FRC publishes survey reviewing how auditors have applied new extended auditor reporting requirements

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02 Mar, 2015

The Financial Reporting Council (FRC) has today published the results of a survey into how auditors have applied the new “extended auditor’s report” requirements. The survey, of 153 extended auditor’s reports (63 of which were FTSE 100 companies) explored both whether the new requirements had been complied with and also areas of innovation. The FRC is encouraged by the response of audit firms to these new requirements.

In response to calls from investors to make audits more transparent, the Financial Reporting Council (FRC) issued revisions to ISA 700 (UK and Ireland) The Independent Auditor’s Report on Financial statements in June 2013. The revisions require auditors reporting on companies which comply with the UK Corporate Governance Code to provide significantly increased disclosure around risks, materiality and scope of the audit.  The revisions are designed to complement changes to the UK Corporate Governance Code in October 2012 and are effective for the audits of financial statements for periods commencing on or after 1 October 2012.

The results of the survey indicate that auditors have met the new requirements and “in many cases had made, sometimes quite radical, further changes to auditor’s reports going beyond the changes required by the FRC”.

The key areas of innovation highlighted by the survey were:

Disclosing the materiality benchmark used.

Disclosing the magnitude of unadjusted differences being reported to the Audit Committee.

Reporting of detailed audit findings with respect to identified risks.

Experimentation with detailed broader explanation of the audit scoping process.

Improved presentation of auditor’s reports through the use of diagrams and graphs.

Addressing going concern disclosures in auditor’s reports.

Locating the auditor’s opinion at the beginning of the report rather than at the end.

Moving generic descriptions of the scope of an audit to a web-site.

The key areas identified where further improvement might usefully be made were:

Increasing the granularity of risk reporting (i.e. being as entity specific as possible)

Improving the discussion of the auditor’s application of materiality and why a particular benchmark or level was chosen and addressing other aspects of materiality.

Making a clearer linkage between the discussions of risks and materiality and the description of how these influenced the scope of the audit.

A number of the suggested improvements were supported by investors and audit firms during post-survey meetings held by the FRC.  Investors and audit firms also suggested that more disclosure of comparative information and explanations of changes from one period to another would be an improvement.  A number of other ‘aspirational changes’ were proposed by investors and audit firms including:

Introducing a discussion within either the auditor’s report or the Audit Committee report as to why an auditor raises a risk that is not also dealt with by the Audit Committee in its report.

Including the new information provided in the extended auditor’s report in the preliminary announcement.

Providing an opportunity for stakeholders to challenge the proposed scope of the audit by publishing the audit plan in advance of the year end.

Providing more encouragement for the reporting of issues arising from the quality of company’s systems.

The survey highlights that there has been a move away from the traditional binary pass/fail model of the past.  The FRC is keen to maintain the momentum of this initiative and encourages investors and other users of annual reports to continue to provide feedback to audit firms on the usefulness of the extended auditor’s reports; highlighting what they find most useful and what is of less use.

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