Amendments have been made to the following International Standards on Auditing (ISAs) for audits of financial statements for periods commencing on or after 1 October 2012:
- ISA 260 Communication with those charged with governance, 700 The auditor’s report on financial statements (Revised);
- ISA 705 Modifications to the opinion in the independent auditor’s report;
- ISA 706 Emphasis of matter paragraphs, other matter paragraphs in the independent auditor’s report; and
- ISA 720A The auditor’s responsibilities relating to other information in documents containing audited financial statements
The ISAs are effective The changes in the standards are mainly directed at:
• enhancing communications by requiring the auditor to communicate to the audit committee information on significant professional judgments made in the audit; and
• a requirement for the auditor to report, by exception, “if the board’s statement that the annual report is fair, balanced and understandable is inconsistent with the knowledge acquired by the auditor in the course of performing the audit, or if the matters disclosed in the report from the audit committee do not appropriately address matters communicated by the auditor to the committee.”
The guidance in ISA 720 section A material misstatement of fact is helpful and states:
- A10-1 - A material misstatement of fact in other information would potentially include an inconsistency between information obtained by the auditor during the audit (such as information obtained as part of the planning process or analytical procedures, or as written representations) and information which is included in the other information.
- A10-2. - The auditor has regard to the nature of the inconsistency or misstatement that in the auditor’s opinion exists. A distinction may be drawn between a matter of fact and one of judgment. It is generally more difficult for the auditor to take issue with a matter of judgment (such as the view of those charged with governance of the likely out-turn for the following year) than a factual error. Although an auditor does not substitute the auditor’s judgment for that of management and those charged with governance in such matters, there may be circumstances in which the auditor is aware that the expressed view of management and those charged with governance is significantly at variance with the entity's internal assessment or is so unreasonable as not to be credible to someone with the auditor’s knowledge.
The FRC have stated that the revisions to the auditor reporting standards have also been made to enable those standards to be used by auditors in the Republic of Ireland and also to more fully align the requirements of ISAs (UK and Ireland) 705 and 706 with those of ISA (UK and Ireland) 700. A new Bulletin 2012/1 providing a compendium of illustrative auditor’s reports on Irish financial statements will be issued in the near future.