Accounting Media Communication Assignment New reporting standards for audits

Shayne Rebello Mr. Guerrisi A! " M #ecember $%& '($'

New reporting standards for audits September '($' issue y Gundi )effrey http*++www.thebottomlinenews.ca+inde,.php-section.article/articleid.01"

Audit reports are about to get a ma2or facelift& but auditors 3 while supporting more informati4e reports o4er all 3 are a leery about whether some of the specific proposals recently floated are necessary or e4en useful. 5hate4er the final outcome& it will affect how Canada6s auditors go about their business. 7or many years now& the auditor6s report has been a fairly short and almost boilerplate document that sheds 4irtually no light on the issues of most interest to its users. !he 8nternational Auditing and Assurance Standards oard 98AAS : aims to change that. 8ts Invitation to Comment: Improving the Auditors Report& released at the end of )une& offers suggestions for ma;ing reports more transparent& informati4e and useful. <A =uality audit should be accompanied by an informati4e auditor6s report that deli4ers 4alue to an entity6s sta;eholders&< said 8AAS chairman Arnold Schilder in the 8n4itation to Comment 98!C:. <!he auditor6s report should better e,plain what an auditor does and enable the auditor to shine a light on ;ey matters based on the auditor6s wor;.< Canada6s Auditing and Assurance Standards oard <strongly supports the auditor reporting initiati4e&< says Greg Shields& director of auditing and assurance at the Canadian 8nstitute of Chartered Accountants. <Any change to the auditor6s report that will ma;e it more useful& and result in more people actually reading the report& is highly desirable. A proposal such as positioning the auditor6s opinion as the first paragraph in the report is not li;ely to be contro4ersial* the opinion is li;ely the primary focus of most readers and it ma;es sense for it to appear first. >owe4er& 8 thin; that 2ust about all the other proposals are li;ely to generate some amount of contro4ersy.< Alaina !ennison& a partner in the audit practice with ?wC& agrees that <the time is right to significantly enhance auditor reporting&< but adds that any changes should be based on a clear set of principles and that they actually add rele4ance to the audit report. She also says she doesn6t belie4e that all of the 8AAS proposals meet those ob2ecti4es !ennison is part of a ?wC Global wor;ing group that is loo;ing at the ramifications of the proposal to put together a global response for submission to the 8AAS . <5e belie4e the proposals are a positi4e step in the shorter term&< she says. <>owe4er& more radical reforms need to be framed as part of a wider re4iew of the corporate reporting model.<

According to the 8!C& the call for change& which echoes many of the proposals already aired by the @uropean Commission and the A.S. ?ublic Company Reporting B4ersight oard& was prompted by institutional in4estors and financial analysts who want auditors to help them <na4igate increasingly comple, financial statements and point out the areas on which the auditor6s wor; effort was focused& particularly on the most sub2ecti4e matters within the financial statements.< !he 8!C lays out four primary suggestions for beefing up the audit report. !he first as;s for additional information in what would be called <auditor commentary.< !his section would highlight what& in the auditor6s 2udgment& are li;ely to be most important issues for users6 understanding of the financial statements or the audit. 8t would mention outstanding litigation& 4aluation of financial instruments and internal control 3 areas where significant management 2udgment is at sta;e. !he 8AAS would also li;e to see an auditor6s conclusion on the appropriateness of management6s use of the going concern assumption in preparing the financial statements& and an e,plicit statement as to whether any material uncertainties affecting going concern were identified during the audit. An auditor6s statement on whether they noticed any material inconsistencies between the audited financial statements and other information& and specific identification of the information they considered& might also be useful. 7inally& the 8AAS wants a prominent placement of the audit opinion and other entityC specific information in the auditor6s report 3 possibly up front. 8t6s the auditor6s commentary that is getting the most attention& says Shields. >e worries there may be little consistency in what would be included in such commentary. <!here would no longer be a Dstandard6 auditor6s report* e4ery report would be uni=ue. A positi4e aspect of this is that the auditor6s report would pro4ide more transparency about the indi4idual company being audited. A negati4e aspect is that the reports on 4irtually identical companies could be significantly different. @ach auditor would be deciding on the matters that would li;ely to be most important to users of the particular set of financial statements being audited.< !ennison 4oices the same concern. <5e6re in fa4our of highlighting things in the auditor6s report that are described in the financial statements& but there need to be rules of the game to ensure consistency among auditor commentaries. Eou shouldn6t get different commentaries depending on who your auditor is.< She also worries about how far the auditor6s commentary might go. <!he auditor shouldn6t be an original source of factual data about an entity&< she says& adding that the auditor should not be the initial pro4ider of information about the company being audited& because <that is management6s responsibility. Auditor commentary should emphasiFe particularly important matters that management has already disclosed in the financial statements.<

#iscussing the going concern assumption within the audit report also concerns !ennison. <7inancial statements already disclose that they were prepared on a going concern basis. >a4ing a specific conclusion in the audit report may not add 4alue and it could widen the e,pectations6 gap of users.< Shields adds that <no audit can be designed to pro4ide an opinion that an entity will be able to continue as a going concern. Moreo4er& a disclosure in the auditor6s report of a material uncertainty about an entity6s ability to continue as a going concern might& in some cases& be the tipping point that dri4es a company under when& absent auditor commentary& it might ha4e sur4i4ed.< Shields also fears that certain aspects of the auditor commentary could easily be misinterpretedG for e,ample& the sample audit report in the 8!C contains an auditor commentary paragraph on the in4ol4ement of other auditors in the audit& including the percentage of the audit underta;en by component auditors. <!his may be misinterpreted as implying that responsibility for the group audit has been di4ided between the group auditor and the component auditors when actually& under the auditing standard& the group auditor has sole responsibility.< oth note that& if the suggested changes are adopted& the enhancements will lead to higher audit costs. And Shields belie4es it would ta;e significantly more time to draft the detailed auditor6s reports proposed in the 8!C than the current standard shortCform auditor6s report. <!here would li;ely be a number of drafts and detailed re4iews of wording before the report is finaliFed. Also& more time is li;ely to be spent on auditing matters specifically discussed in the report. 7or e,ample& to me& it seems li;ely that auditors of some companies would spend more time and effort on auditing matters related to going concern and material uncertainties.< >owe4er& !ennison points out that <at this point& it6s hard to measure how much the additional costs would be. 8t all depends on how far they end up e,panding auditor in4ol4ement.<

$. Summary* !his article by Gundi )effery from thebottomlinenwes.ca is regarding the proposed changes to the auditing process and audit reports. Currently& audit reports are short concise and for the most part& do not paint a 4ery clear picture regarding the financial position of a company. >owe4er& during an in4itation to comment& !he 8nternational Auditing and Assurance Standards oard 98AAS : outlined " ma2or changes to the current auditing standards that would help increase the usefulness of audits. Bne of the biggest changes proposed by the 8AAS would be the implementation more in depth auditor opinion section in audits that would allow readers& such as analysts and in4estors better realiFe the financial position of the company. Specifically& the 8AAS recommends that auditors include in their comments the nature of any outstanding litigation& the 4alue of 4arious financial instruments and the =uality of internal control of a company. !he board belie4es that in such areas of great importance& it is 4ital that auditors ha4e the opportunity to 4oice their concerns and comments. Adding to the auditor6s comments& the 8AAS would li;e to see auditors disclose e,plicitly the state of a company6s going concern assumption. @ssentially this would call for auditors to comment on gi4en businesses6 ability to continue to operate under its current financial situation. !hirdly& 8AAS recommends that any discrepancies in the boo;s of the audited companies be clearly identified in the comments section& as well as any other material information that may pro4e useful to readers. 7inally& in an effort to draw attention to the auditor6s 4iews& the commentary be placed prominently near the beginning of the report. #espite the positi4e effects 8AAS 6s recommendations would ha4e on the auditing process& many organiFations li;e !ennison are weary of the potential conse=uences. !ennison 4oices that auditors comments may ha4e an detrimental effect on a company. 7or e,ample& if in the commentary& auditors disclose any uncertainty regarding the ability of a company to continue under the going concern assumption& in4estors may shy away from the company. As a result& the company may actually be forced to close down due to the auditor6s comments. !ennison also notes that the changes proposed by 8AAS would result in a less standardiFed auditing process and could thus mislead readers. @ssentially& two identical companies could hypothetically recei4e two 4ery different audit reports due to the proposed auditor commentary. 8n addition to this& !ennison is fearful that the new emphasis on auditor opinion could allow biases and effect the o4erall tone of the audit. !ennison notes that it is not the 2ob of the auditor to speculate on the future of a company& but instead& to comment on the state of a company based on concreted& factual e4idence. 8f these proposed changes are appro4ed& audits in the future will undoubtedly pro4ide more in depth analysis and offer readers a clearer picture of the financial position of a company. Bn the other hand& these new standards will surely bump up the cost of an audit as they will be more lengthy and time consuming. !herefore& the entire accounting and business community must weigh the pros and cons of these proposed changes before ma;ing a decision.

'. Significant aspects of accounting* !his article deals with one of the most important aspects of an accounting ;nown as auditing. Most large corporations are re=uired by law to undergo an auditing process& where their financial statements are analyFed to ensure the accounting standards are fair and in compliance with the GAA?s. !herefore& owners pay 4ery close attention to the audit report to ensure any issues with the company are sorted out =uic;ly. #espite the importance of the auditor6s role& audits traditionally focus solely on the numbers& and tend to ignore the o4erall opinion of the auditor. !his ma;es it e,tremely difficult for in4estors who read audit reports to get a clear picture of the financial position of a company. An accounting body ;now as the 8nternational Auditing and Assurance Standards oard 98AAS :& was in4ited to comment on Canadian auditing practices in an effort to ma;e the reports more effecti4e. !he 8AAS came up with four recommendations that would pro4ide more insight to the company6s finances. !he most significant change recommended was the implementation of an auditor commentary section. >ere the auditor would ha4e the opportunity to disclose any material information regarding outstanding litigation& 4aluations of financial instruments and the =uality of internal control. !he auditor would also ha4e the opportunity to 4oice his+her opinion on the company6s state regarding its going concern assumption as well as any noteworthy discrepancies in the financial statements. 7inally& it is proposed to ha4e the commentary placed near the beginning of the report& in an effort to draw attention to the opinion of the auditor. Audits are one of the most significant aspects in accounting& which is why any alteration to the process must be considered with great care. @ssentially& these changes are proposed to pro4ide auditors an outlet to e,press their e,pert opinion on a company& while sa4ing in4estors the trouble of decoding the numbers by themsel4es. As one might assume& these changes would ha4e a profound impact on the auditing process. >owe4er& the increased emphasis on personal opinion would lengthen the auditing process and thus raise prices for audits significantly. H. Aspects that would catch the eye of and in4estor+ reader !his proposed changes outlined in this article would be of great importance to in4estors. 7or one& the implementation of the auditor commentary would reduce the in4estor6s wor;load as he+she does not ha4e to sift through the 4ast amounts of data to arri4e at an o4erall financial picture of a company. !he in4estor would be able to utiliFe the e,pert opinion of an auditor to 2udge the state of a company. !hus& potential in4estors would be better e=uipped to ma;e sound 4enture decisions. >owe4er& readers of audit reports must bear in mind that these comments are opinions& and should not be mista;en for hard facts. Bccasionally& auditors may ha4e positi4e or negati4e biases towards a company& that may shine through into an audit commentary. !herefore& in4estors should ensure that the comments made by the auditor are bac;ed up by solid empirical e4idence and not pure opinion.

". usiness community reaction )udging by the information in this article there are two different 4iews on about the proposed changes to the auditing process. Bn one side& the 8AAS & along with pri4ate in4estors& shareholders& creditors and go4ernment regulators would li;e to see the pro2ected changes implemented. 8n4estors would en2oy e,pert analysis of a company without ha4ing to do the all the number crunching pre4iously re=uired. As a result& they would be able to ma;e in4estment decisions more confidently and effecti4ely. Bn the other hand& those who oppose the changes claim that the new process will allow for too much personal opinion which could pro4e detrimental for some businesses. As well& business owners would probably li;e to see the old auditing standards ;ept in places& as the new process would result in higher auditing costs. !his additional e,pense may pro4e e,tremely burdensome for some companies as audits are usually performed on a yearly basis. 7inally auditors themsel4es would probably face mi,ed reactions concerning the proposed changes. #espite the increase in auditing charges& accountants would ha4e to spend a great deal of e,tra time preparing the reports. 0. ?ersonal Reaction As an aspiring Chartered Accountant& this article caught my eye and is of e,treme importance to my future occupation. ?ersonally& 8 am 4ery much for the changes in auditing standards proposed by the 8AAS . Not only would these changes produce a more readable audit report& but it would also produce a more transparent picture of a company. 5ith the impro4ed auditor comments section& anyone would be able to read and understand the findings of the auditor without ha4ing to sift through the mountains of information. Although 8 do agree with !ennison6s argument that the disclosure of any uncertainness of a company6s going concern could in fact cause it to shut down& 8 find their other arguments =uite wea;. !ennison6s concern that the commentary could be based on personal opinion rather than fact is in my opinion baseless. Chartered Accountants are e,tremely diligent& trustworthy& and precise professionals who pride themsel4es on sound accounting principals. !hey study e,tensi4ely in order to be able to ma;e decisions based on ob2ecti4e e4idenceG which is why 8 find it =uite difficult to belie4e that an auditor would allow his+her emotions come through and effect the audit report. 7urthermore& 8 would li;e to see an opportunity for auditors to ma;e future predictions as well as suggestions for impro4ements added to the auditor6s summary. 5ith their e,tensi4e ;nowledge of finance& accounting& and management& combined with their familiarity of a gi4en company& auditors are surely capable of pro4iding e,pert predictions as well as suggestions for impro4ements. !hese additional items would pro4e in4aluable to companies and certainly increase the 4alue and responsibility of auditors. 8n conclusion& 8 belie4e that the changes to the auditing process will bring about great benefit for the entire business community.

ibliography <!he ottom Iine.< The Bottom Line. N.p.& n.d. 5eb. $J #ec. '($'.