The International Auditing and Assurance Standards Board has issued a new document outlining a possible approach to an improved auditor’s reporting model, while inviting the public to comment.

The document, known as “Invitation to Comment: Improving the Auditor’s Report,” aims to enhance, on a global basis, the communicative value of the auditor’s report on financial statements.  In the U.S., the Public Company Accounting Oversight Board has also made it a priority to improve the auditor’s reporting model to include more details and is consulting with the IAASB, which operates under the auspices of the International Federation of Accountants.

The IAASB document features a revised auditor’s report that illustrates the application of the IAASB’s suggested improvements and provides the IAASB’s rationale for the suggested improvements, together with a discussion of their potential value and impediments, and in what areas feedback is sought.

“The global financial crisis has spurred users of audited financial statements to want to know more about individual audits and to gain further insights into the audited entity and its financial statements,” said IAASB chairman Arnold Schilder in a statement. “While the auditor’s opinion is valued, many perceive that the auditor’s report could be more informative and shine light on key matters based on the auditor’s work. Change, therefore, is essential and the IAASB is strongly committed in the public interest to deliver meaningful improvements to auditor reporting as quickly as possible.”

At the heart of the suggested improvements is the need for transparency on matters specific to the audited financial statements and the audit that was performed. A proposed new section in the auditor’s report, “Auditor Commentary,” is envisaged to be the mechanism by which auditors may call attention to matters that are, in the auditor’s judgment, likely to be most important to the users’ understanding of the audited financial statements or the audit. There are also suggested improvements with respect to new statements regarding going concern and other information in documents containing the audited financial statements, the description of the responsibilities of the auditor and key features of the audit itself, and enhancement to the format of the report.

The “Auditor Commentary” information would be required for public interest entities—which includes, at a minimum, listed entities—and could be provided at the discretion of the auditor for other entities.

It would also include an auditor conclusion on the appropriateness of management’s use of the going concern assumption in preparing the financial statements and an explicit statement as to whether material uncertainties in relation to going concern have been identified. There would be an auditor statement as to whether any material inconsistencies between the audited financial statements and other information have been identified based on the auditor’s reading of other information, and specific identification of the information read by the auditor. The auditor’s report would provide prominent placement of the auditor’s opinion and other entity-specific information.

The report could also highlight pending litigation. In a model of the report included in the document, one paragraph noted, "The Company is exposed to various claims and contingencies in the normal course of business. We draw attention to Note 9, which describes the uncertainty related to an environmental claim regarding a business that was sold by the Company in 20X0."

Another section in the model report discusses problems with evaluating goodwill impairment after a series of acquisitions,

“The Consultative Advisory Group (CAG), which comprises over 30 member organizations and observers that are key stakeholders of the IAASB, is of the view that this is a very important project,” said IAASB CAG chairman Linda de Beer. “All CAG member organizations, but in particular user groups and regulators, are of the view that the auditor’s report should point the reader to key aspects important for an understanding of the entity and its financial statements. Mandatory auditor commentary will go a long way to address this need of shareholders and others. The CAG responded very positively at its meeting in March 2012 to the aspects that the IAASB is addressing in the ITC.”

The ITC includes planned dates for IAASB roundtables in the North American (September 10), European (September 14), and Asia Pacific (October 8) regions. The IAASB intends to finalize plans for these roundtables in the coming weeks, and will post them on its Auditor Reporting page.

“The IAASB has heard—and indeed embraces—the call from stakeholders to re-examine and, to an extent re-invent, the auditor’s report,” said IAASB technical director James Gunn. “There is still much work to be done, and the IAASB will continue its deliberations in 2012 and 2013. However, it is critical that the IAASB hear from a wide range of stakeholders at this stage regarding the suggested improvements and whether they will achieve the value that users seek in order for the board’s future standard-setting proposals to develop in a way that will best serve the public interest.”

The IAASB invites all stakeholders to respond to this ITC. To access the ITC and submit a comment, visit the IAASB’s Web site at http://www.ifac.org/publications-resources/improving-auditor-s-report. Comments on the ITC are requested by Oct. 8, 2012.

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