Accountants’ body revises Auditor’s report guidelines

By Our Reporter

The International Federation of Accountants (IFAC), the global professional body for accountants has drafted revised guidelines for preparing the auditor’s report. The new report will be more detailed and descriptive to enhance transparency and improve communication with investors.

The auditor’s report is a written independent opinion of an auditor pertaining to an entity’s financial statements, disclosed in the annual report. According to the Companies Act 2012, all financial statements must be audited. Section 170 (1) of the Act directs auditors to make a report on accounts, balance sheets and profit and loss accounts examined by them.

The auditor’s report provides in-depth analysis of an entity’s financial statements, stating whether they have been prepared according to the appropriate International Financial Reporting Standards and whether they are a true representation of the entity’s financial position. In investment planning therefore, key decision making is premised on the precision of the auditor’s report, hence the need to improve its communicative value.

In drafting the report, the auditor refers to International Standards on Audit (ISAs). IFAC has modified the old ISAs and created new ISAs. Among the new ISAs is ISA 701 Communicating Key Audit Matters in the Independent Auditor’s Report.

According to this ISA, the auditor is obliged to state and describe Key Audit Matters. Key Audit Matters in this context are issues which are ranked as highly significant especially relating to governance. In determining these, the auditor will consider: high risk areas, issues requiring significant judgment and estimates and key events or transactions. By drawing attention to significant matters, ISA 701 is expected to simplify comprehension of the auditor’s report.

Adoption of this Standard is mandatory for all companies listed on the stock exchange.

To enhance transparency, the new auditor’s report requires disclosure of the name of the engagement partner (the staff of the audit firm, who has performed the audit). Previously, only the name of the audit firm was disclosed. This means that the engagement partner will be recognized for his/her work.

The auditor will be required to report distinctly on an entity’s going concern and disclose material uncertainties appropriately. For this purpose, a separate section has been created titled, Material Uncertainty Related to Going Concern. Going concern refers to an entity’s ability to achieve business continuity in the unforeseeable future, in this case, for a period not shorter than 12 months. For investors seeking to purchase shares, this modification will ensure better judgment.

The new auditor’s report will further contain a detailed description of the auditor’s responsibilities, including the objectives of the auditor and a statement on professional judgment.

In the new report, the auditor will be required to provide a statement on ethical conduct especially with regards to auditor independence in performing the audit.

Adoption of the new report is mandatory for all IFAC member bodies. The Institute of Certified Public Accountants of Uganda (ICPAU) is a member body of the IFAC.

ICPAU adopted International Standards in Auditing (ISAs) in 1999 without modifications and they are applicable for all audit engagements. The revised and new ISAs will be effective from 15th December 2016, but earlier adoption is encouraged.