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ANALYSIS: The renewal of vows: Auditor reporting and ethical requirements

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How are the changes in auditor reporting requirements related to ethics? By Saadiya Adam

Some might consider ethical requirements an unlikely topic to discuss alongside the recently released new and revised auditor reporting standards by the International Auditing and Assurance Standards Board (IAASB), and specifically International Standard on Auditing (ISA) 700 (Revised), Forming an Opinion and Reporting on Financial Statements. While there may be greater discussions on more recent topics such as Key Audit Matters (KAM) and the format of the auditor’s report, the old couple of ‘auditor reporting and ethical requirements’, does still deserve some attention.

  • The vow: The new and revised auditor reporting standards have introduced an affirmative statement regarding independence and ethics to be added to the auditor’s report. An explicit statement is required first that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit and second that the auditor has fulfilled his/her other ethical responsibilities in accordance with these requirements. The ethical responsibilities, especially those relating to independence, are no longer left to the title, ‘The Independent Auditors Report’. While the distinguishing title remains, it is now to be explicitly stated as follows (as amended for how it could be addressed in South Africa): ‘We are independent of the company in accordance with the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (IRBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in South Africa, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IRBA Code.’
  • Elevated status: It seems that this old couple has now been given a better position within the auditor’s report. One can appreciate that this relationship has been included under the Basis for Opinion section and is no longer included in the Auditor’s Responsibility section. The result of this seemingly small change is that the status of the registered auditor’s responsibility to ethics in the auditor’s report has been elevated. It also raises a question: How would it affect the validity of the audit opinion if the registered auditor is not independent of the audit client or has not complied with the IRBA Code and legislative ethical requirements?
  • Including the family: The affirmative statement provided above is not limited to the IRBA Code, for on careful reading it becomes clear that it may include legislative requirements. This means that South African laws and regulations should also be taken into account. In South Africa a conversation on auditor independence seldom occurs without the mention of section 90(2) of the Companies Act 71 of 2008, which prohibits an audit firm from being appointed as auditor in cases where certain specified services had been rendered to the same client.
  • Take your name: ISA 700 (Revised) has a new signing convention which requires the disclosure of the name of the individual registered auditor in the auditor’s report for audits of financial statements of listed entities with a ‘harm’s way’ exemption. Section 150 of the IRBA Code already has a similar requirement, but one that it extends to all auditor’s reports and does not include a similar the ‘harm’s way’ exemption. Therefore, registered auditors will be required to comply with the IRBA Code, and continue to add their name to any auditor’s report they sign.
  • Far reaching: While some changes to the new and revised auditor reporting standards are applicable to listed entities only, the changes to the ethical reporting requirements affect the audits of financial statements of all entities.

The IRBA is currently revising the South African Auditing Practice Statement 3 (Revised November 2013), Illustrative Reports, as a result of the new and revised auditor reporting standards. This will include illustrations of the changes mentioned above.

The key question is: Do these amendments auger principle changes for registered auditors? And the easy answer is no, as registered auditors have always been required to consider their independence and ethical responsibilities. Thus it is not surprising that the International Ethics Standards Board for Accountants was supportive of the new proposed statement of compliance with independence and other ethical requirements in the auditor’s report, and noted that the statement ‘raised awareness of the Code’.

The inclusion of the affirmative statement will also remind those charged with governance, as well as members of the audit committee, of their responsibilities to appoint an auditor who is independent and has complied with ethical requirements in legislation. This may result in those charged with governance posing questions to the auditor on entity-specific ethical considerations, such as the provision of non-audit services to the audit client, network firms and long association of senior personnel with the audit client.

The message should not be lost. The registered auditor’s independence and ethical responsibilities are important enough to be emphasised by the IAASB in the new and revised auditor reporting standards. Ultimately, this will lead to greater awareness in audit firms about issues surrounding their ethical policy, manuals and practices so that these statements can continue to be made authoritatively and with confidence.

Author: Saadiya Adam CA(SA) is Professional Manager: Ethics at the Independent Regulatory Board for Auditors