New Auditor’s Report effective December 15, 2016

Auditor’s report is the main deliverable in an audit engagement. An audit of financial statements’ primary objective is to express an opinion whether the financial statements are free from material misstatements. But aside from the opinion, there is an increasing need for communication of other significant items both to those charged with governance and the users of the financial statements. This is the reason why changes are made to the auditor’s report.


What are the Changes?

Mandatory for audits of financial statements of listed entities, voluntarily application allowed for entities other than listed entities:

  • New section to communicate key audit matters (KAM). KAM are those matters that, in the auditor’s judgment, were of most significance in the audit of the current period financial statements
  • Disclosure of the name of the engagement partner (in the Philippines, this is being done)

For all audits:

  • Opinion section required to be presented first, followed by the Basis for Opinion section, unless law or regulation prescribe otherwise
  • Enhanced auditor reporting on going concern, including:
    • Description of the respective responsibilities of management and the auditor for going concern
    • A separate section when a material uncertainty exists and is adequately disclosed, under the heading “Material Uncertainty Related to Going Concern”
    • New requirement to challenge adequacy of disclosures for “close calls“ in view of the applicable financial reporting framework when events or conditions are identified that may cast significant doubt on an entity’s ability to continue as a going concern
  • Affirmative statement about the auditor’s independence and fulfillment of relevant ethical responsibilities, with disclosure of the jurisdiction of origin of those requirements or reference to the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants
  • Enhanced description of the auditor’s responsibilities and key features of an audit. Certain components of the description of the auditor’s responsibilities may be presented in an appendix to the auditor’s report or, where law, regulation or national auditing standards expressly permit, by reference in the auditor’s report to a website of an appropriate authority

Why is it Changing?

The auditor’s report is the key deliverable addressing the output of the audit process. Investors and other users of financial statements have called for the auditor’s report to be more informative – in particular, for auditors to provide more relevant information to users based on the audit that was performed.

The IAASB agrees that enhanced auditor reporting is critical to influencing the value of the financial statement audit, and to the continued relevance of the auditing profession. Therefore, the overall objective of the IAASB’s auditor reporting project has been to enhance the communicative value of the auditor’s report, in the public interest.

What are the Intended Benefits?

The IAASB intends for its new and revised Auditor Reporting standards to result in an auditor’s report that increases confidence in the audit and the financial statements. The IAASB believes that in addition to the increased transparency and enhanced informational value of the auditor’s report, changes to auditor reporting will also have the benefit of:

  • Enhanced communications between investors and the auditor, as well as the auditor and those charged with governance
  • Increased attention by management and those charged with governance to the disclosures in the financial statements to which reference is made in the auditor’s report
  • Renewed focus of the auditor on matters to be communicated in the auditor’s report, which could indirectly result in an increase in professional skepticism

Informed by international academic research, public consultations, and stakeholder outreach, the IAASB developed the new and revised Auditor Reporting standards that represents and supports an important change in practice.

Which ISAs are Changing?

  • ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
  • New ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
  • ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
  • ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
  • ISA 570 (Revised), Going Concern
  • ISA 260 (Revised), Communication with Those Charged with Governance
  • Conforming amendments to other ISAs

When are the Changes Effective?

The new and revised Auditor Reporting standards will be effective for audits of financial statements for periods ending on or after December 15, 2016.

Let us know your thoughts! 🙂

Disclaimer: Opinions expressed in this article are that of the author and information provided are for general conceptual guidance for public information and are not substitute for expert advice. Contact for more information and if you want to avail professional services. Find us on Facebook!

Orlando Calundan is a CPA who has exposures in FS audit of entities in various industries such as real estate, food/restaurants, manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements.

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