Standards
The Auditor's Report
Proposed Handbook revisions align auditor reports with ISA.
FROM: NOV-DEC 2006 ISSUE | BY STEPHEN SPECTOR
In July 2006, the Auditing and Assurance Standards Board (AASB) issued an exposure draft which will revise Handbook Section 5400, The Auditor's Standard Report, according to the new standard audit report wording contained in International Standard on Auditing (ISA) 700, The Independent Auditor's Report on a Complete Set of General Purpose Financial Statements. Phase I is being conducted on a fast-track basis, whereas the AASB will address the remaining issues and propose to adopt ISA 700, along with International Standards on Auditing 701, The Independent Auditor's Report on Other Historical Financial Information, and 800, The Auditor's Report on Special Purpose Audit Engagements as part of a second phase, sometime in 2007.
The project proposes to change the wording of the auditor's report. The main features are as follows:
Management's Responsibility
The exposure draft expands the description of management's responsibility to indicate that it includes designing, implementing, and maintaining internal control in the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
The exposure draft proposes to replace the scope paragraph of the auditor's report with a new paragraph that contains an expanded description of the auditor's responsibility indicating that:
- An audit includes assessing the risks of material misstatement in the financial statements;
- The auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances; and
- The auditor's consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of the entity's internal control, and, accordingly, the auditor expresses no such opinion.
Auditor Stand Back
In ISA 700, there is a requirement for an auditor "stand back" to assess whether the financial statements are fairly presented, as ethical requirements prevent the auditor from being associated with misleading financial statements. Such a stand back is not expressly dealt with in Canadian standards, although, like international standards, the rules of professional conduct prohibit an auditor from being associated with misleading financial statements.
ISA 700 also contemplates an extremely rare case in which following GAAP might result in misleading financial statements. ISA 700 indicates that if the auditor encounters circumstances that lead him or her to conclude that compliance with a specific requirement results in misleading financial statements, the auditor would consider the need to modify the auditor's report. This issue is not addressed in existing Canadian standards.
Fair Presentation
ISA 700 applies to the auditor's report when the financial statements meet two criteria:
- The financial statements are general purpose financial statements; and
- The financial reporting framework used is designed to achieve a fair presentation.
ISA 700 does not define the second criterion. It is an important criterion because if it is not met, the auditor is required to report under ISA 800, The Auditor's Report on Special Purpose Audit Engagements (in the process of being revised and renumbered as ISA 701), which means that the auditor does not qualify his or her opinion but gives a "properly prepared in accordance with the framework" form of opinion. Canadian standards are based only on the first criterion; as a result, if an auditor is reporting on general purpose financial statements, the auditor's opinion is always based on "fairly presents" and on the assumption that the framework is designed for such a presentation. Canadian standards do not deal with the compliance form of opinion being considered for new ISA 701.
Date and Subsequent Events
The revisions to ISA 700 also were intended to clarify the date of the auditor's report in International Standard on Auditing 560, Subsequent Events. ISA 700 also requires that the date of the auditor's report be no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence, including evidence that the financial statements have been prepared and that those with the recognized authority have asserted they have taken responsibility for them.
In reviewing ISA 560, the AASB will consider how other existing differences between Canadian standards and ISAs should be addressed. For example, ISA 560 does not permit double dating of the auditor's report when an event occurs after the date of the auditor's report but before the financial statements are issued. ISA 560 requires the auditor to date the report no earlier than the date of approval of the amended financial statements and perform extended subsequent events procedures up to the date of the new report.
Additional Handbook Changes
The project also proposes revisions to other Handbook sections, such as:
- Sections 5090, Audit of Financial Statements — an Introduction, and 5095, Reasonable Assurance and Audit Risk, regarding the objectives and principles governing an audit;
- Section 5110, Terms of the Engagement;
- Section 5405, Date of the Auditor's Report; and
- Section 6550, Subsequent Events.
While the International Assurance and Auditing Standards Board (IAASB) issued revisions to ISA 700 in December 2004, the updated wording of the auditor's report is intended to enhance readers' understanding by including better explanations of the responsibilities of management and the auditor, an updated description of the audit process to reflect the new audit risk standards, and clarification of the scope of the auditor's responsibilities with respect to internal control.
Revised ISA 700 is effective for auditors' reports dated on or after December 31, 2006. The AASB will make its proposals effective in 2007 in order to allow sufficient time for practitioners to implement the revisions. However, as is normal practice, the AASB will encourage early implementation of the new auditor's report wording.
The IAASB plans to issue two new ISAs early next year: ISA 701, The Independent Auditor's Report on Other Historical Financial Information, and ISA 800, The Independent Auditor's Report on Summary Audited Financial Statements. These ISAs will provide guidance on the form the auditor's report should take when financial statements are prepared for special purposes or when the auditor is reporting on summarized financial statements. These projects have been delayed because of the IAASB's Clarity project, which is revising the structure and terminology of all the ISAs.
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Stephen Spector, MA, FCGA, owns Spector and Associates and teaches Financial and Managerial Accounting at Simon Fraser University. He also serves on CGA-BC’s board of governors. E-mail shspector@shaw.ca.