Standards for financial statements will be changing significantly in the near future. Here’s a summary of what to look for.
New and revised standards for auditor reporting
Criticism of and loss of confidence in external financial statement audits following the corporate failures of the 2008 recession resulted in significant changes to auditor reporting standards at the international level. These changes are designed to improve the value of financial statement audits by providing greater transparency and including more relevant information.
In April 2017, Canada’s Auditing and Assurance Standards Board (AASB) approved the international standards on auditor reporting issued by the International Auditing and Assurance Standards Board. At the time of this writing, the new Canadian auditing standards (CASs) relating to auditor reporting had not yet been published in the CPA Canada Handbook – Assurance, but their inclusion is expected to happen in mid-2017.
In the CASs, reference is made to “the new auditor reporting standards,” which comprise CASs 260, 570, 700, 701, 705, 706, and conforming amendments to other CASs. These standards will be effective for periods ending on or after December 15, 2018, with early adoption permitted.
Significant additions and changes include:
- The reporting of key audit matters (KAMs). In addition to reporting KAMs (matters the auditor views as most significant), the auditor must explain how these matters were addressed in the audit. The AASB amended the scope of the reporting of key audit matters so that such matters are to be communicated in the auditor’s report only when required by law or regulation or the auditor decides to do so. This scope remains unchanged at the time of the writing of this article.
- Mandatory disclosure of the name of the engagement partner for audits of listed entities; voluntary disclosure for audits of other entities.
- An opinion section to be presented first, followed by a basis for opinion section unless law or regulation prescribes otherwise.
- Enhanced auditor reporting on going concern.
- An affirmative statement about the auditor’s independence and fulfilment of relevant ethical responsibilities.
- An enhanced description of the auditor’s responsibilities and the key features of the audit.
New review engagement standard
In December 2015, the AASB approved the new Canadian Standard on Review Engagements (CSRE) 2400, Engagements to Review Historical Financial Statements. CSRE 2400 was included in the CPA Canada Handbook – Assurance in April 2016 and is effective for reviews of financial statements for periods ending on or after December 14, 2017. Early adoption is not permitted, but practitioners should plan for implementation well before the effective date.
CSRE 2400 replaces the review engagement standards for financial statements and other historical financial information found in the 8000 series of the handbook. The term “limited assurance” is included in CSRE 2400. The definition of limited assurance in CSRE 2400 explains its relationship to reasonable assurance and, consistent with the concept of plausibility in the 8000 series, highlights that the level of assurance obtained in a review engagement has to be meaningful.
CSRE 2400 has many new requirements, including:
- A more rigorous requirement with regard to the factors and preconditions that must be met for a practitioner to accept a review engagement.
- A requirement for more extensive content in the engagement and representation letters; additionally, a requirement that circumstances be addressed when the wording of the practitioner’s report is prescribed by law or regulation.
- A more detailed and rigorous requirement to document aspects of the engagement.
In addition, CSRE 2400 requires that a practitioner:
- Communicate with management or those charged with governance all matters judged to be sufficiently important to merit attention.
- Obtain an understanding of the entity and its environment and applicable financial reporting framework to identify areas in the financial statements where material misstatements are likely to arise.
- Design and perform inquiry and analytical procedures to address all material items in the financial statements and focus on addressing areas where material misstatements are likely to arise.
- Accumulate any misstatements identified during the review, communicate these misstatements to management, and request that the misstatements be corrected.
- Form a conclusion and determine whether limited assurance has been obtained.
- Express an unmodified or modified conclusion in the context of the applied financial reporting framework. The wording of the conclusion depends on whether the applicable financial reporting framework is a “fair presentation framework” or “compliance framework.” These concepts are not included in the 8000 series.
Canadian practitioners have indicated that there is a need for a clarified standard that would provide requirements and guidance on specific matters that have caused confusion and ambiguity in performing compilation engagements. One such matter is an increased distribution of financial information to users other than management or those charged with governance—particularly lenders.
In December 2016, the AASB released the consultation paper “Compilation Engagements: Exploring Options for Change,” and had its Compilation Engagements Task Force conduct roundtable discussions with stakeholders across the country, including CPABC members in Vancouver.
These roundtables included discussions about enhancing the scope and definition of a compilation engagement and enhancing the compilation engagement report.
The AASB’s discussions concerning this project are ongoing.
If you’d like to obtain a PDF copy of the consultation paper, email CPABC professional standards advisor Brigitte Ilk, CPA, CGA, at firstname.lastname@example.org.