In
July the International Auditing and Assurance
Standards Board (IAASB) issued revised international auditing standards focusing on disclosures with the aim to have consistent approach in audit.
In this article I would like to provide a new definition of disclosures and consider
planning audit procedures with regards to disclosure notes. The standard will
become effective from December 2016.
Definition
First, the IAASB removed the term “related notes” from
definition of financial statements and introduced the term “disclosures”.
Disclosures comprise explanatory
or descriptive information, set out as required, expressly permitted or
otherwise allowed by the applicable financial reporting framework, on the face
of financial statement, or in the notes, or incorporated therein by
cross-reference.
Explanatory or descriptive
information required to be included in the financial statements by the
applicable financial reporting framework may be incorporated therein by
cross-reference to information in another document, such as a management report
or a risk report.
Planning
The
revised ISA 300 requires auditor to put “appropriate attention” and “plan
adequate time” for the disclosures audit. The standard requires considering
following factors in planning procedure for disclosures:
- Changes in entity’s environment, financial condition or activities;
- Changes in applicable financial reporting framework;
- The need for the involvement of an auditor’s expert;
- Matters in disclosures which auditor may wish to discuss with those charged with governance.
Practical considerations
I think
the audit of disclosures on some projects could be underestimated and IAASB did
the right deed to revise its standards. I would emphasise following points with
regards to audit of disclosures:
- Disclosures need to be tracked: in my best practice experience there is usually Excel spreadsheet in audit file with list (check list) of all disclosures requiring audit. The disclosure list contains references to work papers where disclosure has been audited. In some case Excel spreadsheet with check list might contain documentation of audit procedures in it: for example, leasing disclosures audited within this Excel workbook.
- All audit team members assigned to do the audit must be aware that they are responsible for audit of disclosures from the very beginning of audit. Ideally Excel workbook should contain Excel spreadsheet dedicated to disclosure note. The practice to be avoided is when audit of trial balance figures and disclosures are carried out by different persons in team.
- Considering point 2, the audit procedures in respect of each disclosure note should be carefully designed and elaborated. The practice to be avoided is when disclosures audit shifted to the end of audit and when it appears that disclosures might take more than planned time.
- Some disclosures as mentioned by ISA might require expert’s involvement, e.g. pension benefit plans, derivatives valuation, management’s forecasts in strategic report. Significant or complex disclosures might require a) significant input of auditor’s time to carry out the procedure, b) numerous reviews from manager to partner.
- During the audit of disclosers the errors might be detected which might affect general ledger. This is because disclosures might provide more information and bigger picture than merely the audit of breakdown. This is another argument to incorporate the audit of disclosures in early stages: the client may be unhappy if errors would be communicated in last stage of audit.
