Auditors of UK companies are finding innovative ways to improve the transparency of their audit reports, going beyond requirements that were instituted to improve investor confidence, according to a report by the Financial Reporting Council (FRC).
In a bid to encourage a move away from boilerplate reports that the FRC described as “failing to communicate the auditor’s work and insights,” the regulator introduced additional requirements for audits of companies subject to the UK Corporate Governance Code with effect for periods commencing on or after October 1st 2012.
The requirements include describing the assessed risks of material misstatement, materiality, and the scope of the audit.
To gauge the progress made so far, the FRC analysed 153 extended auditor’s reports published between July and September 2014. The study found that the regulations have yielded a wide variety of approaches that have led to more descriptive, innovative reports.
The survey report, Extended Auditor’s Report: A Review of Experience in the First Year, states that significant innovation was found in the following areas:
- Disclosing the materiality benchmark used.
- Disclosing the magnitude of unadjusted differences being reported to the audit committee.
- Reporting of detailed audit findings with respect to identified risks.
- Experimentation with detailed broader explanation of the audit scoping process.
- Improved presentation of auditor’s reports through the use of diagrams and graphs.
- Addressing going-concern disclosures in auditor’s reports.
- Locating the auditor’s opinion at the beginning of the report rather than at the end.
- Moving generic descriptions of the scope of an audit to a website.
However, the analysis showed that there are some areas where there is potential for further progress. These include:
- Increasing the entity-specific risk reporting.
- Improving the discussion of the auditor’s application of materiality and why a particular benchmark or level was chosen.
- Making a clearer link between the discussions of risks and materiality and the description of how these influenced the scope of the audit.
Improving the transparency of audit reports is an issue regulators are addressing around the world, and progress made in the UK will be monitored with great interest. In the US, the Public Company Accounting Oversight Board (PCAOB) is updating its reporting model and is keeping a keen eye on developments in the UK.
Similarly, the International Auditing and Assurance Standards Board (IAASB) recently issued a standard to generate greater transparency in audits that will apply to reporting periods ending on or after December 15th 2016.
—Samantha White (swhite@aicpa.org) is a CGMA Magazine senior editor.
