1. 28 NOVEMBER 2013
BUSINESS
T
he International Auditing and Assurance Standards
Board (IAASB) has recently issued an exposure draft
(ED) Reporting on Audited Financial Statements
containing proposed new and revised International
Standards on Auditing (ISAs).
This follows on from the invitation to comment (ITC)
Improving the Auditor’s Report released last June.
This article provides a brief overview of the proposals,
with a comparison to the initial suggestions for improvements
that were outlined in the October 2012 Journal article
“Enhanced Auditor Reporting”.
The auditor’s report is the key deliverable that addresses
the output of the audit process for users of the audited
financial statements. The IAASB is of the view that changes
in auditor reporting may have positive benefits on audit
quality, or users’ perceptions of it. It is thought that a
renewed focus on matters to be reported could indirectly
result in an increase in the auditor’s professional scepticism,
and result in a more robust dialogue with those charged
with governance, both of which may contribute to increased
audit quality.
Enhanced auditor reporting is viewed as critical to the
perceived value of the financial statement audit and thus to
the continued relevance of the auditing profession.
KEY AUDIT MATTERS
An auditor reporting on “key audit matters” for listed entities
replaces the concept in the ITC of “auditor commentary”
which was suggested for public interest entities. For this, a new
auditing standard is proposed: ISA 701 Communicating Key
Audit Matters in the Independent Auditor’s Report to establish
requirements and guidance for the auditor’s determination
and communication of key audit matters.
Key audit matters are defined as those matters that, in the
auditor’s professional judgement, are of most significance in
the audit of the financial statements of the current period.
Although this is a matter of professional judgement, the
focus should be on areas of significant auditor attention,
including:
a) areas identified as significant risks or involving significant
auditor judgement
b) areas in which the auditor encountered significant
difficulty during the audit, including with respect to
obtaining sufficient appropriate audit evidence
c) circumstances that required significant modification of
the auditor’s planned approach to the audit, including as
a result of the identification of a significant deficiency in
internal control.
Matters giving rise to a modification of the auditor’s
opinion are, by their nature, key audit matters, but are
to be reported separately in the Basis for Qualified (or
Adverse) Opinion section of the auditor’s report. When the
auditor disclaims an opinion, proposed ISA 705 (Revised)
Modifications to the Opinion in the Independent Auditor’s
Report prohibits the auditor from including additional
information on key audit matters, going concern or other
information.
The IAASB is of the view that
changes in auditor reporting
may have positive benefits
on audit quality, or users’
perceptions of it
The concept of key audit matters is relative, so it is
likely there will always be one or more matters of “most
significance” in an audit. However, the IAASB accepts it is
conceivable that there may be certain limited circumstances
in which there are no key audit matters. In this case
proposed ISA 701 requires a statement in the auditor’s
report that there are no key audit matters, to signal that
the auditor has still made this determination.
The communication of key audit matters in accordance
with proposed ISA 701 represents a particularly significant
change in practice.
Despite the emphasis on the Key Audit Matters section
needing to be entity-specific, there is still a risk that such
BY ZOWIE MURRAY CA
Proposals for auditor reporting
An overview of the proposed new and revised International Standards on Auditing.

2. 29NOVEMBER 2013
BUSINESS
information would likely become boilerplate over time.
Auditors would need to make a conscious effort for this
not to be the case. Also, the description of key audit matters
cannot merely reiterate what is disclosed in the financial
statements or simply point to those disclosures without
providing additional context.
It is acknowledged that auditors of financial statements
of entities other than listed entities may wish to use the new
mechanism of key audit matters on a voluntary basis. A
post-implementation review of the standard would inform
the IAASB whether broader applicability of proposed
ISA 701 to entities other than listed entities might be
appropriate in the future.
COMMUNICATION
Key audit matters are selected from matters communicated
with those charged with governance. Accordingly, the
IAASB determined that limited amendments to ISA 260
Communication with Those Charged with Governance were
necessary in light of proposed ISA 701.
The IAASB is proposing to require that auditors
communicate with those charged with governance about the
significant risks the auditor has identified. In addition to this,
when communicating the significant findings from the audit, to
also communicate any circumstances that required significant
modification of the auditor’s planned approach to the audit.
The IAASB believes it is in the public interest to establish
this requirement for all entities, not only for listed entities.
EMPHASIS OF MATTER AND OTHER MATTER PARAGRAPHS
The mechanism of Emphasis of Matter paragraphs and Other
Matter paragraphs has been retained, and the IAASB is not
proposing any change to the underlying concepts. This is
because key audit matters are not required to be reported
for audits of non-listed entities.
Use of Emphasis of Matter paragraphs is infrequent.
Therefore when a Key Audit Matters section is included in
the auditor’s report, the IAASB believes Emphasis of Matter
paragraphs will be rare.
Auditors should not use Emphasis of Matter paragraphs
or Other Matter paragraphs for matters determined to be
key audit matters. Proposed ISA 706 (Revised) Emphasis
of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report clarifies the relationship
between Emphasis of Matter paragraphs, Other Matter
paragraphs and the Key Audit Matters section of the
auditor’s report.
GOING CONCERN
The most common use of Emphasis of Matter paragraphs
currently is to highlight material uncertainties relating to going
concern, which will now be replaced by a similar paragraph

3. 31NOVEMBER 2013
BUSINESS
as part of a separate Going Concern section.
The proposed changes to ISA 570 Going Concern are
broadly consistent with the suggested improvements in the
ITC, although the IAASB has decided to replace the term
“going concern assumption” with the concept of “going
concern basis of accounting”. It is proposed to include a
conclusion on the appropriateness of management’s use
of the going concern basis of accounting in preparing
the financial statements, and a statement as to whether
a material uncertainty that may cast significant doubt on
the entity’s ability to continue as a going concern has been
identified.
A material uncertainty relating to going concern would,
by its nature, be a key audit matter. Accordingly, a material
uncertainty relating to going concern will no longer be a
required Emphasis of Matter paragraph.
INDEPENDENCE
The ITC suggested a statement of auditor compliance with
relevant ethical requirements, including those relating to
independence. This has been changed to require an explicit
statement that the auditor is independent of the entity and has
fulfilled the auditor’s other relevant ethical responsibilities,
with disclosure of the source(s) of those requirements. This
is similar to disclosing that the audit was conducted in
accordance with ISAs or that the financial statements were
prepared in accordance with IFRSs. The statement relating
to independence is required to be placed in the Auditor’s
Responsibilities for the Audit of the Financial Statements
section rather than the Basis for Disclaimer of Opinion
section as originally proposed.
In the New Zealand environment, “relevant ethical
requirements” comprise NZICA’s Code of Ethics, and
the New Zealand Auditing and Assurance Standards
Board (NZAuASB) PES 1 Code of Ethics for Assurance
Practitioners. However, there may be challenges around
what such a disclosure would comprise in the context of
complex group audit situations.
In the absence of established thresholds for what
may constitute either a minor or a significant breach of
independence, the IAASB decided against requiring public
disclosure of breaches of independence requirements by
the auditor.
ENGAGEMENT PARTNER
Rather than require disclosure of the name of the engagement
partner for all entities as suggested in the ITC, the IAASB has
concluded it would be appropriate to limit the requirement
in proposed ISA 700 (Revised) Forming an Opinion and
Reporting on Financial Statements to audits of financial
statements of listed entities, along with the inclusion of a
“harm’s way” exemption. It is believed this would provide
the engagement partner with a greater sense of personal
responsibility and accountability, which would translate
to improved audit quality.
FORM OF REPORT
It was suggested in the ITC that the IAASB would mandate
the ordering and placement of the required elements in the
auditor’s report. As a result of feedback from respondents
to the ITC, the IAASB reconsidered its position (with the
exception of the introductory paragraph). However, specific
headings are still required in the auditor’s report to ensure
the required reporting elements can be recognised.
The IAASB’s preferred ordering and placement of the
required auditor reporting elements is highlighted through
the illustrative auditor’s reports in the appendix of ISA
700 (Revised) to encourage consistency in presentation.
OTHER INFORMATION
The IAASB continues to pursue auditor reporting on other
information, and is currently in process of considering
comments on the exposure draft of proposed ISA 720
(Revised) The Auditor’s Responsibilities Relating to Other
Information in Documents Containing or Accompanying
Audited Financial Statements and the Auditor’s Report
Thereon. These elements of proposed ISA 700 (Revised)
will be finalised when the revision of ISA 720 is completed,
so that reporting on other information will come into effect
at the same time as the other enhancements addressed by
the proposed ISAs.
WHAT DOES THIS MEAN FOR US?
Ultimately it will be up to the NZAuASB to decide which
entities any changes made to the auditor reporting model will
apply to. The NZAuASB is proposing that a New Zealand ED
run separately but in parallel with the IAASB ED to expose
the changes required to the IAASB proposals as a result of
legislative requirements and the new accounting standard
frameworks in New Zealand. However, the international
proposed amendments to auditor reporting will be adopted
in New Zealand should the IAASB finalise the standards on
auditor reporting as proposed in the ED and there are no
compelling reasons for further amendments to the proposals
identified during the consultation process in New Zealand.
As this is likely to have implications for auditor reporting
in New Zealand, NZICA’s Technical Services Team is
planning to prepare a submission on these proposals.
Comments are due to the IAASB by 22 November 2013.
If you would like to contribute to our submission, please
email submission.feedback@nzica.com.
Zowie Murray CA is a Technical Advisor on NZICA’s
Technical Services Team.

4. Copyright of Chartered Accountants Journal is the property of Institute of Chartered
Accountants of New Zealand and its content may not be copied or emailed to multiple sites or
posted to a listserv without the copyright holder's express written permission. However, users
may print, download, or email articles for individual use.