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FRC comments to the IAASB on its exposure draft Addressing Disclosures in the Audit of Financial Statements

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22 Sep 2014

The Financial Reporting Council (FRC) has issued its comment letter on the International Auditing and Assurance Standard Board's (IAASB's) exposure draft 'Addressing Disclosures in the Audit of Financial Statements', which was published in May 2014. Overall the FRC is very supportive of the proposed changes and strongly encourage the IAASB to finalise the proposed amendments to the ISAs as soon as possible.

The IAASB's exposure draft proposes changes to several International Standards on Auditing (ISAs), with the most significant being: 

  • Clarifying the meaning of the term "financial statements" to include all disclosures subject to audit, noting such disclosures may be found on the face of financial statements, included in related notes, and where permitted by the financial reporting framework, incorporated by cross-reference
  • New application material to assist in the establishment of an appropriate focus on disclosures in the audit, and to bring forward consideration of disclosure to earlier in the audit process
  • Enhancements to encourage a more robust risk assessment around disclosures, e.g. considering assertions for related disclosures when considering classes of transactions, events and account balances, considerations about the source of information for disclosures, and clarifying the nature of potential misstatements in disclosures (including non-quantitative disclosures)
  • New application material to clarify and explain the expectations of an auditor when evaluating misstatements and forming an opinion, highlighting the types misstatements that might be identified, explaining that disclosure misstatements need to be accumulated, providing examples of disclosure misstatements that may impact the understandability of the financial statements, and how misstatement disclosures impact the evaluation of the presentation of the financial statements.

The FRC is strongly supportive of the proposed changes to ISAs. However, one area where they do not agree with the IAASB is in relation to the need for a new requirement in ISA 320 requiring auditors to make a preliminary determination of materiality for non-quantitative disclosures. Although the IAASB debated introducing such a requirement, they decided it was not necessary, something with which the FRC disagrees. They believe that in the absence of such a requirement, the ISA would remain largely focussed on the quantitative aspects of materiality when it is the non-quantitative aspects that can give rise to the most challenging issues. The FRC proposes in its comment letter a new requirement that could be introduced.

In addition to their responses to the detailed questions raised by the IAASB, the FRC also notes that many of the challenges in relation to the quality of financial statement disclosures and their audit cannot be solved by amendments to the ISAs alone. An example of this is the lack of a disclosure framework to guide preparers in determining the nature and extent of disclosure that is appropriate. In the light of this, the FRC strongly support the ongoing collaboration between the IAASB and the International Accounting Standards Board (IASB) on the IASB's Disclosure initiative.

The full comment letter can be downloaded from the FRC website.

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