Mid December 2016 saw the introduction of a new audit report on financial statements in New Zealand. 

This new, more detailed reporting is a result of changes made by the International Auditing and Assurance Standards Board (the IAASB), and subsequently adopted for New Zealand by our local standard setter, the New Zealand Auditing and Assurance Standards Board.

This article looks at what has changed and why, and what this means for readers of audit reports on financial statements.  

Why the change?

The landscape of accounting and auditing in New Zealand has changed significantly over the last decade.     Accounting in New Zealand went global with the adoption of International Financial Reporting Standards - and similarly auditing followed with the progressive adoption of International Standards on Auditing.  Since these introductions, we have seen accounting standards get progressively more complex and detailed as they try to keep up with ever more complex global business. 

In 2011, the New Zealand Government formed a standard setter in this area called the New Zealand Auditing and Assurance Standards Board (NZAuASB) being one of the two sub-boards of the External Reporting Board (XRB).  This board's role is to set auditing and assurance standards for all statutorily required audits in New Zealand.  In doing so they closely follow the International Audit and Assurance Standards Board as audit and assurance standards become increasingly consistent internationally.

One of the outputs from the Global Financial Crises aftermath was a questioning of whether auditors were providing enough information in their reporting to investors.  As a result, there was increasing calls from some sectors for a more informative audit report.  This was advocated for as a means to provide greater transparency about the audit and which they believe is in the public interest.

Hence in comparison to say 40 years ago, audit reporting has now moved from a single statement along the lines of “Audited and found correct” to what can now in some cases be a 6-page detailed report.  

What is the effect on the audit process?

The underlying objective of the changes is to focus on increasing transparency about the audit process. However, the actual work performed by the auditor with regard to gathering evidence in support of the audit opinion is unaffected.  The enhancements build upon the underlying concepts in an audit which address how a risk based audit is performed and what is required to be communicated with those charged with governance and management, an attempt to provide more of a public window into the work of the auditor which has previously been hidden to most. 

How will the audit report change?

The audit opinion paragraph

Following the lead of the Office of the Auditor General in New Zealand who have been doing this for years, the “Opinion” section is now required to be presented first, followed by the Basis of opinion section.  This makes the section most sought out by the reader now the first thing they read.

The Basis of opinion is now not only limited to those modified opinions, but to all opinions.  This paragraph now includes an affirmative statement about the auditor’s independence and fulfilment of relevant ethical responsibilities as well.

Going concern

The auditor is now required to enhance their reporting on the entity’s use of the going concern assumption in preparing their financial statements.  This is particularly surrounding “close-call” situations, as well as the introduction of a separate section within the audit report if there is a material uncertainty related to going concern which has been disclosed adequately in the financial statements.

To further help clarify responsibilities, the auditor’s report will now make specific mention of the fact that it is the directors of the entity who are primarily responsible for assessing the entity’s ability to continue as a going concern.

Other information

Often reports that contain audited financial statements also contain other non-audited information.  Hence it is important that readers who may be relying on the auditor’s work are clear about what the auditor has seen and what they have done. 

As such there are new reporting responsibilities for auditors with regard to other information included in an annual report in which the audited financial statements are presented.  The other information may be financial or non-financial. The auditor is required to identify material inconsistencies between the other information, and the financial statements and the auditor’s knowledge of the business.  The findings of the auditor with regard to other information will be documented in a separate section within the audit report.  This section will detail the following information:

  • responsibilities of those charged with governance for the other information;
  • responsibilities of the auditor relating to reading, considering and reporting on other information;
  • identification of the other information;
  • a statement that the auditor’s opinion does not cover the other information; and
  • whether the auditor has nothing further to report on the other information, or a description of the uncorrected material misstatement of the other information, where the auditor has identified one.

Name of the engagement partner

For audit reports on financial statements of FMC reporting entities considered to have a higher level of public accountability (such as listed companies, managed investment schemes etc.) the name of the engagement partner is now required to be included in the audit report.

Description of the auditor’s responsibilities

In an effort to restrict the volume in the audit report and move some of the potentially boilerplate disclosure, the description of the auditor’s responsibilities is now permitted to be moved out of the auditor’s report and referred instead to the XRB’s website.  

Key audit matters – for listed entities only

Key audit matters (KAM) are those which the auditor has assessed as most significant in performing their audit of the reporting entity.  As such it is felt that this information will also be of interest to investors and other readers of the audit report.  Hence for some entities there is now the requirement for the auditor to:

  • identify key audit matters
  • explain why they consider it of significance to the audit
  • describe how the matter was addressed; and
  • refer to any related disclosures in the financial statements

As KAM is a significant change and potentially increasing the cost impost of audit, it has been decided to only implement it in some entities as an initial trial.  The communicating of key audit matters currently only applies to audits of complete sets of general purpose financial statements of listed issuers; when law or regulation requires the auditor, or alternatively if the auditor and audited entity otherwise voluntarily decide to include them in the auditor’s report.

A listed issuer is defined as a person that is party to a listing agreement with a licensed market operator in relation to a licensed market as defined in the Financial Markets Conduct Act 2013 (section 6(1)).

It is important to note, that auditors will be required to communicate key audit matters of the audits of complete sets of general purpose financial statements of a FMC reporting entity considered to have a higher level of public accountability other than listed issuers.  However, this extension of entities covered is only applicable for periods ending on or after 31 December 2018.  This means that there is a two-year transition period for non-listed issuers.

The intention is that communicating key audit matters provides additional information to intended users of the financial statements to assist them in understanding matters that were of most significance in the audit of the financial statements of the current period, as well as enhancing their understanding of the entity and the areas subject to significant management judgment in the audited financial statements.

Key audit matters are only included with regard to current period figures, as this is generally the focus of the users.

It is important to note that this new section is not intended to be a separate opinion on individual matters, but rather a tool for communicating the matters which were of most significance to the auditor.

Conclusion

The calls for auditors to lift the lid on their audit process and provide more detailed information for users have been heard by the international standard setting community.  The result is now in force in New Zealand.

It now only remains to be seen if the longer more detailed audit reports achieve the hoped for aim of providing more useful information, and reducing the audit expectation or understanding gap.