How and Why the Wording in the External Audit Report has Evolved - Essay Example

Table of contents Table of contents 1 1.1 Introduction 1 1.2 Perceptions on the purpose of the external audit report 4 1.3 Explanation of how and why the wording in the external audit report has evolved 4 1.4 Explanation and critical appraisal of the IAASB's latest pronouncements 5 1.5 Likely future developments 6 1.6 Conclusions and final observations. 7 References 8 1.1 Introduction The global business environment has continued to face complex financial challenges; therefore, institutional investors and financial analysts need to be accessible to individual audits, the audited entity, and its financial statements. The move is necessary in order to enable the stakeholders, especially the institutional investors and financial analysts, to make informed decisions concerning investment opportunities. Therefore, the International Auditing and Assurance Standards Board (IAASB), as an international body, is providing leadership in finding a practical solution to the challenges facing the changing business world. Since 2006, the IAASB has made steps into correcting the shortcomings of the existing audit reporting (Healy 2014, par.3; Marks and Spencer Group plc 2013, p. 77). For instance, there was a joint initiative that was between IAASB and the Auditing Standards Board of the American Institute of certified public accounts to carry out academic research. The research was to provide answers on user perceptions concerning the financial statement audit, and the auditor's report at different levels of business growth among the users. The research report that was completed in 2009 found that there was a strong call for change in auditor reporting among the investor and the user communities of the financial information (Healy 2014, par.2). After the research findings had been compiled, IAASB Consultative Advisory Group (CAG) meeting followed to discuss the agenda on audit reporting areas of change in March 2010. Other IAASB meetings that took place as a follow-up were the December 2010 meeting, March 2011 meeting and the May 2011 meeting in an attempt to explore the options for change (Healy 2014, par.4). The existing audit report was found to have unsatisfactory content, auditor's report to the audit committee, auditor reporting model, and weak reporting responsibilities for audit committees to the Board of Directors. As a result, the task force was formed to spearhead the auditor reporting project comprising of sub-committees or drafting teams (Healy 2014, par.7). The auditor reporting project is based on academic research and is being done by several groups who are reputable and interested in the agenda. These groups include: the European Commission (EC), the U.S Public Company Accounting Oversight Board (PCAOB), and the UK Financial Reporting Council (FRC) (Healy 2014, par. 9; Singh 2013, par. 3). The joint effort by the international bodies is expected to give integrity and credibility to the current audit report. The task force was supposed to revise the international Standards on Auditing (ISAs) 700, forming an opinion and reporting on Financial Statements, and other related ISAs that needed amendments (Healy 2014, par12; Catanach 2013, par. 1-2). The proposed changes touched on auditor commentary (AC), auditors' procedures, auditor's responsibilities, and matters relating to "building blocks" approach. There has been growing a consensus on the need to include the AC in the auditor's report (IAASB Exposure draft 2013, p.6). The task force will need to work on the content of AC, the criteria for writing it, the proposed objective for the AC, and a clear difference between AC and Emphasis of matter. It was also proposed that conclusion on auditor's procedures related to ‘going concern' be expanded to include issues such as "material uncertainties" and information in financial statements (Healy 2014, par13). In addition, the auditor's responsibilities needed to be defined by clarifying the contents in a risk-based approach in the ISA's. The concept of building blocks approach needed to be retained and revised in order to accommodate various auditors reporting by entities of different types and sizes (Healy 2014, par14). All these changes aim at enhancing business between the business entrepreneurs and the institutional investors by providing the necessary information and openness in business operations. 1.2 Perceptions on the purpose of the external audit report There were perceptions that the auditors needed to be more transparent and detailed on key issues in the financial statements (IAASB 2012, p.3). The external audit report’s meaningfulness and value is a priority to the institutional investors and financial analysts in order to use the information for decision making. Therefore, it was perceived that an improved external audit report would be instrumental in informing the users when and where to invest. 1.3 Explanation of how and why the wording in the external audit report has evolved The input by the stakeholders, through the Invitation To Comment (ITC) initiative, carried out by IAASB, prompted the need for change in audit reporting (IAASB at a Glance 2012, p.1). The stakeholders registered dissatisfaction in the operating audit report based on previous ISAs, and hence the suggestion was put forth to deliberate on various proposals. Also, IAASB saw the need to formulate a common audit reporting based on ISAs that will be used around the world by investors. It was found that streamlining audit reporting may not be fully achieved without involving corporate governance and financial reporting. Therefore, changes in the audit reporting meant covering a big milestone in the business world. The realization that the audit report project was leading to greater gains motivated the stakeholders even the more (IAASB 2012, p.4). It was also crucial that the external audit report be changed to assist the users to make more informed decisions based on financial statements and the audit. As a result, there was an attempt to initiate change from handling complicated Jargons and figures to simplified information. The external audit report has evolved through detailed deliberations between the IAASB and the stakeholders. It has been propelled by the needs of the users of the audit report who realize that the world's business environment is not friendly. The world financial crisis requires informed decision-making before investment. 1.4 Explanation and critical appraisal of the IAASB's latest pronouncements The IAASB has agreed to improve on the auditor reporting that will be adopted internationally, with minimal differences from the national audit reporting- if any. First, additional information will be included in the auditor's report. The extra information will enhance the user's understanding of the audited financial statements or the audit commonly known as "Auditor's Commentary" (IAASB 2012, p.6; Crump 2013, par. 8). The information can be obtained from the auditor by other entities that he may choose. Second, the auditor conclusion will have to include a report on how the entity management uses the ‘going concern' assumption in preparing financial statements (IAASB At a Glance 2013, p.2). In addition, the auditor will have to state clearly whether material uncertainties, in relation to ‘going concern', have been identified during the auditing process. Third, the report will also include the auditor's statement that will focus on any "material inconsistencies between the audited financial statements and other information based on the auditor's reading" (IAASB 2012, p.6). Fourth, giving priority to the auditor's opinion and the entity-specific information in the auditor's report has been emphasized, since it serves as a guide to the user (Marks and Spencer Group plc 2014, p.84). Fifth, there are emphasis for the audit to be transparent and separate responsibilities of the auditor, management and Those Charged with Governance (TCWG) in an ISA audit (IAASB 2012, p.6). The current audit report has incorporated the stakeholder's opinion and perspectives concerning the changes happening in the audit reporting project. There is an open initiative to contribute to the ongoing audit reporting project by users, such as the institutional investors and financial analysts, regulators, and audit oversight bodies. These stakeholders may be more interested in the content of the auditor's report. Audit committees that prepare and present the financial statements are directly involved, since they bear any additional effort or cost required. They also have to weigh the implications of the proposed ISAs in their audit reporting. Other stakeholders include; the small and medium practices (SMPs), auditors of small and medium entities (SMEs). They may be concerned about the manner in which the proposed ISAs will be implemented, and whether they consider their size. Developing nations are key stakeholders since they have many investment opportunities for the institutional investors. Other respondents who may need to contribute towards key issues such as translation of the standard auditor's report have been given the opportunity to contribute. 1.5 Likely future developments The changes that are proposed on the audit reporting may result to individuals overstepping into each other's roles and responsibilities. It is more likely to happen in the financial reporting process; where both the external auditor and the audit committee are required to disseminate the audit information to the information users (IAASB 2011, p.24). The audit outcome may dictate that the entity needs changes that affect the current responsibility of the auditor or those in the entity's management. The additional information in the proposed audit report is expected to influence the user's understanding and usage of the report in making business decisions. In addition, the changes may affect behavior of the auditor and those in entity management towards their roles, and towards each other. For instance, when the auditor has to report on additional auditor commentary on sensitive accounting estimates in the financial statements, depending on how they are portrayed, the management staff may react positively or negatively. The user's level of understanding of the corporate audit reporting will determine whether, the users of the audit report benefit or not (IAASB 2011, p.25). Many stakeholders may not be specialists in interpreting the audit report. Therefore, the additional information may not be useful if it is not simple enough to be understood and put into intended use. However, more responsibility translates to more auditors' fees. Hence, if the business management does not compensate the auditor well, then the auditor may be pressurized to do less work in other areas that are not of immediate focus. As a result, the quality of the audit report is compromised, and this could lead to unforeseen loopholes that may cause the business downfall. 1.6 Conclusions and final observations. The current auditor's report has attempted to minimize the expectation gap that has existed between what the users expect of the auditors and what the auditors know to be their statutory duties. The roles and responsibilities of the auditor are clearly defined in the auditor's report under revision. In addition, the existing information gap has been relatively closed, since the audit report users will access information through Auditor's Commentary. Consequently, the user will benefit from audit reports, and hence they will enjoy economic security through informed decision making. Launching a standard audit report will enhance corporate governance in the business world. References Auditors’ Report on Financial Statements, (n.d.). SAS 600 ‘The Auditors’ Report on Financial Statements’ (APB 1993): Audit Reports and Audit Exemption engagements (S.l) pp. 409-412. Catanach, A. (2013). A New Audit Report? No…Auditor Accountability! [online] Available at: [Accessed 25 December 2014]. Crump, R. (2012). IAASB Proposed Mandatory Auditor Commentary. [online] Available at: < http://www.accountancyage.com/aa/news/2186994/iaasb-proposed-mandatory-auditor-commentary> [Accessed 25 December 2014]. Healy, K. (Ongoing project). Auditor Reporting. [online] Available at: < http://www.ifac.org/auditing-assurance/projects/auditor-reporting> [Accessed 25 December 2014]. International Auditing and Assurance Standards Board (IAASB), (2011). Enhancing the Value of Auditor Reporting: Exploring Options for Change. Consultation Paper May 2011 Comments requested by September 16, 2011. [online] Available at: [Accessed 25 December 2014]. IAASB, (2012a). At A Glance, Invitation to comment: Improving the auditor’s Report IAASB, (2012b). Improving The Auditor’s Report: Invitation to comment. [online] Available at: [Accessed 25 December 2014]. AASB, (2013a). At A Glance, Exposure Draft, Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs). [online] Available at: [Accessed 25 December 2014]. IAASB, (2013b). Exposure draft, Reporting on Audited Financial statements: Proposed New And Revised International Standards on Auditing (ISAs). [online] Available at: [Accessed 25 December 2014]. IAASB, (2013a). Auditor Reporting - The IAASB's #1 Priority! [online] Available at: [Accessed 25 December 2014]. Marks and Spencer Group plc, (2013a). Annual report and financial statements: Independent Auditor’s report, Governance. Marks and Spencer Group plc, (2013b). Annual report and financial statements 2014: Independent Auditor’s report, Governance. Singh, R. (2013). Reporting update could see auditors assure entire report. [online] Available at: [Accessed 25 December 2014]. 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