latteAuditing is not a profession known for its love of change; its responsibility to society is to ensure the integrity of financial systems and processes and this lends itself to a conservative approach. Auditors are not poets.

However, last week, the Australian Auditing and Assurance Standards Board re-released for comment the International Auditing and Assurance Standards Board Exposure draft, ‘The Auditor’s Responsibilities Relating to Other Information’.

After careful deliberation, the IAASB concluded that there should be a “raising of the bar”, though it should not go so far as to require the auditor to obtain assurance on the other information. The IAASB concluded that this should be done through having a requirement for the auditor to consider whether there is a material inconsistency between the other information and the auditor’s knowledge obtained during the course of the audit, and requiring the auditor to remain alert for other indications that the other information appears to be materially misstated.

What does this mean for auditors?

In effect, the AASB and the IAASB are saying, given the increased importance of narrative information given by investors and stakeholders, how can the auditors and their standards better fulfill on their general role, which is to validate business and accounting information, and not just fulfill their literal role for annual financial reports, which is to check that the financial statements are in order?

auditor2The Exposure draft asks auditors what they think about their responsibilities regarding what can be a pretty grey area: how far should they go in checking whether people are writing factually accurate things in the management commentary and notes to their annual reports and other reports?

Last year, as our readers will recall, the Australian Securities and Investment Commission (ASIC) released a regulatory guideline asking companies to be more careful with the narrative in their annual reports, because it affects the way the market evaluates company performance.

It seems, through the re-issue of this Exposure Document, that the IAASB is also beginning to view the writing in annual reports as having a material affect on the integrity of the information presented to markets.

Essentials: Auditor’s Responsibilities Relating to Other Information

From the Exposure Document issued by the IAASB, examples of that would constitute ‘Other information’ include

  • Summaries of “key financial results, such as net income, earnings per share, dividends, sales and other operating revenues, and purchases and operating expenses”.
  • Information used in graphs and verbal analysis that illustrates company performance, “such as income from continuing operations by major operating area, or sales by geographical segment or product line”.
  • “Financial measures or ratios such as gross margin, return on average capital employed, return on average shareholders’ equity, current ratio, interest coverage ratio and debt ratio. Some of these may be directly reconcilable to the financial statements”.
  • Explanations of critical accounting estimates and related assumptions.
  • Descriptions of the nature of off-balance sheet arrangements.
  • Descriptions of changes in legal or regulatory requirements, such as new tax or environmental regulations, that have materially impacted the entity’s operations or fiscal position, or will have a material impact on the entity’s future financial prospects.

The outcome will have an impact on the reports of not only conventional companies but also companies limited by guarantee or any other entity that uses auditors in the presentation of its reports.

What does this mean for annual report writers?

auditorOkay, so this is not that exciting for people who aren’t part of the accounting profession, but it’s actually quite a significant idea, and should impact on the way that management (and, by extension, the writer or editor of the annual report) communicates with its auditor and the representations the writer makes in the text of the operating and financial review or management commentary of the annual report.

In practice, this would require the auditor to do two things:

  1. ‘Consider’ (not ‘guarantee’) – using a defined process, possibly – whether the content of the financials was congruent with the management commentary, and whether there was anything else that the auditor happen to find out about or notice during their audit task that might suggest there was a discrepancy between the management commentary and other activities going on at the time.
  2. Provide a short explanation of what the above activity means – that it’s not assurance, but auditors are paying attention to the verbal content of annual reports. There’s a sample statement in the Exposure Draft which sheds some light on this.

auditor4The standard would therefore require the writer to be able to read and interpret financial statements; if they don’t understand what they are reading in the financial statements, the writer can’t accurately reflect them in the commentary, and the editor can’t check the commentary for accuracy. This would, in the proposed standards change, lead the auditor to draw it to the attention of the writer and/or management, and require them to make changes to improve the accuracy.

The Exposure Draft is located here. The IAASB is asking auditors to submit their comments electronically through the IAASB website, using the ‘Submit a Comment’ link, as both a PDF and a Word file.

What do you think? How far do you think auditors should go with validating management commentary? Does is matter how financially literate your annual report writer or editor is?

Why you should care: Auditors' Responsibilities Relating to Other Information by

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