New auditor’s report: A clear way forward?

Source: Stock.XCHNG

There is not a month goes by where you don’t read the words “audit” and “reform” together in the same sentence in some publication or another, says Steve Collings.

Attempts by regulatory bodies to overhaul the audit regime to make the audit gain more credibility is going to be a huge task given the lambasting that auditors have received over recent years and the way in which the audit profession, as a whole, has been slammed by various critics.

Audit firms themselves have come in for some fierce criticism from their own regulators for failing to...

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  • Assessed risks of material misstatement
  • Materiality
  • Audit scope
  • Initial concerns
  • Conclusion

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Comments
carnmores's picture

yet still    1 thanks

carnmores | | Permalink

only the company itself can rely on it ?

Previous thread    1 thanks

arnold28 | | Permalink

Readers may also be interested in the other thread on this site discussing the issues.

http://www.accountingweb.co.uk/article/frc-changes-audit-report-standard/542759

Thanks

eddybee | | Permalink

Steve

Thanks very much for the article.   Some difficult decisions ahead for auditors of listed companies, particularly where risks are commercially sensitive or even reputationally damaging to the client.   

However I don't think you can fault most of the logic (although the location information could be misleading if not put in context of both materiality and the underlying control systems).  Having said that, talking generally, there is a danger of information overload.

It will be interesting to see how this pans out, what happens if the auditor fails to disclose a risk that proves to be significant?   Even if it doesn't give rise to litigation, it could put the conduct of the audit (& the auditor) in the spotlight!!

I wonder if this change will encourage companies to look more closely at their internal controls/ risk management.   For example, I note (with some self interest) that there are a number of smaller (but not tiny) listed companies, that don't have an internal audit function. 

David Lewis

www.camroseconsulting.co.uk

 

 

 

 

 

Steve Collings's picture

@David Lewis

Steve Collings | | Permalink

Thank you for your comments.

The FRC have to be commended on ANY improvements they make to the auditor's report.  There are many in the profession that are opposed to the revisions to ISA (UK & IRL) 700 and they are also critical of the current auditor's report format, hence a 'no win' situation.  Personally, I would not like to see an auditor's report spanning several pages in a firm's attempts to cover themselves as this would go against the FRC's objectives of trying to make the auditor's report more meaningful to users; hence there has got to be an element of reality where risks and scope are concerned. Certainly I would only expect to see 'material' risks rather than 'every' risk pertinent to a client (and would hope that's what regulatory bodies would expect as well).

Best wishes

Steve

Reporting

Ayesha Bham | | Permalink

I recently attended a seminar where the speaker talked about this issue. She advised that every risk should be disclosed to be on the safe side! Needless to say the audience of around 100 accountants were horrified (although she didn't say that this revision was for listed companies only so thanks for the clarification Steve).
I agree the report is rubbish as it is and think the revisions actually do make sense provided QAD et al don't expect every possible risk - we are trying to reduce paper usage (!)

Tom 7000's picture

chocolate teapot

Tom 7000 | | Permalink

 

Q: Who is required to apply the UK Corporate Governance Code ?

A: All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report on how they have applied the Code in their annual report and accounts.

 

Q: Whats a premium listing? 

A Premium Listing is only available to equity shares issued by trading companies and closed and open-ended investment entities. Issuers with a Premium Listing are required to meet the UK’s super-equivalent rules which are higher than the EU minimum requirements. A Premium Listing means the company is expected to meet the UK’s highest standards of regulation and corporate governance – and as a consequence may enjoy a lower cost of capital through greater transparency and through building investor confidence. 

 

Q How many Auditors reading this do these rules apply to

A: None

 

...but stand up and be counted if you are signing off huge plcs accounts ;o)

 

Had me worried for a minute there

Reporting

eddybee | | Permalink

I can't imagine that including every risk is what is envisaged,  it would water down the meaningfulness of the information and would probably require a statement that's longer than the accounts!!  

In reality, there will always be risks that wouldn't normally come under the auditor's radar eg: if a fraud arises through collusion.   It really wouldn't be feasible to note every conceivable risk.

 

 

 

nigelr's picture

Reporting

nigelr | | Permalink

Every few years the same comment is made that the Audit Report is not fit for purpose and then we get a revised Standard which usually doubles the size of the Audit report. 

On each ocassion the revision does nothing to combat the fact that the public, investors and analysts have a different expectation as to what the audit report provides to that which the Auditor believes they are providing.  This used to be called the 'Expectation Gap'.

This current change will equally fail to provide any further clarrification or assurance.  In providing details of Risk and Materiality the users of the accounts will simply misinterpret the facts provided and not take account of the fact that it is all based upon the individual Auditors Opinion.  It is not a scientific calculation.  Accordingly the credit agencies and analytsts will compare one report to another for a business in the same sector and asess investment potential and credit limits based upon the difference saying that the items disclosed indicate the quality of the audit.

Giving more information is not the answer, it is simply more confusion.  What is required is that the users of the accounts become educated in understanding accounts and more importantly what an Audit is.

Audit Report trip advisor rating

frankfx | | Permalink

Seems to be  that the needs of the user /reader of the audit report  has been neglected.

What readily digestible and comprehensible form of wording is required for the unsophsiticated shareholder or stakeholder.

Start from that point and we may end up with the desired outcome.

Wordage and verbage , amplified with explanations, is not the answer.

The Shareholder wants to be assured that he/she should have no concern  and can sleep easy.... or informed that there are 'issues' .... with a some scale of concern.

Perhaps a TRIP advisor rating system is all that is required 

We do not want something for the lawyers and insurance companies to get their teeth into- at the auditors expense.

Not forgetting  the windfall for the lecture circuit and training companies.

 

 

Corporate Governance

twickers | | Permalink

 

Trading company ?- you should also define.......and explain why rules do not apply to ALL