PwC Österreich GmbH. The New Auditor's Report Practical Examples. 13. September Gerhard Prachner

Transcription

1 Österreich GmbH The New Auditor's Report Practical Examples Gerhard Prachner

2 Overview of content of the new IAASB reporting model (1/2) Title Addressee Auditor s opinion Basics for Opinion Material uncertainty regarding going concern (if any) Emphasis paragraphs* (if any) Key audit matters Other matter paragraphs* (if any) Indication, that is the report of an independent auditor Appropriately addressed The audit opinion and identification of what s been audited will now be the first section of the report. The Basis for Opinion will directly follow the Opinion section and, in addition to referring to compliance with the ISAs and referring to the auditor s responsibilities section, will now include the new assertion of the auditor s independence. If the audit opinion has been modified, the explanation would be here too. If there is a material uncertainty with respect to going concern, it will now be described in a separate section that identifies it as such. *An emphasis of matter paragraph may be next if, for example, it is relevant to understanding the financial reporting framework, or it might follow the key audit matters if it relates to a matter also addressed in that section. The new section providing insight into the key matters addressed in the audit will be required for audits of listed companies, but can also be included voluntarily by others. *The placement of an Other Matter paragraph could be here if it relates to the financial statement audit only, or later in the report if it relates to other legal or regulatory requirements, or both. 2

3 Overview of content of the new IAASB reporting model (2/2) Other information Responsibilities for the financial statements Auditor s responsibilities Other reporting responsibilities Date, address and signature A new section in the auditor s report will describe the auditor s responsibilities for other information (e.g., the rest of the annual report, including the management report) and the outcome of fulfilling those responsibilities. The description of management s responsibilities will be expanded to explain its responsibilities with respect to going c0ncern. It will also now identify those charged with governance (if different from management). The description of the auditor s responsibilities under the ISAs is now much more comprehensive and includes a description of the auditor s responsibilities with respect to going concern. Responsibilities beyond auditor s responsibilities under ISA Report on other legal and regulatory requirements. In addition to the signature, address and date, auditor s reports for listed companies will now also have to identify the engagement partner s name. 3

4 Interaction between descriptions of Key Audit Matters and other elements required to be included in the auditor s report Modified opinions (ISA 705 Qualified/Adverse opinion) Material uncertainty related to going concern (ISA 570 Going concern) Additional information (ISA 706 Emphasis of matter/other matter paragraphs) 4

5 Additional information in the auditor s report Emphasis of matter paragraphs Auditor shall include emphasis of matter paragraph provided: i. would not be required to modification and ii. when ISA 701 applies, the matter has not be determined to be a KAM Other matter paragraphs Auditor shall include other matter paragraph provided: i. is not prohibited by law or regulation and ii. when ISA 701 applies, the matter has not be determined to be a KAM 5

6 Modified opinion and material uncertainty Matters giving rise to a modified opinion or material uncertainty -> by nature: Key Audit Matters However: these matters shall not be described in KAM section Rather: Report on those matters in accordance with ISA 705 or ISA 570 and include reference to Basis for Qualified/Adverse Opinion or Material Uncertainty related to going concern section in KAM section 6

7 How the reporting models compare (1/2) Stage of development December 2016 in effect Auditor s report element (for listed company audits,) Prominent placement of the auditor s opinion and other entityspecific information Key audit matters/critical audit matters/audit risks: Identification of the matters/risks Description of how the audit responded to the matters/risks Description of the outcomes/findings Key audit input judgements, including materiality and group scoping IAASB US PCAOB UK FRC EU audit regulation August 2016 proposed standard June 2013 standard in effect Final approved requirements, 2017 in effect Guidance suggests they may be included Not required but has been included in a few reports Required where relevant 7

8 How the reporting models compare (2/2) Stage of development December 2016 in effect Conclusions regarding going concern Statement regarding the outcome of auditor s consideration of other information (e.g., the front half of the annual report) IAASB US PCAOB UK FRC EU audit regulation Enhanced descriptions of responsibilities August 2016 proposed standard No change to extant model Statement regarding the auditor s independence Disclosure of the year the auditor began consecutively serving as the company s auditor Identification of the engagement partner s name June 2013 standard in effect Not required but have been included by some firms Final approved requirements, 2017 in effect No change to extant model For listed companies Being addressed in a separate project Reference to the requirement to be independent Not in the auditor s report but included in the report by the audit committee on its work 8

9 Examples of KAMs (From the s audit report on TUI Travel plc s 30 September 2014 financial statements) Key Audit Matter How our audit addressed the Key Audit Matter Revenue recognition ISAs (UK & Ireland) presume there is a risk of fraud in revenue recognition on every audit engagement. We focused on judgement in revenue in the recognition for certain contractual arrangements. Risk of management override of internal controls ISAs (UK & Ireland) require that we consider this. We challenged the key assumptions and judgements made by management in the calculation of certain contractual revenues, including whether the Group was entitled to, and appropriately recognized, revenue in line with their contractual obligations and revenue recognition policy. We also tested manual journal entries posted to revenue. We tested manual journal entries made by local and Group management to determine that the adjustments made were appropriate. We considered whether there was evidence of bias by Directors in the significant accounting estimates and judgements relevant to the financial statements. We also assessed the overall control environment of the Group and interviewed senior management. 9

10 Examples of KAMs (From the s audit report on TUI Travel plc s 30 September 2014 financial statements) Key Audit Matter How our audit addressed the Key Audit Matter Revenue recognition ISAs (UK & Ireland) presume there is a risk of fraud in revenue recognition on every audit engagement. We focused on judgement in revenue in the recognition for certain contractual arrangements. Risk of management override of internal controls ISAs (UK & Ireland) require that we consider this. We challenged the key assumptions and judgements made by management in the calculation of certain contractual revenues, including whether the Group was entitled to, and appropriately recognized, revenue in line with their contractual obligations and revenue recognition policy. We also tested manual Generic journal entries posted to revenue. descriptions of both the risk and the We tested manual journal entries made by responses local and Group management to determine that the adjustments made were appropriate. We considered whether there was evidence of bias by Directors in the significant accounting estimates and judgements relevant to the financial statements. We also assessed the overall control environment of the Group and interviewed senior management. 10

11 Examples of KAMs (From the s audit report on TUI Travel plc s 30 September 2014 financial statements) Key Audit Matter How our audit addressed the Key Audit Matter Pension liabilities We focused on this area because of the magnitude of the defined benefit pension liability in the overall context of the Group Balance Sheet Measurement of the liabilities requires judgement by management in choosing appropriate actuarial assumptions. Changes in key assumptions can cause a material change in the value of the pension deficit. We have considered and challenged the reasonableness of the key actuarial assumptions by comparing these to benchmark ranges based on market conditions and available actuarial data. We assessed whether the methods used to determine the key assumptions were consistently applied and evaluated the rationale for any changes in approach. We also obtained supporting evidence for each of the key inputs into the overall pension deficit calculation (such as census data and asset values). 11

12 Examples of KAMs (From the s audit report on TUI Travel plc s 30 September 2014 financial statements) Key Audit Matter No cross reference to the related note disclosure Descriptions are quite generic and could apply to any entity How our audit addressed the Key Audit Matter Pension liabilities We focused on this area because of the magnitude of the defined benefit pension liability in the overall context of the Group Balance Sheet Measurement of the liabilities requires judgement by management in choosing appropriate actuarial assumptions. Changes in key assumptions can cause a material change in the value of the pension deficit. No indication of what the significant judgements and key assumptions are We have considered and challenged the reasonableness of the key actuarial assumptions by comparing these to benchmark ranges based on market conditions and available actuarial data. We assessed whether the methods used to determine the key assumptions were consistently applied and evaluated the rationale for any changes in approach. We also obtained supporting evidence for each of the key inputs into the overall pension deficit calculation (such as census data and asset values). Description implies seeking to support inputs rather than evaluating inputs 12

13 Key Audit Matters 13

14 Practical Examples 14

15 Hints and tips for writing the report Begin with the end in mind Anticipate the time involved Management and those charged with governance are keenly interested in the report Getting the descriptions of key audit matters right is a very challenging task Write with the audience in mind A good report is one where you can cover the name of the company and still be able to tell what industry the company is in and maybe even which company it is. 15

16 Writing style Area Hint/Tip For example Tense and style Use past tense Use we checked, we obtained and do not include any present tense phrases check, obtain, agree Avoiding boilerplate Be specific and avoid hypothetical statements Use plain speaking i.e. avoid technical terminology Be factual and specific Avoid general statements Use we identified [x] reconciling items and obtained instead of phrases such as where differences were identified we, we traced any reconciling items to and where we could not rely on controls we as these raise immediate questions over whether there were differences/reconciling items If using client-defined terminology, consider whether this is defined in the financial statements and whether a reader of the report will understand what we are saying in our report Instead of we determined the amount of evidence we needed to, use we obtained evidence over [x], [y] Instead of the balance involves significant judgement or there are inherent assumptions, it is better to explain what the judgements relate to and what the key assumptions are 16

17 Writing style The following words imply a level of work/degree of certainty in our work that is not appropriate: Avoid the word/phrase We validated We ensured /we tested to ensure We assure, we assured /we obtained assurance We reviewed In our opinion We obtained evidence to support management s assumptions/ position because we don t validate management s numbers an audit cannot ensure anything our assurance opinion is on the financial statements as a whole; use of these words implies assuring individual balances/items review has a specific meaning in assurance; use tested, checked as alternatives clearly this risks piecemeal opinions avoid all statements that imply seeking to agree with management s outcome this implies a lack of challenge/skepticism. 17

18 Writing style Avoid the word/phrase We challenged management s assumptions/view Comfort because like reasonable this has little meaning without context challenged how? we do not obtain comfort, we obtain evidence Use these words/phrases with care We tested all items We found the balance to be reasonable So, use when only when every item has been tested Context is provided to explain the basis on which something is considered reasonable, for example, compared with what? 18

19 Examples of KAMs (From the s audit report on TUI Travel plc s 30 September 2014 financial statements) Key Audit Matter Risk of fraud in revenue recognition See note 1 of the financial statements for the Director s disclosures of the related accounting policies, judgements and estimates for further information. We focused on recognition in revenue because there can be a significant difference between the timing of receipt of cash from customers and the subsequent recognition of revenue on the holiday departure date. Due to manual intervention and the high volume of transactions, the high number of different reservation systems and the interfaces of these with the accounting records there is the potential for deliberate manipulation or error. How our audit addressed the Key Audit Matter We assessed the consistency of the application of the revenue recognition policy by reconsidering the accounting policy for the different sources of the Group s revenues. We tested the design and operating effectiveness of the controls (including IT controls) over revenue systems across the Group to determine the extent of additional substantive testing required and also tested key reservation system reconciliations at 30 September We found no material misstatements from our testing. We checked that revenue had been recognized at the correct time by testing a sample of transactions and comparing the departure dates against which the revenue had been recognized. No exceptions were noted from our testing. Our work also included testing a sample of manual journals which did not identify any items that could not be substantiated. 19

20 Examples of KAMs (From the s audit report on TUI Travel plc s 30 September 2014 financial statements) Clear cross Key Audit Matter reference to the related disclosures in We assessed the consistency of the application of the revenue the financial recognition policy by reconsidering the accounting policy for the Risk of fraud in revenue recognition statements different sources of the Group s revenues. We tested the design and operating effectiveness of the controls (including IT controls) over See note 1 of the financial statements for the revenue systems across the Group to determine the extent of additional Director s disclosures of the related substantive testing required and also tested key reservation system accounting policies, judgements and reconciliations at 30 September We found no material estimates for further information. misstatements from our testing. How our audit addressed the Key Audit Matter We focused on recognition in revenue We checked that revenue had been recognized at the correct time by because there can be a significant difference testing a sample of transactions and comparing the departure dates between the timing of receipt of cash from against which the revenue had been recognized. No exceptions were customers and the subsequent recognition of noted from our testing. revenue on the holiday departure date. Due to manual intervention and the high volume Our work also included testing a sample of manual journals which did of transactions, the high number of Identifies different risks not identify any items that could not be substantiated. reservation systems and the interfaces of of fraud in these with the accounting records there revenue is the potential for deliberate manipulation recognition or error. specific to the circumstances of the entity 20

21 Independent auditor s report Wm Morrison Supermarkets PLC 21

22 Independent auditor s report Wm Morrison Supermarkets PLC 22

23 Independent auditor s report Wm Morrison Supermarkets PLC 23

24 Independent auditor s report Wm Morrison Supermarkets PLC 24

25 Independent auditor s report Wm Morrison Supermarkets PLC 25

26 Independent auditor s report Wm Morrison Supermarkets PLC 26

27 Independent auditor s report Wm Morrison Supermarkets PLC 27

28 Independent auditor s report Wm Morrison Supermarkets PLC 28

29 Independent auditor s report Wm Morrison Supermarkets PLC 29

30 Independent auditor s report Wm Morrison Supermarkets PLC 30

31 Independent auditor s report Wm Morrison Supermarkets PLC 31

32 Independent auditor s report Wm Morrison Supermarkets PLC 32

33 Independent auditor s report Wm Morrison Supermarkets PLC 33

34 Independent auditor s report Wm Morrison Supermarkets PLC 34

35 Independent auditor s report Wm Morrison Supermarkets PLC 35

36 Independent auditor s report TUI Travel PLC 36

37 Areas of focus 37

38 38

39 A further review of experience Expansion to cover 278 reports (year one 153 reports) FRC engaged with investors, major audit firms, including round table discussion, reviewed relevant publications, academic analysis Focus of review audit risks materiality audit scope change of auditor Going concern Basis of Accounting and Longer Term Viability Statements 39

40 Change in Audit risks 40

41 Language in respect of areas of judgement audit procedures 41

42 Language in respect of areas of judgement audit procedures 42

43 Summary Investors have welcomed extended auditor reporting and greatly value the enhanced information it provides (source: FRC, Extended auditor s reports, January 206) FRC reviews UK and Ireland ISAs as part of the EU reforms (EU Audit Regulation and Directive) Implementation of New Revised ISAs Implementation of EU Audit Regulation and Directive 43

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