There have been two changes to audit reports in response to revised accounting regulations and auditing standards. Auditors will need to state whether the financial statements and the Directors report (and Strategic report if applicable) are materially consistent, providing Directors with an additional layer of assurance. Executives will need to be mindful of this additional scrutiny and preparation of these reports in advance of the audit is key.
The two changes are as follows:
Updated Audit Reports – periods on or after 1 January 2016
With the changes in the Companies, Partnerships and Group (Accounts and Reports) Regulations 2015, SI2015/980, there has been a significant extension to the auditor’s responsibilities in that the auditor now reports additionally on whether the narrative reporting content complies with the relevant legislation. This applies for periods commencing on or after 1 January 2016.
The auditor must now state:
- A) whether, in his opinion, based on the work undertaken in the course of the audit: the information given in the strategic report (if any) and the directors’ report for the financial year for which the accounts are prepared is consistent with those accounts; and any such strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
- B) state whether, in the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, he has identified material misstatements in the strategic report (if any) and the directors' report; and
- C) if applicable, give an indication of the nature of each of the misstatements referred to in (B).
New Audit Reports – periods on or after 17 June 2016
The International Auditing and Assurance Standards Board (ISAAB) had released updated International Standards on Auditing in 2016 which changed the auditor’s report included in the annual financial statements. The changes were designed to enhance the communication between auditors and those charged with governance, and to increase confidence and transparency in its reporting.
ISAAB had changed the International Standards on Auditing (ISA) 700: Forming an Opinion and Reporting on Financial Statements and 701: Communicating Key Audit Matters in the Independent Auditor’s Report. The UK ISAs have been revised accordingly by the Financial Reporting Council (FRC) to allow the UK to be at the forefront of international reforms and auditor reporting. The requirements of these UK ISAs are aimed at addressing an appropriate balance between the need for consistency and comparability in auditor reporting globally and the need to increase the value of auditor reporting by making the information provided in the auditor’s report more relevant to users.
The FRC Compendium of illustrative auditor’s reports (released in a bulletin in October 2016) is applicable to financial statements for periods commencing on or after 17 June 2016.
The significant changes include the following:
- the Opinion section will be presented first;
- there will be enhanced reporting on going concern;
- there will be an affirmative statement of the auditor’s independence, including fulfilment of ethical responsibilities;
- there will be an enhanced description of the auditor’s responsibilities and of the key features of the audit undertaken.