirements on going concern?

The auditor’s report includes a description of respective responsibilities of management and auditors in relation to going concern.

Where a material uncertainty exists related to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern, and there is adequate disclosure about it in the financial statements, the auditor expresses an unmodified opinion. But the auditor needs to report this in a separate section in the auditor’s report under the heading “material uncertainty related to going concern” rather than as an emphasis of matter. This new section will still need to draw attention to the note in the financial statements and the auditor will need to state that there is a material uncertainty but the auditor’s opinion is not modified [ISA 570 (Revised).22].

While not a reporting change, there is also an explicit new requirement to challenge the adequacy of disclosures in the financial statements in certain circumstances This is where events and conditions have been identified that may cast significant doubt on an entity’s ability to continue as a going concern but, based on the audit evidence obtained, the auditor concludes no material uncertainty exists [ISA 570 (Revised).20].

Who needs to communicate KAM?

Key audit matters are those matters that, in the auditor’s professional judgement, are the most significant in the audit of the current period financial statements. 

ISA 701 addresses the responsibility for the auditor to communicate KAM in the audit report. It covers the auditor’s judgement as to what to communicate and the form and content of how it is communicated.

It applies to audits of listed entity general purpose financial statements or where the auditor is otherwise required by law or regulation, or decides to, communicate KAM in the auditor’s report. However, ISA 705 (Revised) prohibits the communication of KAM when the auditor disclaims an opinion on the financial statements, unless required by law or regulation [ISA 705 (Revised).29].

ISA 220 Quality control for an audit of financial statements defines a listed entity as an entity whose shares, stock or debt are quoted or listed on a recognised stock exchange, or are marketed under the regulations of a recognised stock exchange or other equivalent body [ISA 220.7g]. The appropriate national standard setter (or others) in each jurisdiction may determine which entities fall within this category.

KAM need to be specific to the entity and it may be helpful for the auditor to see the communication of KAM as a way of showcasing the audit and sharing important knowledge and insights gained.

ISA 701 makes it clear that communicating KAM is not:

• a substitute for disclosures in the financial statements that management is required to make under the applicable financial reporting framework;
• a substitute for the auditor expressing a modified opinion when required under ISA 705 (Revised);
• a substitute for reporting in accordance with ISA 570 (Revised) when a material uncertainty exists casting significant doubt on an entity’s ability to continue as a going concern; or
• a separate opinion on individual matters [ISA 701.4].

How do auditors determine KAM?

Key audit matters are selected from the matters communicated to those charged with governance. In determining KAM the auditor needs to take into account:

• areas of higher assessed risk of material misstatement, or significant risk identified in accordance with ISA 315 (Revised);
• significant auditor judgements relating to areas in the financial statements that involved significant management judgement, including accounting estimates identified as having high estimation uncertainty; and
• the effect on the audit of significant events or transactions that occurred during the period [ISA701.9].

The auditor determines which of these were of the most significance in the audit. ISA 701.A27-A30 provide guidance and factors that may influence this determination.

ISA 260 (Revised) requires the auditor to communicate various matters with those charged with governance. These include the auditor’s responsibilities in relation to the audit, the planned scope and timing of the audit, significant findings from the audit and auditor independence [ISA 260 (Revised).17-19].

The auditor is required to communicate about the significant risks identified by the auditor, as part of communicating an overview of the planned scope and timing of the audit. The nature and extent of communication with those charged with governance about such matters is likely to help the auditor identify which matters are the most significant.

What information needs to be included in the auditor’s report about KAM?

The auditor needs to describe each KAM using an appropriate subheading under the heading “key audit matters”. The description needs to include a reference to the related disclosure, if any, in the financial statements and address:

• why the matter was considered to be one of the most significant and therefore determined a KAM; and
• how the matter was addressed in the audit [ISA 701.13].

There are a few exceptions. This may be where law and regulation precludes disclosure or where, in very rare cases, the auditor determines that the adverse consequences of communicating a KAM outweigh the public interest benefits.

Where there is a modified opinion or material uncertainty which casts significant doubt on the entity’s ability to continue as a going concern in the auditor’s report, these are KAM. The KAM section of the audit report would simply refer to the relevant sections of the audit report rather than repeat the detailed information elsewhere in the audit report.

As well as communicating KAM, auditors of listed entities also need to disclose the name of the engagement partner. In rare circumstances where disclosure is reasonably expected to lead to a significant personal security threat this is not required [ISA 700 (Revised).46]. If the auditor intends not to include the name of the partner, the auditor needs to discuss this intention with those charged with governance to inform the auditor’s assessment of likelihood/severity of a significant personal security threat.

What about other information in the financial statements?

ISA 720 (Revised) requires auditors to read and consider other information in the annual report. Other information that is materially inconsistent with the financial statements or the auditor’s knowledge obtained in the audit may indicate a material misstatement of either the financial statements or the other information.

The requirements in ISA 720 (Revised) are applicable to all audits where other information is presented in an annual report. “Other information” means financial or non-financial information included in an entity’s annual report, other than the financial statements and auditor’s report thereon [ISA 720 (Revised).12c].

A separate section is needed in the auditor’s report, titled “other information” or other appropriate heading when, at the date of the auditor’s report:

• for a listed entity audit: the auditor has obtained or expects to obtain the other information; or
• for a non-listed entity audit: the auditor has obtained some or all of the other information.

The section needs to include:

• a statement that management is responsible for the other information;
• a statement that the auditor’s opinion does not cover the other information and so the auditor does not express an audit opinion or any other form of assurance conclusion on it;
• a description of the auditor’s responsibilities for reading, considering and reporting on the other information;
• if the auditor has obtained some or all of the other information at the date of the auditor’s report: identification of the other information obtained prior to the date of the auditor’s report. A statement in respect of this information that the auditor has nothing to report. Or, if the auditor has concluded that there is a material misstatement of the other information, a statement that describes the uncorrected material misstatement of the other information; and
• if the auditor expects to obtain other information after the date of the auditor’s report: for audits of listed entities, the auditor must identify the other information expected after the date of the auditor’s report. For all other entities, there is no reporting required (though the auditor still has responsibilities under ISA 720 (Revised) to perform the necessary procedures on the other information).