2.

0 BACKGROUND
Through a Joint Memorandum of Support adopted by the PICPA
Foundation and Association of Certified Public Accountants in Public Practice
(ACPAPP) signed on March 17, 1986, the Auditing Standards and Practice
Council (ASPC) was established. The council was tasked to establish and
promulgate auditing standards, practices and procedures considered as
generally accepted auditing in the Philippines.
The ASPC pronouncements were adopted mostly from the auditing
standards and practice statements issued by the International Auditing
Practice Committee (IAPC) of the International Federation of Accountants
(IFAC). IAPC was later replaced by the International Auditing and Assurance
Board (IAASB) which develops auditing and assurance standards and
guidance for use by all professional accountants and the objective of which is
to serve the public interest by setting high-quality auditing, assurance, and
other related standards and by facilitating the convergence of international
and national auditing and assurance standards, thereby enhancing the
quality and consistency of practice throughout the world and strengthening
public confidence in the global auditing and assurance profession.
On December 2005, the ASPC was also transformed to Auditing and
Assurance Standards Council (AASC) and assumed all responsibilities of the
former.

As taken from the bodys (AASC) official website, The main objective
of the AASC in adopting IAASB standards and practice statements is to attain
uniformity of the local GAAS with the IAASB pronouncements. This
harmonization is expected to enhance the reliability and acceptability of
audited financial statements of Philippine companies. (aasc.org, 2010)
2.1 Conception of Proposed ISA 701
Over the course of many years, the auditors have been issuing a report
of either a pass or fail opinion on the financial statements. It has been and is
still valuable up to this period however; certain circumstances urged the
users of the auditors report to call for more information to aid them in
decision- making, resulting in a demand to craft a new audit standard to
answer this predicament.
This demand has been acted upon; thus, the conception of the
Exposure Drafts for the Proposed New and Revised Auditing Standards by
IAASB. The Proposed ISAs and key enhancements are: Proposed ISA 700
(Revised), Forming an Opinion, Proposed ISA 701, Communicating Key Audit
Matters in the Independent Auditors Report, Proposed ISA 260 (Revised),
Communication with Those Charged with Governance, Proposed ISA 570
(Revised), Going Concern, Proposed ISA 705 (Revised), Modifications to the
Opinion in the Independent Auditors Report, Proposed ISA 706 (Revised),
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the

Independent Auditors Report, Proposed Conforming Amendments to Other

ISAs.
The Proposed ISAs is the end result of IAASB deliberations on the topic
of auditor reporting, which were informed by international research, public
consultation, and stakeholder outreach undertaken by the IAASB.

As enumerated in the Complete ED, Reporting on Audited Financial

Statements, the IAASBs process to date included:

jointly commissioned international academic research on user

perceptions of the standard auditors report (the research reports
dated May September 2009 are available on the IAASB website)
May 2011 Consultation Paper, Enhancing the Value of Auditor
Reporting: Exploring Options for Change, which incorporated findings
from the abovementioned research and input obtained from the
IAASBs dialogue with stakeholders around the world, and explored
options in light of this feedback and other national developments
June 2012 Invitation to Comment (ITC), Improving the Auditors
Report, which sought views on the indicative direction to improve how
and what auditors communicate to users through the auditors report
three global roundtables and additional outreach to solicit feedback on
the indicative direction outlined in the June 2012 ITC.
Continued monitoring of, and interaction with, policymakers and
national standard setters with auditor reporting initiatives.(IAASB,
2010)

The signals from these inputs were clear: Change is essential. The
Proposed ISAs represent a significant change in practice, and several
standard setters - the US Public Company Accounting Oversight Board

(PCAOB), European Union, and the United Kingdom- noticed the same and
has responded through similar measures.

2.2

Objective of This Paper

The main objective of this paper is to justify the reasonableness of the

application of this proposal not only internationally but most of all, on a local
perspective, i.e., its adoption and application in the Philippines.
One of the early firms to adapt to the proposed standards is the Klynveld
Peat Marwick Goerdeler (KPMG) which brought it to a field test with Royce
Rolls, which was made internationally, bold and emanated positive results.
At KPMG we field tested reports that went further still, reporting the
findings from that audit work. It has received a very warm welcome from
investors as well as global attention. Im very encouraged by that success,
says Tony Cates, Head of Audit at KPMG in the UK.
With the right things on the right trajectory, the adaption and
application in the Philippines will be a smooth sail. The transparency added
in the reports will trigger to a better communication between the audit
profession and the investment community. Ingmar Rega, Head of Audit,
KPMG in Germany says, We could express our opinion on many more things
if the liability regime and regulation were different. It would be good for the
capital markets to have an additional statement on the robustness of the
model and the risks and opportunities associated with the business model.

Furthermore, the audit profession must go forward and be modified to so

as to stay useful in a rapidly changing global economic environment. Without
these significant and substantial revisions, the audit profession will stay
stagnant, left behind, and miss the opportunity to add value in to what
auditors do.

2.3

Outline Of Current Audit Reports

As mentioned, this paper is focused on the communication of key audit

matters in the auditors report, which is a newly crafted proposed standard,
therefore, has no existing and current standard. However, the concept of this
proposed standard is built upon the existing standard on Emphasis of Matter
and Other Matter Paragraph which is to be discussed in the next chapters.

2.4

Features And Expected Benefits From The Proposed ISAs On

Key Audit Matters

The proposals are to include in the auditors report a description of
matters which they consider to be of most significance in the audit. The
IAASBs aim is to significantly expand the content of the auditors report,

beyond being a simple pass/fail assessment, so that it provides information

about the audit to users, says KPMG. Below is an excerpt from the Proposed
ISA 701 to further elucidate on Key Audit Matters:
Definition
7. For purposes of the ISAs, the following term has the meaning
attributed below:
Key audit matters Those matters that, in the auditors professional
judgment, were of most significance in the audit of the financial
statements of the current period. Key audit matters are selected
from matters communicated with those charged with governance.
Requirements
Determining Key Audit Matters
8. The auditor shall determine which of the matters communicated
with those charged with governance are the key audit matters. In
making this determination, the auditor shall take into account areas of
significant auditor attention in performing the audit, including: (Ref:
Para. A1A14, A24)
(a) Areas identified as significant risks in accordance with ISA 315
(Revised)1 or involving significant auditor judgment. (Ref: Para. A15
A19)
(b) Areas in which the auditor encountered significant difficulty during
the audit, including with respect to obtaining sufficient appropriate
audit evidence. (Ref: Para. A20A21)
(c) Circumstances that required significant modification of the auditors
planned approach to the audit, including as a result of the
identification of a significant deficiency in internal control. (Ref: Para.
A22A23)
Communicating Key Audit Matters
9. The auditor shall communicate the key audit matters determined in
accordance with paragraph 8 in a separate section of the auditors
report under the heading Key Audit Matters. The auditors report
shall state that:

(a) Key audit matters are those matters that, in the auditors
professional judgment, were of most significance in the audit of the
financial statements [of the current period];
(b) Key audit matters are selected from matters communicated with
[those charged with governance], but are not intended to represent all
matters that were discussed with them;
(c) The auditors procedures relating to these matters were designed in
the context of the audit of the financial statements as a whole; and
(d) The auditors opinion on the financial statements is not modified
with respect to any of the key audit matters, and the auditor does not
express an opinion on these individual matters. (Ref: Para. A25A29)
10. The auditor shall describe each key audit matter in the Key Audit
Matters section using an appropriate subheading, except in the
circumstances explained in paragraph 11. The description of each key
audit matter shall include: (Ref: Para. A30)
(a) An explanation of why the auditor considered the matter to be one
of most significance in the audit and, to the extent the auditor
considers it necessary as part of this explanation, its effect on the
audit; and (Ref: Para. A31A41)
(b) A reference to the related disclosure(s), if any, in the financial
statements. (Ref: Para. A42A43)
Interaction between Descriptions of Key Audit Matters and Other
Elements Required to Be Included in the Auditors Report
11. A matter giving rise to a qualified or adverse opinion in accordance
with proposed ISA 705 (Revised),2 or the existence of a material
uncertainty related to events or conditions that may cast significant
doubt on the entitys ability to continue as a going concern (hereinafter
referred to as material uncertainty) in accordance with proposed ISA
570 (Revised),3 is by its nature a key audit matter. However, the
auditor shall:
(a) Report on these matter(s) in accordance with the applicable ISA(s);
(b) Not describe these matter(s) in the Key Audit Matters section of the
auditors report; and

(c) Include a reference to the Basis for Qualified (or Adverse) Opinion
or the Going Concern section(s) in the introductory language of the Key
Audit Matters section. (Ref: Para. A44A45)
Communication with Those Charged with Governance
12. The auditor shall communicate with those charged with
governance those matters the auditor has determined are the key
audit matters to be included in the auditors report.(IAASB, 2012)
Potential Impacts
The IAASB believes that the proposal for the auditor to communicate key
audit matters will not only assist users in understanding those matters that
were of most significance in the audit of the financial statements, but may
also:

Assist users of the financial statements in understanding the entity and

areas of significant management judgment in the audited financial

statements, as such matters are areas of focus in performing the audit.

Provide users of the financial statements a basis to further engage with
management and those charged with governance about certain
matters relating to the entity and the audited financial statements.

Below is an excerpt from the IAASBs Exposure Drafts on Reporting on

Audited Financial Statements:

Expected Benefits from the Proposed ISAs

The primary beneficiaries of the IAASBs work on auditor reporting will
be investors, analysts and other users of the auditors report. An audit
enhances the credibility of financial statements and can directly or

indirectly improve the quality of financial reporting. Because the

auditors report is the key deliverable addressing the output of the
audit process for users of the audited financial statements, the IAASB
is of the view that changes in auditor reporting may have positive
benefits to audit quality or users perception of it.1 This in turn may
increase the confidence that users have in the audit and the financial
statements, which is in the public interest. In addition, the IAASB
believes the following benefits, among others, could be realized as a
result of the Proposed ISAs:
Enhanced communicative value of the auditors report, providing
more transparency about the audit that was performed.
Increased attention by management and those charged with
governance to the disclosures in the financial statements to
which reference is made in the auditors report (e.g., key audit
matters, going concern, etc.), which may further improve the
quality of financial reporting.
Renewed focus of the auditor on matters to be reported, which
could indirectly result in an increase in professional skepticism,
among other contributors to audit quality.
Enhanced communications between the auditor and those
charged with governance, for example more robust dialogue
about the key audit matters that will be communicated in the
auditors report.(IAASB, 2012)
Aside from the above mentioned assistance that the communication of key
audit matters can offer, the IAASB also believes that disclosing more
information about the audit will increase confidence in the quality if the
audit, thereby demonstrating its strength and value to users. (KPMG, 2013).
In the same statement, it adds that an enhanced communication between
those charged with governance and the auditor will be one of the useful
results of the proposals implementation.

2.5

Need

For

New

And

Separate Standard In Addressing Key Audit Matters

With the demands of todays economic environment, the current audit
report does not seem to be addressing todays demands. Users are dealing
with increasing complexity in financial reporting and the companies they are
investing in. The IAASB proposals provide the opportunity for the audit
profession to show a little more of the value they bring to the reporting
process. In the ITC issued, the IAASB provides the reasons of why they came
up with suggestions to improve the auditors report in an excerpt shown
below:

Why change the Auditors Report now?

1. The IAASB jointly commissioned international academic research on
user perceptions of the standard auditors report in 2006. Findings
from this research, the input obtained from the IAASBs dialogue
with various stakeholders around the world, and the international
feedback the IAASB has received on its May 2011 Consultation
Paper, Enhancing the Value of Auditor Reporting: Exploring Options
for Change, have all evidenced a singular point: the status quo is
not an option. There is clear demand for auditors to provide greater
transparency about significant matters in the financial statements,
as well as the conduct of the individual audit. Further, meaningful
change now, rather than incremental change over time, is seen as
necessary in order to better meet the information needs of users of
audited financial statements.
2. This call for change is common in many quarters of the world.
Recent initiatives of the US Public Company Accounting Oversight
Board (PCAOB), the European Commission (EC), and others with
respect to auditor reporting all indicate that users believe the
auditors report should be improved. These initiatives also have
reflected the need to improve corporate reporting more broadly.

3. It is notable that the call for change initially came primarily from
institutional investors and financial analysts who are looking to
auditors to help assist in navigating increasingly complex financial
statements and point out the areas on which the auditors work
effort was focused particularly on the most subjective matters
within the financial statements. However, there are other users of
the auditors report, including securities regulators, lenders and
other creditors, and public sector authorities, who will have an
interest in developments in this area, as will other stakeholders,
including preparers, those charged with governance (TCWG) of an
entity, and audit regulators.
4. The sovereign debt crisis has also demonstrated the critical
importance of public sector reporting and highlighted the important
interaction between the private and public sectors. This interaction
and the effects thereof is likely to be relevant to users of both public
and private sector financial statements, and improving auditor
reporting in both sectors will strengthen transparency in financial
reporting overall.
5. The IAASB aspires to improve auditor reporting on a global basis, in
the same way that it has worked to strengthen and harmonize the
underlying work effort of audits through its clarified ISAs. This ITC
sets out the indicative direction proposed by the IAASB for the
future auditors report. The IAASB is committed to progressing this
change as quickly as possible in the public interest, but needs input
from a broad range of stakeholders before it is in a position to revise
the relevant ISAs.
6. The IAASB also recognizes that, to a degree, it will be necessary for
auditors reports to vary across jurisdictions due to differences in
national law or regulation. It is important that reports issued for
audits conducted in accordance with ISAs share a degree of
commonality that will enable investors around the world to clearly
recognize them. Obtaining diverse views in order to achieve the
right balance between global consistency and national flexibility is
an important objective of this ITC.
7. In pursuing changes to the auditors report, the IAASB also
acknowledges that other, perhaps longer-term, considerations are
equally important. As noted in the IAASBs May 2011 consultation,
many believe that the type of change necessary to appropriately
respond to the information needs of users and narrow the
expectations and information gaps would be more holistic and

cannot be achieved by changes to the auditors report alone. There

is a strong view by some that consideration of the information both
within and outside of the financial statements, and the role of TCWG
(for example, an entitys Board of Directors or Audit Committee), is
paramount to further meaningful change. Therefore, it is important
that efforts to improve auditor reporting are synchronized with
improvements to corporate governance and financial reporting
more broadly.
8. Accounting standard setters have a critical role to play in ensuring
that the financial statements that result from the application of a
financial reporting framework meet the financial information needs
of users. Management and TCWG have a responsibility to prepare
the financial statements in a manner that achieves fair presentation
but, perhaps even more importantly, they should seek to present
the entitys information in a manner that gives users of the financial
statements a clear and complete picture of the entity and its
operations, including its financial results. The collective efforts of
the IAASB, and these and other groups, such as governance
organizations and securities regulators, are all with the same goal in
mind: to improve users ability to make more informed decisions on
the basis of the financial statements and the audit.(IAASB,2012)