AUDITORS will be required to warn investors about risks within the companies they audit as part of a "step change" in the way audit reports are structured proposed by the FRC.
In response to criticism that auditors' reports are uninformative, the reporting watchdog has launched a consultation to extend their scope to include a commentary of the "risks of material misstatement" identified by the auditor.
As part of the changes, which could force auditors to flag risks that differ from those disclosed by company directors, auditors will be required to explain how they applied the concept of materiality – which relates to the importance of transactions, balances and errors contained in the financial statements – and summarise how the audit scope responded to company risks.
Nick Land [pictured], chairman of the FRC's audit and assurance council, said the new rules would provide a "step change from the traditional binary pass/fail model of audit report".
"Such reports have increasingly been criticised as being uninformative by investors, and other users of financial statements. The proposals ... 'close the circle' by requiring the auditor to disclose information about the audit, within the auditor's report itself," Land said.
The proposed changes build on modifications made by the FRC to board and auditor reporting last September, requiring the auditor to communicate information to the audit committee about significant audit judgments and to report by exception if the board's disclosures do not, in its view, appropriately address the matters it communicated.
The consultation period ends on 30 April 2013.
As an auditor for a Big 4 I welcome this. We all feel the audit report is too vague and provides little value to users of the financial statement.
Although this will mean more work for us, it does mean our work will be valued by a greater number of people.
Posted by: Malcolm, 05 Feb 2013 | 20:02
The Auditor's only responsibility should be to report whether or not Management's Financial Statements are reported in compliance with Accounting Standards. It is Management's responsibility to make the financial statements & disclosures. The Standards are becoming inconsistent. They demand the Auditor respond as a Manager. What are you going to do with the Independence Standards as Auditors become more & more responsible for prediciting a Company's future risks & decision making process?
Posted by: Steve Green, 07 Feb 2013 | 17:39
this will just serve to create a dilution of the audit report, not a strength - to highlight an area of 'risk of material mistatement' would be to cast doubt on how valid the clean audit report really is. The audit report says we've tested the numbers and we're happy they are not materially mistated, so why then flag an area as saying it does contain a risk of misatatement!
Posted by: Mark, 08 Feb 2013 | 12:14
Steve - if that is all auditors do, then they need to dramatically reduce their fees. This is a welcome move, as long as it isn't another excuse to up the bill.
Posted by: Sam Shah, 09 Feb 2013 | 11:09
So far we commented on the truth and fairness of financial statements and so the programme of work performed which is obviously a smaller work programme to cover than to be professionally able to talk about that and a risk profile seen from the profile of the investorate also. Obviously we do risk based auditing, but it is a concentration merely on the risk that financial statements could contain material error. The risk that the objectives of the business show a higher or lower deviation from those expected is quite a separate workload, and would need for us to work alongside management with a need to be far more intrusive than clients have experienced so far. So people want to give more duties to us, but will we have the accompanying rights? Will we be able to set our monitoring eyes in the company all year round, watching all the aspects and taking responsibility for risk? I expect not. Even the tools that we need to be able to do the existing job properly, namely a proper budget and also certain rights as officer of the company enshrined in the law are very variable. The UK and Ireland still have rights for the auditor to attend the AGM, for instance. In Poland I get to attend the AGM if invited but I have no right to be there and check that my report isn't being misrepresented orally by directors at the AGM. Just one small example of how auditor's rights vary a lot over just the EU.
Posted by: David James, 11 Feb 2013 | 15:21
Auditors are not always conversant in all manner of investments. Therefore an auditor will relie on the work of another person so as to advice the client. Thus more audit fees to pay such consultancy and ultimately it will not the auditors advise.
Posted by: Miano Ann, 20 Feb 2013 | 11:11
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