Over the past decade, financial statements have become progressively more complex, and therefore appropriate, relevant, and high-quality disclosures have become increasingly important to users of financial statements. Financial statements are now more likely to include a variety of disclosures, ranging from the more traditional disclosure items to more subjective or explanatory, non-quantitative disclosures. Moreover, poor-quality disclosure, such as excessive or immaterial disclosure, may obscure understanding of important matters and erode public confidence in financial reporting.
These developments have presented challenges for preparers and auditors in addressing new types of quantitative and qualitative information. In response, the International Auditing and Assurance Standards Board (IAASB) has released for public comment proposed changes to the International Standards on Auditing (ISAs), mainly to the application material, to enhance the focus of the auditor on disclosures at the early stages of the audit. The Exposure Draft (ED), Addressing Disclosures in the Audit of Financial Statements, is open for comment until September 11, 2014.
The proposals include new guidance on auditor considerations relevant to disclosures—from planning and assessing the risks of material misstatement, to evaluating misstatements and forming an opinion on the financial statements. To complement the ED, the IAASB has also issued the Preliminary Staff Publication, Addressing Disclosures in the Audit of Financial Statements, which highlights important matters addressing disclosures as part of a financial statement audit.
The IFAC Small and Medium Practices (SMP) Committee will be responding to these proposals. Indeed, it has been closely monitoring the development of the ED from the outset, providing input by way of comment letters from an SMP/SME perspective on the IAASB agenda materials. The SMP Committee has developed preliminary views in response to various questions posed in the ED, including:
- We believe that the changes proposed should enhance a more timely and effective audit of disclosures and welcome the provision of additional application material, rather than additional requirements to the ISAs.
- We are, however, concerned that the cost of implementing the proposed changes may outweigh the benefits for the majority of SMP audit clients and have no corresponding effect on audit quality. The disclosure requirements in the financial reporting frameworks for many small- and medium-sized entity (SME) audits are not as complex as those for large, listed entities, and the auditing of SME disclosures is typically straightforward. In addition, giving appropriate attention to disclosures early in the audit process is unlikely to significantly impact many SME audits as the time to complete these audits is often fairly short.
- Many of the issues cannot be solved by the IAASB alone. Its close liaison and continued dialogue with the main stakeholder groups and national standard setters who are reviewing how their standards approach disclosures is especially important. For instance, given the similar timing to the International Accounting Standards Board (IASB)’s Disclosures Initiative, we believe further consideration should be given to how the outcomes of both projects could be more closely aligned to avoid further changes to the ISAs in the near future.
- The issue of materiality for non-quantitative disclosures is an important area for preparers and auditors in practice, and for which SMPs, in particular, would welcome further clarification. However, we support the IAASB’s decision not to change ISA 320, Materiality in Planning and Performing an Audit in isolation.
- It is well recognized that SMPs do not have access to the in-house technical resources available at larger firms, and so face challenges in efficiently and cost-effectively implementing international standards. We support the suggestion to align the effective dates for the disclosure proposals with the other changes to the ISAs, including those related to the Auditor Reporting project and the revision of ISA 720, The Auditor’s Responsibilities Relating to Other Information. In our view, the minimum timeframe between issuance of final standards and the effective date should be 12 months.
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To help the SMP Committee develop its response, it would be keen to hear the views of professional accountants in SMPs and SMEs. Please log in and comment below to share your thoughts on the proposed ISA enhancements focused on financial statement disclosures.
