The main changes to the International Standards on Auditing (ISA) were not superficial, since they include reforms designed to significantly improve audit reports for investors and other users of financial statements (banks, shareholders, customers, suppliers, the government sector, etc.). In the “RULES RELATING TO THE REPORT OR OPINION OF THE CPA” (sections 700 and 800 of the ISA), there is a new ISA 701 with key or relevant issues of auditing, known as Key Audit Matters (KAM).
As we know, the CPA Report is the final product of the audit that is presented at the conclusion phase of the audit, which is read and analyzed by all the users of the financial information that will make decisions in light of said Report. To incorporate the changes in the sections on the formation of an opinion or report (sections 700 and 800 of the ISA) it was necessary to review all the scaffolding or support of these ISAʼs, making changes that go from the planning phase, through the development and conclusions of the audit work on financial statements.
Changes in the ISAs related to the planning and risk assessment phase:
ISA 200 and 330
1. Overall objectives of the independent auditor and performance of the audit in a accordance with ISAʼs.
a. The following is added: “an explanatory or descriptive disclosure of the information required as permitted by the applicable reference framework, on the cover of the financial statements, in notes or incorporated in cross references.” (see new paragraph A 128b of ISA 330).
1. Auditor’s responsibility in the audit of financial statements with respect to fraud.
a. An option of “intentional fraud” is added through: the omission, obscuration or loss of required disclosures, disclosures necessary to achieve a reasonable presentation by the application of the frame of reference.
1. Communication with the heads of the government of the entity.
b. In light of the new ISA 701, the reforms in communication with those responsible for corporate governance required, such as the “significant risks identified by the auditor”.
Some changes in the ISAʼs of the development phase of the audit work
1. Evaluation of the errors identified during the performance of the audit.
a. Some examples of disclosures of errors inaccuracies by qualitative factors are:
b. Inadequate or incomplete description or information about the objectives, policies and processes of the administration to manage the capital of the insurers or banks.
c. The omission of information about the events or circumstances that have had an impairment loss for example in a mining industry. d. An inadequate description of the sensitivity in the reference exchange rates of an entity that carries out international trade activities.
2. Company in operation or business in motion.
a. A paragraph on the evaluation of the ongoing business should be included in the Auditor’s Report or Opinion, which is explained more fully in reformed ISA 700.
Some changes in the ISAʼs in the phase of completion of work and issuance of Reports
1. Formation of the opinion and issuance of the Audit Report on the financial statements. a. Ongoing business: The report requires precise disclosures about Business in Progress
(Reference ISA 570) as follows:
i. Description of the responsibilities, both for the Administration, and for the auditors related to the Running Business.
ii. If there is significant uncertainty, a separate paragraph called Important Uncertainty about the Running Business is required
iii. When there are events or condi- tions that may call into question the ability of the company to continue as an ongoing business, new requirements have been incorporated that constitute a challenge to carry out the appropri- ate disclosure, taking into account the applicable
financial reporting framework.
1. Communication of KAM in the independent audit report.
a. Aimed at companies that are publicly traded or listed. Important audit matters, which are selected from those communicated to those responsible for corporate governance. Those issues must be included in the opinion, which in the auditor’s opinion are the most significant on the financial statements of the current period.
b. Non-public companies may decide to communicate important audit matters in the auditor’s report, as a best practice.
1. Responsibility of the auditor with respect to other information included in the documents containing the audited financial statements.
a. The opinion may include a paragraph on the “responsibility of the auditor in relation to other information included in the audited financial statements”. For example, statistical and economic business information, which is not exactly accounting, but is related to accounting and business finances, for example, in the case of expected losses due to the amendments to IFRS 9, which in some cases It requires analysis with models.
As a member of the GLENIF Latin American Group of Financial Reporting Issuers for several years, I have noticed the impact that this reform represented for our profession and for our clients, for which we have made several presentations on these reforms.
The steps that employers should adopt to respond to these reforms to the ISAʼs are the following:
That the businessmen whose financial statements are or will be audited, document each year with greater follow-up and detail those internal and external factors to their company that may give indications that their business will continue to function as a “business in progress”, for example, changes in technology for the case of their productive assets, increases in costs or decrease in prices caused by the participation of competition, deterioration or significant wear on the value of their assets, among others.
Considering that these Rules are now much more demanding, it is mandatory that the CPA know much better the business, operations and management indicators of its clients and document in greater depth the knowledge of its busi- ness and its risks (Reference: reforms in NIAs 200, 210, 300 and 330), for which the auditor must:
a. Improve your communication with the client at all levels of the organization.
b. Have a more robust interaction and communication between users, auditors and those in charge of the company’s government
Taking into account that users require more relevant and useful information about the entity and the audit, for better decision making (Reference: new ISA 701 and reforms in ISAs 700 and 800), the auditor is required to:
Increase the quality of your audit and the perception of quality of the audit by third parties.
This process means that the CPA must under- stand and analyze the risk factors both internally and externally (reference to reformed NIAS), which is why the auditor must have:
a. Greater experience on the part of the auditor for the analysis of the risk factors both internally and externally of the audited company.
It is necessary the CPA knows in depth their business