The New York State Society of CPAs has expressed concern that an International Audit and Assurance Standards Board proposal that aims to make auditor reporting more transparent and improve users’ understanding of audited financial statements goes too far in expanding the scope of auditor responsibilities.
The Society detailed its views in a March 18 comment letter written in response to the IAASB exposure draft: The Auditor’s Responsibilities Relating to Other Information in Documents Containing or Accompanying Audited Financial Statements and the Auditor’s Report Thereon. The IAASB draft was released to the public in November, and the NYSSCPA released its comment letter Friday to the press.
Under existing IAASB standards, there is no established way for auditors to report on “other information,” or supplementary financial and nonfinancial information that may accompany the audited financial statements and the auditor’s report thereon. (The IAASB’s existing International Standard on Auditing [ISA] 720 addresses other information in a document containing audited financial statements and the auditor’s report on it.)
The IAASB’s new proposal, however, would expand the scope of the audit to include accompanying other information and introduce new auditor reporting responsibilities with respect to it—a measure that the board said was intended to increase transparency.
Other information, according to the IAASB, typically includes the annual report, the chairman’s statement, management reports on corporate risk management or internal controls, and risk assessments. It may also include documents such as corporate sustainability reports, which give information about economic, environmental, social and governance performance. The IAASB exposure draft said that a document falls under the scope of the proposal if it has a primary purpose of providing commentary to enhance the user’s understanding of the audited financial statements or the financial reporting process.
In its comment letter, the NYSSCPA cautioned that the IAASB proposal would have unintended consequences and, more significantly, create unreasonable expectations about the auditor and audit report.
Renee Mikalopas-Cassidy, who chairs the NYSSCPA’s International Accounting and Auditing Committee and one of the letter’s principal drafters, said that while the proposal “greatly expands” the responsibility for information required by auditors, they wouldn’t necessarily be able to understand or comment on some of the additional documents in a worthwhile way.
According to the NYSSCPA, including documents such as sustainability reports within the scope of the standard would not provide transparency or clarity to the reader. As it is unclear exactly how the auditor is supposed to determine whether these reports are or are not within the scope, the other documents should not be included at this time.
While the NYSSCPA said it supports the overall principle of broadening the scope of the audit, the IAASB needs to clarify how management and the auditor will determine what is and is not in scope; the timing of the release of documents within this scope; how the auditor will describe the work done on the in-scope documents; the auditor’s responsibility for documents that were not available at the date of the audit report itself; and the manner in which the auditor is meant to report on these documents.
“We support the IAASB’s efforts and strategy to enhance auditor reporting so that what we do as auditors is transparent,” said Jan C. Herringer, a member and past chair of the NYSSCPA’s Auditing Standards Committee and another of the letter’s principal drafters. “But we felt in this specific instance there were things that needed to be addressed, before that objective could be met and before they could reach the objective of enhancing users’ understanding.”
In its response letter, the Society called attention to what it felt was ambiguous wording that could confuse the user, especially considering that IAASB standards have to be translated into other languages. For example, the NYSSCPA suggested changing the phrase “in light of the auditor’s understanding,” to “within the context of the auditor’s understanding,” which it believed to be less prone to misunderstanding or mistranslation. The Society also said that use of the term “consider” was vague in the context of an auditing standard, and suggested instead that the IAASB use “read within the context of the auditor’s understanding” as an alternative.
In addition, the Society felt that the exposure draft’s definition of “inconsistency” needed to be amended, because the one the IAASB gives, which relates to “information that is incorrect, unreasonable or inappropriate or is presented in a way that omits or obscures information,” differs from the term’s common usage and may be subject to misunderstanding by users.
The NYSSCPA also took issue with a part of the proposal stating that the auditor’s understanding of an entity and its environment that is acquired during an audit also encompasses an understanding of matters that may be prospective in nature. The Society felt that this inflates expectations about the auditor’s responsibilities, and argued that any prospective information an auditor is responsible for should be limited to that which directly affects disclosures and amounts recorded on the financial statement, rather than other documentation that is not directly related to the financial statements.
In the IAASB proposal, information that inappropriately influences the economic decisions of the user for whom the auditor’s report is prepared would be considered materially inconsistent, but the Society was not sure that this was appropriate based on the limited procedures performed. Ultimately, the NYSSCPA said, the IAASB needs to clarify that the auditor is only responsible for work that directly relates to the audit itself.
If not, “there is a risk that the procedures described in the application guidance may lead a practitioner to perform more procedures than would have been otherwise required for purposes of expressing an audit opinion on the financial statement,” the Society said
Recognizing that the proposed ISA is a substantive revision, and given the need for national due process and translation, as applicable, the IAASB believes that an appropriate effective date for the standard would be 12 to 15 months after the final standard is issued.
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