Take-up of new requirements for extended auditor’s reports has been positive; many auditors have made quite radical changes that go beyond the Financial Reporting Council’s (FRC) new requirements, first announced in 2013. The requirements for auditors to describe assessed risks of material misstatement, materiality and the scope of the audit are beginning to make a process that had previously been described as a “black box” by investors more transparent. In time we hope this will lead to improved justifiable confidence in audit.
The FRC has today released its survey Extended auditor’s reports: A review of experience in the first year (PDF) which confirms that auditors appear not only to have met the new requirements but in many cases to have gone further and reported more widely than required. The FRC considers the extent of innovation and the diversity of approaches adopted by different audit firms to be very encouraging.
Commenting on the survey, Melanie McLaren, Executive Director, Codes and Standards said:
“Confidence in UK audits underpins investor confidence in UK capital markets. The tone and tenor of this report is that the response of auditors to changes designed to improve confidence has been most encouraging. We wanted auditors to be more transparent and insightful in the way they report. The diversity of approaches adopted by different audit firms is to be embraced and we are excited to see how firms will continue to innovate and develop their ideas on how to report.
The UK has been one of the first countries to move away from boilerplate auditor’s reports that were failing to communicate the auditor’s work and insights. We are pleased to see that international standards are now moving in a similar direction.”
Significant innovation was found in the following areas:
- 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 survey also suggests areas where further changes might be made. These areas are:
- Increasing the entity specific risk reporting
- Improving the discussion of the auditor’s application of materiality and why a particular benchmark or level was chosen
- Making a clearer linkage between the discussions of risks and materiality and the description of how these influenced the scope of the audit.
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.
- Between July and September 2014 the FRC carried out a detailed analysis of 153 extended auditor’s reports (63 reports were of FTSE 100 companies) that had been published at that time. 147 out of 153 were issued by the four largest audit firms.
- The analysis was performed by staff of the FRC reading both the extended auditor’s report and the report of the Audit Committee and responding to a number of questions about what they had read. Some of the questions required the recording of objective information such as the number of risks reported by the auditor. Other questions involved making subjective judgments such as the extent to which the description of a risk described specific circumstances of an entity or were written in generic terms. The survey also covers the views of investors, expressed at the IMA’s inaugural auditor reporting awards and considers how reporting may evolve in future.