The IAASB Exposure Draft (ED) ‘Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs) revises a number of existing ISAs (700, 260, 570, 705 and 706) but also introduces a new ISA, ISA 701 ‘Communicating Key audit matters in the Independent Auditor’s Report’.  Under ISA 701, the IAASB proposes that within the audit report there should be a “key audit matters” section which would outline audit matters that were of most significance which arose during the audit.    

The FRC “continues to be strongly supportive of the IAASB’s proposals” but also feel certain changes or improvements can be made: 

• Proposed ISA 701.  The FRC comment that although the auditor should use judgment when describing key audit matters, the proposed ISA 701 should still be “more prescriptive regarding the minimum description in the auditor’s report of each key audit matter”.  The FRC comment that the current proposals are “minimal and may fail to achieve the outcome that the IASB is hoping for in the content of auditor’s reports”.
• Addition to proposed ISA 700.  The FRC comment that this should “require the auditor’s reports of listed companies to include information concerning the scope of the audit and the way in which the scope was influenced by the auditor’s risk assessment and application of the concept of materiality”.  The FRC “encourage” the IAASB to adopt a similar level of requirements as the FRC has introduced in their revisions to ISA 700 ‘The Independent Auditor’s Report on Financial Statements’ (UK and Ireland) which increase disclosures to be provided in three areas; risks, materiality and scope of the audit. 
• Key audit matters disclosure.  The FRC comment that the proposed requirement to describe key audit matters in the auditor’s report or to refer to such a description “is unnecessary where the auditor is satisfied that such matters have been appropriately disclosed in the Annual Report by those charged with Governance”.  The FRC are keen to avoid duplication of a description of the key audit matters in both the auditor’s report and the report prepared by those charged with governance.  They comment that where key audit matters have been described by the audit committee (but not explicitly highlighted as key audit matters), the audit report need only highlight what were the key audit matters in the report prepared by those charged with governance rather than repeating them in the audit report.
• Key audit matters distinction.  The FRC comment that “the IAASB’s proposals do not fully take into account the important definitional difference between an Emphasis of Matter and a Key Audit Matter”.  The FRC indicate that the proposals do not highlight which key audit matters were, in the auditor’s judgment, fundamental to users’ understanding of the financial statements.  The FRC “strongly recommend” that the auditor is required to make this distinction. 

The FRC also comment that they do not believe that the IAASB should provide illustrative examples of key audit matters as this may result in a “standardised” approach, something that was reiterated by investors at a recent roundtable event held in Brussels jointly hosted by the FRC and ACCA.  The FRC believes that key audit matters should be entity specific. 

Additional responses to the detailed questions raised in the IAASB ED are contained within the full FRC comment letter which can be obtained on the International Federation of Accountants (IFAC) website link below. 

The views of the FRC are echoed by The European Securities and Markets Authority (ESMA), The Association of Chartered Certified Accountants (ACCA) and the Investment Management Association (IMA). 

ESMA believe that “the proposed auditor’s report should bring a higher degree of transparency to the audit process” and enhance the accountability of the auditor.  ESMA also believe that the key audit matters section of the audit report should be unique to the specific entity and “should not contain boilerplate language” although, ESMA does acknowledge the usefulness of examples of the key audit matter section.  ESMA also expresses some concerns over the proposals indicating that they do not feel that the proposed standards “provide clear requirements and sufficient guidance to guarantee consistency in the auditor’s approach to key audit matters”. 

The ACCA comment that the inclusion of a key audit matters section within the audit report, as specified by ISA 701, will be “beneficial for users”.  The ACCA also believe that the content of the key audit matters section “should be determined by auditor judgment”.  However, the ACCA believes that the proposals should not be prescriptive but remain “principles-based” which will allow consistency and comparability in approach. 

The IMA comment that the 'key audit matters' section "is a significant step towards increasing the transparency of the audit process and improving the usefulness of the audit report for investors".  They also support that audit reports should be bespoke and "tailored to a company's changing circumstances".

Click for:

• FRC comment letter (link to IFAC website).
• Second FRC comment letter supporting the IAASB work (link to FRC website).
• ESMA comment letter (link to ESMA website)
• ACCA comment letter (link to IFAC website).
• IMA comment letter (link to IFAC website).
• Transcript: 'Improved transparency in auditor reporting' event in Brussels (link to FRC website).
• Our previous story on the IAASB’s proposed changes to audit reports