The New Auditor’s Report and IAASB’s Work Plan Dan Montgomery, Auditor Reporting Implementation Working Group Chair, Former Auditor Reporting Task Force Chair and IAASB Deputy Chair Johannesburg, South Africa October 12, 2015

I. The New Auditor’s Report

Why Change the Auditor’s Report? Foundation for the future of global auditor reporting and improved auditor communications Essential to the continued relevance of the audit profession globally Audit opinion is valued, but could be more informative Users want more relevant and decision-useful information about the entity and the financial statement audit

New and Revised Auditor Reporting Standards – Key Features Audit Opinion – Required to be presented first Key Audit Matters – Required for listed entities Going Concern – Additional focus Other Information – New section Responsibilities – In the audit; Independence and ethical obligations; Engagement partner (listed entities)

Expected Benefits of the New Auditor’s Report Enhanced communicative value to users More robust interactions and communication among users, auditors and those charged with governance (TCWG) Increased attention by management and TCWG to the disclosures referred to in the key audit matters (KAM) section of the auditor’s report Increased professional skepticism in areas where KAM are identified Increased audit quality or users’ perception of audit quality

Decision-Making Framework for Determining KAM Matters that were communicated with TCWG Matters that required significant auditor attention Matters of most significance in the audit KAM are defined as those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance. A Key Audit Matters section is required in the auditor’s report for audits of financial statements of listed entities in accordance with new ISA 701; may be required by law or regulation, or auditor may provide voluntarily, for other entities. The auditor’s decision-making process is a two-step process, beginning first with the narrowing of matters to those that required significant auditor attention and then a further narrowing of matters to those matters to the matters of most significance. Key Audit Matters

Initial Step in Determining KAM Matters that were communicated with TCWG Matters that required significant auditor attention The auditor will always consider Areas of higher assessed risks of material misstatements or significant risks (i.e., risks requiring special audit consideration) Significant auditor judgments relating to areas of significant management judgment (e.g., complex accounting estimates) Effect on the audit of significant events or transactions As an initial step in determining KAM, ISA 701 requires the auditor to determine, from the matters that were communicated with TCWG, those matters that required significant auditor attention. The three bullets on this slide are the considerations for the auditor in determining matters requiring significant auditor attention.

Determination of Matters of Most Significance in the Audit – KAM Matters that required significant auditor attention Matters of most significance in the audit KAM is determined by the auditor’s consideration of the Nature and extent of communication with TCWG Importance to intended users’ understanding of the financial statements Nature and extent of audit effort needed to address Nature of the underlying accounting policy, its complexity or subjectivity Nature and materiality, quantitatively or qualitatively, of corrected and accumulated uncorrected misstatements due to fraud or error (if any) Severity of any control deficiencies identified relevant to the matter (if any) Nature and severity of difficulties in applying audit procedures, evaluating the results of those procedures, and obtaining relevant and reliable evidence

KAM – What They Are, and What They are Not 10/20/2014 KAM – What They Are, and What They are Not The auditor’s perspective on matters of most importance to the audit A concise summary of important audit matters versus more detailed and robust discussions with TCWG (e.g., the audit committee) NOT a replacement of or supplement for management’s perspective embodied in the financial statements and disclosures NOT a scorecard on management’s performance or the relative aggressiveness or conservatism in management’s accounting policies or judgments

KAM – Delivering Entity-Specific Information to Users Consistency and Comparability Relevance and Usefulness Boilerplate; generic language; not relevant to the entity or the audit The framework in ISA 701 provides auditors with a decision-making process to determine KAM. It builds on, and is conditioned on, the auditor’s application of a risk-based approach in conducting the ISA audit. Therefore, while entities themselves may have similar sets of facts and circumstances, audits of similar entities may not be conducted in the same way. The manner in which ISA 701 is drafted achieves an appropriate balance between prescription to promote consistency in which matters are determined and communicated as KAM. It also provides guidance to auditors to describe KAM in a manner that is specific to the particular entity and the audit engagement that was performed, thereby making it most useful and relevant to investors and other users. The description of a KAM will naturally refer to any related disclosures in the financial statements. However, the level of detail for each individual KAM description is a matter of professional judgment, and may vary depending on the specific facts and circumstances of the particular engagement. The flexibility that ISA 701 allows is intended to enable auditors to be as entity-specific and audit-specific as possible in describing each KAM so that they continue to be relevant and useful to investors and other users. Entity- and audit specific information of increased value

Are KAM Always Communicated in the Auditor’s Report? Auditor is required to include each KAM unless Law or regulation precludes disclosure In extremely rare circumstances, the auditor determines that the matter should not be communicated Adverse consequences of communicating the KAM would reasonably be expected to outweigh the public interest benefits of such communication In certain limited circumstances, there may be no KAM to be communicated Concepts of EOM and OM paragraphs are retained EOM and OM paragraphs cannot be used as a substitute for communicating a matter determined to be a KAM

Enhanced Auditor Reporting on Going Concern Changes to ISAs and the auditor's report to focus more on GC Explicit description of the respective responsibilities of management and the auditor in all auditor’s reports Separate GC section required when material uncertainty exists, with a heading “Material Uncertainty Related to Going Concern” New requirement to challenge adequacy of disclosures for GC “close calls”

Interaction Between KAM and Going Concern (GC) Matters relating to GC, including “close calls”, may be determined to be KAM and communicated in the auditor’s report in accordance with new ISA 701 When a material uncertainty related to GC exists, it is by nature a KAM, but is reported separately in the “Material Uncertainty Related to Going Concern” section of the auditor’s report More information about GC is available in the Auditor Reporting Toolkit at: www.iaasb.org/auditor-reporting.

Other Changes to the Auditor’s Report Auditor’s opinion required to be presented first Required Basis for Opinion section for unmodified opinions Statement about independence and other ethical responsibilities Naming of the engagement partner (listed entities only) Enhanced description of auditor responsibilities and key features of the audit Required identification section when TCWG are separate from management Auditor’s opinion required to be presented first, but law or regulation may prescribe alternate presentation provided certain requirements are met Statement about independence and other ethical responsibilities – Either (i) Disclosure of the sources of relevant ethical requirements; (ii) Jurisdiction of origin; or (iii) Reference to the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) Enhanced description of auditor responsibilities and key features of the audit – may be placed in appendix or where law or regulation permits, on a website of appropriate authority

Resources – Auditor Reporting Toolkit New Webpage www.iaasb.org/auditor- reporting with easy access to new and revised standards and other resources Auditor Reporting Fact Sheet Auditor Reporting “At a Glance” Basis for Conclusions Publications on GC and KAM Illustrative KAM examples Plans for webcasts, podcasts and other potential publications

Implementation Support IAASB-supported “roll-out plan” with objectives of Promoting awareness Informing and educating users Learning about experiences of those responsible for adopting and implementing the standards Preparing for post-implementation review Planned activities Outreach and other communications Auditor Reporting Toolkit New WG formed to develop this material and plans for additional outreach on the topic - Stress that IAASB’s activities alone are not enough to support effective implementation – necessary for preparers and TCWG to understand the new and revised ISAs, in particular ISA 701 so that they can be better prepared for discussions about KAM and the other new enhancements in the auditor’s report - Also to highlight is the possibility of developing FAQs as feedback is obtained from implementation - Want to hear from Committee members about what questions and concerns that have been identified New and revised Auditor Reporting standards are effective for periods ending on or after December 15, 2016

II. IAASB Work Plan – Enhancing Audit Quality

Enhancing Audit Quality Key Strategic Objective: Ensure that ISAs continue to form the basis for high-quality, valuable and relevant audits conducted worldwide by responding on a timely basis to issues noted in practice and emerging developments Clarified ISAs and ISQC 1 serve fundamental role in underpinning audit quality, need to evolve in response to Changes in business environment Firm’s business models (structures; organization of audits) ISA Implementation Monitoring findings and other feedback on current practices Audit inspection findings Outreach and other interactions

Work Plan for 2015–2016 ― Priority Projects The IAASB in the Coming Years Work Plan for 2015–2016 ― Priority Projects 2015: (1) Intense exploration, research and outreach  One discussion paper (ITC); (2) Project proposal related to ISA 540 2016: Analysis of comments and dialogue  Proposals for standard setting and other guidance Enhancing Audit Quality with a Clear Public Interest Perspective Quality Control Group Audits ISA 540, Incl. FI Professional Skepticism

Timing―ITC Issuance of ITC (Quality Control; Group Audits; Professional Skepticism) – Dec 2015; Comment period of 150 days ending May 2016; outreach events held while ITC is out for comment and possibly after Comment analysis and discussion – May 2016–Sept 2016 Approval of project proposals (Quality Control and Group Audits), and decision on IAASB way forward re: Professional Skepticism – Sept 2016 Development of Exposure Drafts (Quality Control and Group Audits) – Sept 2016–mid-2017

Timing―ISA 540, Including Audits of Financial Institutions Project proposal for holistic revision of ISA 540 planned for December 2015 Commitment to standard-setting activities to commence immediately Project update planned for Dec 2015/Jan 2016 to Raise awareness of challenges likely to be encountered by auditors and preparers with respect to IFRS 9 Alert auditors and other interested parties to the IAASB’s work in this area and its consideration of the relevant issues Highlight how the extant ISAs and other material addresses the audit issues in relation to IFRS 9 (for FIs and other entities) IAPN 1000 also relevant Signal the IAASB’s plans with respect to the issues that are likely to be addressed in the revision of ISA 540 and the proposed timeline

Preparing for the Future Monitoring of identified and emerging developments in audit, assurance and related services and provide recommendations to the IAASB on topics to be pursued Data analytics and the effect on the audit, including whether ISAs could be viewed as restricting innovation Integrated reporting, including the demand for assurance on integrated reports Services other than audits, in particular for SMEs “Hybrid engagements” and how agreed-upon procedures may be used in connection with other services, including the IAASB’s recently revised review and compilation standards