October 2014

Overview

Our overview of topical issues

Enhancing the auditors report

About Overview
Welcome to EYs Overview
series. These documents
provide a concise overview
of relevant topical or
fast-moving global public
policy and regulatory issues
and are designed to give
you current information on
emerging developments.

1 See New UK Auditors Report Update: Findings from

the FTSE 100 New Auditors Reports, Citi Research,
Western Europe, 3 September 2014, and New UK
Auditors Reports: A Review of the New Information,
Citi Research, Western Europe, 27 March 2014.
2 See Article 10(2)(f) of Regulation (EU) No. 537/2014
of the European Parliament and of the Council of
16 April 2014 on specific requirements regarding
statutory audit of public interest entities and repealing
Commission Decision 2005/909/EC.

Over the course of many years, auditors have provided a binary pass/fail opinion on a companys
financial statements. Either the financial statements fairly present the companys financial position
and operations in accordance with applicable accounting standards, or they do not. While the
traditional approach remains valuable, many believe it is no longer enough. Auditors have more
insights to share, and investors are eager to hear them. And several regulators and standard
setters have responded with measures that would require auditors to say more.
The United Kingdom adopted a new, principles-based standard in 2013, and UK auditors issued
their first reports under the new standard earlier this year. Investors and other stakeholders have
been generally positive about the new reports, which have varied in length and detail.1
The International Auditing and Assurance Standards Board (IAASB) approved final standards
to enhance the auditors report in September (subject to review and approval of due process
by the Public Interest Oversight Board) with issuance expected in early 2015. The standards
will be effective for 2016 calendar year-end audits. The aspect of the IAASBs proposal that
has attracted the most attention is its requirement for the auditor to communicate key audit
matters in all auditors reports for listed entities. This would require auditors to report on those
areas of the audit that demanded the most significant auditor attention.
The European Union adopted its new auditor reporting requirements as part of the recent audit
reform legislation. The legislation will be effective for 30 June 2017 fiscal year-end audits.
The EU approach is similar in some respects to both the UKs and the IAASBs. One difference,
though, is its requirement that the auditors report include a statement that no prohibited nonaudit services were provided.2
The US Public Company Accounting Oversight Board (PCAOB) issued an initial proposal to
enhance auditor reporting in 2013 and has indicated it intends to issue a re-proposal by
March 2015. The PCAOB had proposed that the auditor be required to report on critical audit
matters, which are similar but not identical to the IAASBs key audit matters. Critical audit
matters, according to the PCAOBs definition, would represent the areas in the audit of the
financial statements of most significant auditor difficulty.

Enhancing the auditors report: October 2014

In all likelihood, of course, those areas that

require the most significant auditor attention
will be matters that are also the most
difficult, subjective or complex. However,
investors have said repeatedly and we
agree that it would be much better if the
IAASB, the EU and the PCAOB were more
closely aligned. While we recognize that
legal, regulatory and reporting frameworks
vary, comparability is important for global
investors and global markets, and the
auditors report should be as consistent as
possible across jurisdictions. Key provisions
of the UK, IAASB, EU and PCAOB approaches
are compared in Table 1.3
Proponents of enhanced auditor reporting
argue that it contributes to increased public
confidence in financial reporting, the role of
the audit committee and the audit itself by
opening up what some have seen as a black
box. They believe enhancements would lead

to a greater understanding of what auditors

do and dont do and increase the relevance
of the audit report. Some proponents also
believe that any changes to the auditors
report should complement the audit
committees disclosures.
Even supporters caution, however, that the
auditors report should not become a source
of original information about a company and
that financial statement disclosure needs to
remain managements responsibility. Some
commenters have raised concerns about the
potential liability risks associated with an
enhanced auditors report. There also is a risk
of the report devolving into more boilerplate
language simply because, in most cases, the
important matters on which the auditor is
reporting are likely to be fairly consistent year
to year. And some commenters, especially in
the US, have highlighted that an enhanced
auditors report can never replicate the

in-depth interactions that take place between

an external auditor and the audit committee.
The challenge is how to craft an auditors
report that provides relevant and meaningful
information that can be helpful to users of
the financial statements, without resulting in
these or other unintended consequences.

Our view
EY supports initiatives to enhance the
auditors report. We believe expanded auditor
reporting will not only help respond to
investor demands, but will also help increase
public confidence in financial reporting and
governance. Despite the practical challenges,
we believe that auditors should be more
transparent with the public about the audit.
This will contribute to the ongoing relevance
of the financial statement audit and help
serve the public interest.4

3 The Netherlands is considering proposals to expand the auditors report as

part of a broader focus on audit quality and independence. The new Dutch
auditors report is expected to reflect the IAASBs standards on key audit
matters as well as the new EU requirements on independence. In addition,
the Dutch proposals would require expanded reporting on going concern,
materiality and scope. Recommendations are currently under review in
Parliament. The profession is aiming to provide expanded auditor reporting
for all 2014 opinions issued to public interest entities.
4 Point of view: Auditor reporting, EY, February 2014.

Enhancing the auditors report: October 2014

Table 1: Comparing approaches to enhancing the auditors report

Status

US PCAOB

IAASB

UK

Proposed rule issued

August 2013.

Exposure draft issued July 2013.

Adopted June 2013, effective Adopted April 2014, as part of

for audits for periods
broad audit reform legislation.
commencing on or after
1 October 2012.

Comment period closed

December 2013 (248
comment letters filed).
Public hearing held
April 2014.

Comment period closed November

2013. (139 comment letters filed.)

EU

Revised standards approved in

September 2014 with issuance planned
for January 2015.

Re-proposal expected before

March 2015.
Effective date

Not certain, but likely to align

with IAASB

Effective for 2016 calendar year-end

audits

Already in effect

Member State implementation

beginning in fiscal years ending
30 June 2017

What entities are Public companies

covered
(SEC registrants)

Required for all entities, except for

KAM and naming of the engagement
partner, which are required only for
listed entities. KAM and EP name are
voluntary for audits of other entities
unless required by law or regulation.

UK listed companies

Public interest entities (PIE), which

are companies with securities
admitted to trading on a regulated
market in the EU/EEA, private
credit institutions and insurance
undertakings. Possibility of even
wider application.

What the
auditors report
should describe

Critical audit matters.

Key audit matters.

Materiality, the scope

of the audit, the most
Critical audit matters
Key audit matters represent those
significant risks of material
represent the areas in
areas of most significance in the audit, misstatement, and how these
the audit of the financial
determined from matters discussed with were addressed
statements of most significant those charged with governance and that
auditor difficulty (including
required significant auditor attention.
those matters that involve the
most difficult, subjective or
complex auditor judgments).

A description of the most

significant assessed risks of
material misstatement (including
those relating to fraud); a summary
of the auditors response to
those risks; and key observations
arising with respect to those risks,
where relevant

Auditor tenure

Would be included

Not addressed

Date auditor was appointed and

period of tenure

Going concern

Will be considered by PCAOB

as part of separate initiative

Required statement when a material

Considered as part of
uncertainty exists relating to the
separate initiative
entitys ability to continue as a going
concern. For all auditors reports, an
enhanced description of the respective
responsibilities of management and the
auditor for evaluating going concern.

Similar to IAASB, except there is

no requirement for an enhanced
description of responsibilities for
going concern

Auditors
responsibility
for other
information
(e.g., MD&A)

Would require the auditor to

read and evaluate other
information and disclose the
results of the evaluation in
the report

Considered by IAASB as part of a

separate proposal (but when reporting
is required, it will be in a separate
section of the auditors report with the
same effective date as the other auditor
reporting enhancements)

Not addressed but should be

seen in context of changes
made to UK Corporate
Governance Code and ISAs
(UK and Ireland) in 2012

Requires auditor to confirm that the

management report is consistent
with the financial statements

Naming
engagement
partner

Being considered by PCAOB

as part of separate initiative

Required for listed entities

Already required

Already required

Format

Not addressed

Requires placement of the auditors

opinion first within the report.

Not addressed

Not addressed

Auditor required to report

if the boards disclosures do
not address the matters it
communicated to the audit
committee

Requires a certification that no

prohibited non-audit services have
been provided

Not addressed

Allows for auditor to place identification

of certain auditors responsibilities in
an appendix to the auditors report,
or, when permitted by an appropriate
authority, to use a reference to
a website that describes such
responsibilities
Other statements Not addressed
to be included

Includes affirmative statement in

auditors report about the auditors
independence and other relevant ethical
requirements

Enhancing the auditors report: October 2014

EY | Assurance | Tax | Transactions | Advisory

Contacts
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Public Policy
Beth Brooke-Marciniak
Felice Friedman

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felice.friedman@eyg.ey.com

Professional Practice
Karen Golz
Daniel Montgomery

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daniel.montgomery@eyg.ey.com

Americas
Public Policy
Les Brorsen

les.brorsen@ey.com

Professional Practice
David Kane

david.kane@ey.com

Professional Practice
Bernard Heller

jeremy.jennings@be.ey.com
bernard.heller@fr.ey.com

Asia-Pac
Public Policy
Tony Smith
Professional Practice
John OGrady

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Jeremy Jennings

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Public Policy
Kimihiro Izawa

izawa-kmhr@shinnihon.or.jp

Professional Practice
Hiroshi Hamao

hamao-hrsh@shinnihon.or.jp