Hayley Barker Hoogwerf explores the revised requirements of the 800 series of assurance pronouncements effected in consequence of the issue of the new and revised auditor reporting standards, including practical considerations auditors must be cognisant of in the performance of these specialised standards engagements
The so-called special considerations reporting standards, namely International Standards on Auditing (ISA) 800 (Revised), Special Considerations – Audit of financial statements prepared in accordance with special purpose frameworks (ISA 800 (Revised)) and ISA 805 (Revised), Special Considerations – Audit of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement (ISA 805 (Revised)) were issued by the International Auditing and Assurance Standards Board (IAASB) in January 2016 and have been adopted, issued and prescribed for use by registered auditors in South Africa by the Independent Regulatory Board for Auditors (IRBA) in April 2016. These standards are effective for audits for periods ending on or after 15 December 2016.
The issue of the new and revised auditor reporting standards resulted in certain dilemmas and other practical implications arising in the 800 series of assurance pronouncements.
THE NATURE OF ISA 800 (REVISED) AND ISA 805 (REVISED) ENGAGEMENTS
ISA 800 (Revised) and ISA 805 (Revised) contain special considerations in the application of the ISAs (ISA 100–700 series) in the audit of:
- Financial statements that are prepared in accordance with a special purpose framework, and
- A single financial statement or an element, account or item of a financial statement
These are still audits that are conducted in accordance with ISAs (and it is stated as such in the auditor’s report). Special consideration standards are required, since ISA 700 (Revised) is specifically written in the context of an audit of a complete set for general purpose financial statements.
After the issue of the new and revised auditor reporting standards, it was necessary, in the public interest, for the IAASB to also make changes to extant ISAs 800 and 805. The amendments are limited to auditor reporting and are not intended to substantively change the underlying premise of these engagements.
ISA 800 (Revised) and ISA 805 (Revised) now provide greater clarity about how the new auditor reporting enhancements apply in the context of these types of audit engagements.
The sections that follow elaborate on some of the more prominent matters that have been clarified.
ISA 805 (REVISED) CONSIDERATIONS WHEN THE AUDITOR HAS ALSO ISSUED AN AUDITOR’S REPORT ON THE ENTITY’S COMPLETE SET OF FINANCIAL STATEMENTS
Paragraph 14 of extant ISA 805 requires the auditor to determine the effect of a modified opinion, emphasis of matter paragraph or other matter paragraph included in the auditor’s report on the complete set of financial statements (that is, the ISA 700 (Revised) auditor’s report) on the ISA 805 auditor’s report. Based on this assessment, the auditor is required, where deemed appropriate, to modify the ISA 805 opinion or to include an emphasis of matter or other matter paragraph in the ISA 805 auditor’s report.
Extant ISA 570, Going Concern (ISA 570) deals with the reporting consequences of a material uncertainty related to going concern and ISA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Contained in Audited Financial Statements (ISA 720) with the reporting requirements related to uncorrected material misstatements in other information.
With the issue of the new and revised auditor reporting standards, new specific sections have been introduced into the ISA 700 (Revised) auditor’s reports which are not considered to be an emphasis of matter or other matter paragraph. This created the dilemma, since these new sections are no longer consistent with the scope of the auditor’s considerations as contained in paragraph 14 of extant ISA 805.
The IAASB concluded that the auditor should be required to consider the implications of certain matters included in the ISA 700 (Revised) auditor’s report for purposes of a related ISA 805 engagement. Accordingly, paragraph 14 of ISA 805 (Revised) contains the basic requirement that if the auditor’s report on an entity’s complete set of financial statements includes a modified auditor’s opinion, or an emphasis of matter or other matter paragraph, or reports on a material uncertainty related to going concern, or communicates key audit matters, or describes an uncorrected material misstatement of other information, the auditor shall consider the implications, if any, of these matters for the audit of the single financial statement or of the specific element of a financial statement and for the auditor’s report thereon. In essence, if relevant to the ISA 805 (Revised) engagement, these matters shall be dealt with in the ‘805 auditor’s report’ in accordance with the relevant ISAs, namely ISA 705 (Revised) or ISA 706 (Revised) or ISA 570 (Revised) or ISA 701 or ISA 720 (Revised), respectively.
Each ISA 805 (Revised) engagement is unique and this approach recognises the importance of the auditor’s professional judgement in determining matters to be considered in preparing the ISA 805 (Revised) auditor’s report so that only information of relevance is highlighted.
Paragraph 2 of ISA 570 (Revised) explains that special purpose financial statements may or may not be prepared in accordance with a financial reporting framework for which the going concern basis of accounting is relevant. The application and other explanatory material section of both ISA 800 (Revised) and ISA 805 (Revised) highlights this, drawing the auditor’s attention to the fact that the respective descriptions of responsibilities relating to going concern in the auditor’s report may need to be tailored depending on the relevance of the going concern basis of accounting to the preparation of the financial statements or elements thereof.
KEY AUDIT MATTERS (KAM)
ISA 700 (Revised) requires the auditor to communicate KAM in the auditor’s report of a complete set of general purpose financial statements of a listed entity. In the case of entities other than listed entities, this communication may be required by law or regulation, or as the auditor may otherwise decide. In revising the special considerations reporting standards, the requirement of the auditor to communicate KAM under ISA 800 (Revised) and ISA 805 (Revised) engagements undertaken for listed entities was a subject of debate. It was noted that extant ISA 800 is applicable to audits of financial statements prepared in accordance with a wide range of special purpose reporting frameworks and as such, it may not always be appropriate to require the application of ISA 701.
The IAASB has included guidance in both ISA 800 (Revised) and ISA 805 (Revised) which explains that the application of ISA 701 is only required for these engagements if required by law or regulation or when the auditor otherwise decides to communicate KAM in the auditor’s report. Special purpose financial statements are generally prepared by applying a financial reporting framework established through a law or regulation and this open ended guidance allows regulators to promulgate laws or regulations to further specify requirements relating to the communication of KAM that will enhance the users’ understanding of the financial information so reported on.
When KAM are communicated in the auditor’s report on special purpose financial statements (in terms of ISA 800 (Revised)), or in the auditor’s report on a single financial statement or specific element of a financial statement (in terms of ISA 805 (Revised)), ISA 701 applies in its entirety.
The revised special purpose auditor reporting standards include revised requirements and enhanced application material aimed at increasing transparency in the auditor’s reporting about the audit that has been performed. ISA 800 (Revised) and ISA 805 (Revised) auditor’s reports are unique engagements and the exercise of professional judgement by the auditor in issuing auditor reports that provide specific, relevant and informative communication remains paramount in maintaining stakeholders’ confidence in the assurance process.
 The new and revised Auditor Reporting Standards and related conforming amendments include:
- ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements.
- ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report.
- ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report.
- ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report.
- ISA 570 (Revised), Going Concern.
- ISA 260 (Revised), Communication with Those Charged with Governance, and
- Conforming Amendments to ISAs 210, 220, 230, 510, 540, 580, 600, and 710. A special purpose framework is defined in the ISAs as a financial reporting framework designed to meet the financial information needs of specific users.
-  The new sections included in the auditor’s report in consequence of the revised requirements of ISA 700 (Revised) include:
-  The requirements of the ISAs (ISA 100–700 series) apply in addition to the requirements contained in the special consideration standards (ISA 800 series).
- Enhanced reporting on going concern:
- Inclusion of a paragraph describing the responsibilities of those charged with governance in relation to assessing the ability of the entity to continue as a going concern
- Inclusion of a paragraph describing the auditor’s responsibilities in concluding on the appropriateness of those charged with governance’s use of the going concern assumption, whether a material uncertainty exists as well as the auditor’s responsibility if such an uncertainty exists (which is dependent on whether the related disclosure in the financial statements is adequate), and
- A separate section in the auditor’s reports with heading material uncertainty related to going concern when the auditor concludes that the going concern assumption is appropriate, but a material uncertainty exists and there is adequate disclosure in the financial statements. The auditor can therefore no longer use an emphasis of matter paragraph to draw attention to a material uncertainty related to going concern
- Enhanced reporting on other information:
- Inclusion of a section describing the auditor’s responsibilities in relation to other information contained in the entity’s annual report, and
- Reporting on the outcome of such work in terms of any material misstatement of other information
- The communication of key audit matters (KAM), as applicable to the audit engagement ‒ that is, those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial statements of the current period (in accordance with ISA 701). ISA 700 (Revised), 30‒31.
-  ISA 800 (Revised), A15 and ISA 805(Revised), A19.
AUTHOR |Hayley Barker Hoogwerf is Project Director: Assurance at SAICA