An unprecedented survey in Brazil has shown advances in transparency and clarity of information provided by the New Auditor's Report. The survey, conducted by the Instituto dos Auditores Independentes do Brasil (IBRACON), focused on the inclusion of Key Audit Matters (KAM), the most significant change for listed companies in the New Auditor’s Report. Our goal was to characterize the most significant matters identified in the audit process.

Auditors’ reports from 546 listed companies, including the largest 100 listed companies on the Brazilian stock exchange, were evaluated, identifying 1,329 KAMs (average of 2.43 per audit report), classified into 23 different types based on business structure. As defined by the International Auditing and Assurance Standards Board, Key Audit Matters are those that, in the auditor’s professional judgement, were of most significance in the financial statement audit.

The study identified some key aspects prevalent in new auditors’ reports: 1) the language is more accessible and must make communication with investors, creditors, and regulators more efficient; 2) the presentation is more detailed; and 3) the auditors' focus on areas with greater risk and subjectivity of analysis and his or her attention to the aspect of going concern became emphatic.

Of those auditor’s reports reviewed, 32% presented KAMs related to Impairment of Non-Financial Assets—assumptions and calculations that have high level of judgment. Revenue was the second most covered KAM, in most cases reflecting concerns about the specificities of the contracts and/or segments. Contingencies was also a well-covered matter due to different tax interpretations, the rate of labor claims, and the subjectivity and dependence on third parties in determining loss estimates.

In the banks segment, Allowance for Doubtful Debts were frequently included in KAMs indicating attention to the recoverability of credit portfolios and financial assets in general. Impairment of Non-Financial Assets was also highlight in the retail, transportation, and logistics segments. For energy, the most mentioned KAM was Concession and Sector Assets and Liabilities. For the construction and engineering and highway and airport sectors the greatest auditor's attention was to Revenue Recognition.

The KAMs of companies on the IBRX Bovespa index (that is, those with greater relevance to Brazilian GDP) are in line with those of the remaining organizations surveyed: Impairment of Non-Financial Assets, Contingencies, and Revenue. Due to the economic crisis faced in Brazil, the Going Concern Assumption prominently appeared in 18% of the audit reports.

The survey showed that 23% of the audit reports included KAMs that considered the outcome of auditing procedures, which is allowed but not required by the standards. This was mainly driven by the financial segment, which showed 52% of entities include outcomes of the audit procedures in the KAM section.

The IBRACON survey confirmed our expectation that the New Auditor's Report would meet the growing desire from financial statement users and Brazilian society for a business environment with more compliance, objectivity, and transparency. This advance also confirms the role of the accountancy profession in contributing to audit process transparency and responding to auditor concerns.

You can read more about IBRACON’s survey and auditor reporting in Brazil in Valor Econômico, Brazil's leading economic newspaper.

The study was conducted by the Instituto dos Auditores Independentes do Brasil (Institute of Independent Auditors of Brazil, or IBRACON) as part of its mission to promote the continuous development of the accountancy profession, including strengthening the profession and capital markets’ sustainable development. The New Auditor’s Report was adopted in Brazil through standards issued by the Conselho Federal de Contabilidade (Federal Accounting Board, or CFC), in conformity with the model developed by the International Auditing and Assurance Standards Board (IAASB). The New Auditor's Report began taking effect in Brazil in 2017 for financial statements for the year ended December 31, 2016.

Idésio Coelho

President, IBRACON, Senior Partner, EY, & IFAC Board Member

Idésio Coelho became a member of the IFAC Board in November 2016 after being nominated by the Instituto dos Auditores Independentes do Brasil and Conselho Federal de Contabilidade (IBRACON). Mr. Coelho is a Brazilian certified accountant and auditing professional. He is a senior partner leading the risk management for EY in Brazil, where he has worked for more than 30 years. He is also the regulatory matters leader for South America EY operations. He has experience in local and cross-border listing activities, in quality matters and inspection activities of audit firms. Mr. Coelho is also the President of IBRACON and an active member of the Federal Accounting Council (CFC). He is also the Chair of Trustees of the Foundation supporting the Brazilian Accounting Pronouncements Committee (CPC). In his multiple years and roles serving the accounting profession through IBRACON, CFC, and CPC he has supported the convergence and adoption of the International Auditing Standards and International Financial Reporting Standards in Brazil. Mr. Coelho is graduated from the Fundação Santo André, Brazil with an accountancy degree.