A revised auditing standard issued Tuesday by the UK Financial Reporting Council (FRC) is designed to increase the transparency of the auditor’s report.
The FRC’s revised standard, International Standard on Auditing (UK and Ireland) 700, The Independent Auditor’s Report on Financial Statements, requires auditors to:
- Provide an overview of the scope of the audit, showing how the scope addressed the risk and materiality considerations.
- Describe the risks that had the greatest effect on the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team.
- Explain how they applied the concept of materiality in planning and performing the audit.
“The provision of a fuller description of the work the auditor has undertaken will give far more insight to investors than the binary pass/fail model of the current audit report,” Nick Land, chairman of the FRC’s Audit and Assurance Council, said in a statement. “The improved report will be a better basis for engagement by investors with companies, and we encourage auditors and companies to work together to develop succinct communication to do so.”
The revised standard is designed to complement changes made to the UK Corporate Governance Code in October 2012, and takes effect for audits of financial statements for periods beginning on or after October 1st 2012.
Projects designed to enhance the auditor’s report have been undertaken by numerous regulators in recent years, including the International Auditing and Assurance Standards Board (IAASB) and the US Public Company Accounting Oversight Board (PCAOB). The IAASB and PCAOB projects remain active and have not yet produced final standards.
—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.