News June 2013 FRC issues revised auditing standard: making auditors’ work more transparent to investors

FRC issues revised auditing standard: making auditors’ work more transparent to investors

04 June 2013

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The FRC has today (4 June 2013) made a significant change to the UK’s corporate governance regime with the issue of its revised auditing standard enhancing the transparency of the auditor’s report with the aim of better communication to investors.
The revisions to ISA 700 (UK and Ireland) "The Independent Auditor’s Report on Financial statements” (PDF) require auditors reporting on companies which apply the UK Corporate Governance Code to explain more about their work. The revisions received strong support during the consultation process and are therefore being adopted with only minor amendments.
Nick Land, Chairman of the FRC’s Audit and Assurance Council said:

“I am pleased that auditors as well as investors have given their enthusiastic support for the proposal in the Consultation Paper to supplement the binary pass/fail model of audit report. The provision of a fuller description of the work the auditor has undertaken will give far more insight to investors than the binary pass/fail model of the current audit report. The improved report will be a better basis for engagement by investors with companies, and we encourage auditors and companies to work together to develop succinct communication to do so.”  

What the FRC is asking auditors to do 

  • Provide an overview of the scope of the audit, showing how this addressed the risk and materiality considerations

  • Describe the risks that had the greatest effect on:

    • the overall audit strategy

    • the allocation of resources in the audit

    • directing the efforts of the engagement team

  • Provide an explanation of how they applied the concept of materiality in planning and performing the audit

The revised standard is designed to complement changes made to the UK Corporate Governance Code in October 2012. Accordingly it is effective for audits of financial statements for periods commencing on or after 1 October 2012.

To provide practical support, the FRC's Financial Reporting Lab is running a project for companies and investors on the reporting of Audit Committees in annual reports which will address the interaction with auditor reporting.

Notes to editors:

  • The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
  • The standard can be found here (PDF) and the feedback statement here (PDF).
  • These changes should be seen in the context of the changes made to the UK Corporate Governance Code and ISAs (UK and Ireland) in September/October 2012 which require:
    • The auditor to inform the audit committee about significant audit judgments
    • Audit committees to report their activities, including on their communication with the auditor, to the board
    • Boards to describe the work of the audit committee in the annual report
    • The auditor to report if the board’s disclosures do not address the matters it communicated to the audit committee
  • An example of an auditor’s report illustrating how the June 2013 version of ISA (UK and Ireland) 700 might be implemented is available here (PDF).
  • The Financial Reporting Lab’s project is an opportunity for companies to better understand what it is that the investment community wants to see reported by Audit Committees, in light of both new and existing aspects of the UK Corporate Governance Code and Guidance to Audit Committees, and for investors and analysts to voice their views.