Auditors of listed companies will have to give a clearer explanation of the risks faced by their client under a revised standard that hopes to make audit reports more useful for investors.
The Financial Reporting Council (FRC) said that it has made a "significant" change to ISA 700 (UK and Ireland) 'The Independent Auditor’s Report on Financial Statements'. The revised standard will require auditors reporting on companies which apply the UK Corporate Governance Code to explain more about their work.
Since the financial crisis, shareholders have criticised audit reports for being hard to understand and for giving banks clean bills of health shortly before they collapsed.
There are also concerns about the quality of big-company audits. In May, the FRC, said it is reviewing director appointments in some FTSE 350 companies amid concerns that independence between auditors and companies is being undermined.
The revised audit standard requires auditors to:
- 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 and 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 standard is effective for audits of financial statements for periods commencing on or after 1 October 2012.
Nick Land, Chairman of the FRC’s Audit and Assurance Council said: "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."
Steve Collings, director at LWA and AccountingWEB's regular commentator on financial reporting, said he supported efforts to make audit reports more relevant to shareholders. However, he added that the FRC needed to give more guidance on what risks an audit report should include and materiality - for example, auditors' judgements about the importance of mis-statements or omissions in company accounts or an improper description of accounting policy.
"My main concern is that [we're] going to end up with an auditor's report that will be so long-winded that it will be painful to read," Collings said.
