[Preliminary] Staff Publication

Transcription

1 [Preliminary] Staff Publicatin Addressing Disclsures in the Audit f Financial Statements 1. This [preliminary] 1 dcument highlights matters that may be f relevance fr auditrs when addressing disclsures as part f an audit f financial statements. In particular, it describes financial reprting disclsure trends and their pssible implicatins frm an audit perspective and highlights hw the Internatinal Standards n Auditing (ISAs ) guide the auditr in addressing disclsures. It is intended t help the cnsistent, effective and prper applicatin f the ISAs This preliminary dcument refers t requirements and applicatin material f the ISAs, including thse prpsed amendments made by the Internatinal Auditing and Assurance Standards Bard (IAASB ) included in the Expsure Draft (ED), Prpsed Changes t the Internatinal Standards n Auditing Addressing Disclsures in the Audit f Financial Statements. This material has been written in the cntext f an audit f general purpse financial statements prepared in accrdance with a fair presentatin framewrk, but may als be useful fr audits f financial statements prepared in accrdance with ther financial reprting framewrks. Disclsures are rdinarily fund in the ntes t the financial statements, but may als be fund n the face f the financial statements r utside the financial statements but incrprated by crss-reference (where permitted by the applicable financial reprting framewrk). 3 Tday s financial statements are becming prgressively mre cmplex, and therefre apprpriate, relevant and high-quality disclsures have becme increasingly imprtant t users f financial statements. Financial statements are nw mre likely t include a variety f disclsures, ranging frm the mre traditinal disclsure items t mre subjective r explanatry nn-quantitative disclsures. Different financial reprting framewrks may establish diverse disclsure requirements, and preparers may find it necessary t supplement these requirements with additinal disclsures in rder fr the financial statements t achieve fair presentatin. The Imprtance f the Rle f the Auditr in Financial Statement Disclsures 3. The recent financial crisis highlighted that immediate actin was needed t address the quality f financial statement disclsures. Users rely n infrmatin in financial statements t make ecnmic It is intended that this Staff dcument will be finalized nce the changes t the ISAs fr disclsures have been apprved by the IAASB. Any amendments that are made t thse prpsed in the Expsure Draft will be replicated in this dcument. This publicatin des nt cnstitute an authritative prnuncement f the IAASB nr des it amend r verride the ISAs. The dcument des nt intrduce new requirements in additin t thse cntained in the ISAs. Rather, it is meant t prvide auditrs with relevant guidance in relatin t auditing financial statement disclsures. Further, this publicatin is nt meant t be exhaustive and reading this is nt a substitute fr reading the ISAs. Fr example, Internatinal Financial Reprting Standard (IFRS) 7, Financial Instruments: Disclsures, states that the disclsures required shall either be given in the financial statements r incrprated by crss-reference frm the financial statements t sme ther statement This dcument has been prepared by IAASB staff. It is a nn-authritative dcument issued fr infrmatin purpses nly. Cpyright [June 2014] by the Internatinal Federatin f Accuntants (IFAC). Fr cpyright, trademark, and permissins infrmatin, please see page 18.

2 decisins, and rely n the audit t enhance the degree f cnfidence they may place n the financial infrmatin cntained therein. The auditr s rle in enhancing the credibility f the financial statements can cntribute, thrugh the audit prcess itself, t an imprvement in the quality f financial statement disclsures. 4. Auditing disclsures is an integral part f the audit. It is therefre imprtant that audit prcedures during all stages f the audit include apprpriate cnsideratin f, and wrk effrt n, disclsures. The ISAs already recgnize the rle f disclsures in perfrming risk assessments and develping respnses t assessed risks, gathering and evaluating audit evidence, and in frming an pinin n the financial statements, including evaluating the fair presentatin f the financial statements. In additin, the ISAs ften refer t classes f transactins, accunt balances and disclsures when describing the auditr s respnsibilities in many areas, indicating that disclsures are treated in the same way as classes f transactins and accunt balances in the applicatin f these requirements. 5. Auditing disclsures has becme mre cmplex as the disclsures themselves have evlved. As the fcus has shifted t prviding mre nn-quantitative infrmatin in the disclsures (fr example, disclsures abut risks affecting the entity, disclsure f estimatin uncertainty, r ther narrative disclsures), applying the requirements in the ISAs t disclsures when planning the audit, identifying and assessing the risks f material misstatement, btaining sufficient apprpriate audit evidence, and frming an pinin has becme mre challenging. Ntwithstanding that there may be challenges in auditing certain disclsures, attentin t disclsures in applying the requirements f the ISAs thrughut the audit prcess, enhances the quality f the audit and achieves cmpliance with the ISAs. 6. The fllwing table illustrates sme f the relevant ISAs when auditing disclsures: Planning the Audit, and Identifying, Assessing and Respnding t Risks f Material Misstatement ISA 200 Overall Objectives f the Independent Auditr, and the Cnduct f an Audit in Accrdance with Internatinal Standards n Auditing ISA 210 Agreeing the Terms f Audit Engagements ISA 240 The Auditr s Respnsibilities Relating t Fraud in an Audit f Financial Statements ISA 260 Cmmunicatin with Thse Charged with Gvernance Obtaining Sufficient Apprpriate Audit Evidence ISA 500 Audit Evidence ISA 501 Audit Evidence Specific Cnsideratins fr Selected Items ISA 540 Auditing Accunting Estimates, Including Fair Value Accunting Estimates, and Related Disclsures ISA 550 Related Parties Cmpleting the Audit ISA 450 Evaluatin f Misstatements Identified during the Audit ISA 700 Frming an Opinin and Reprting n Financial Statements 2

3 Planning the Audit, and Identifying, Assessing and Respnding t Risks f Material Misstatement ISA 300 Planning an Audit f Financial Statements ISA 315 (Revised) Identifying and Assessing the Risks f Material Misstatement thrugh Understanding the Entity and Its Envirnment ISA 320 Materiality in Planning and Perfrming an Audit ISA 330 The Auditr s Respnses t Assessed Risks Obtaining Sufficient Apprpriate Audit Evidence ISA 560 Subsequent Events ISA 570 Ging Cncern Cmpleting the Audit 7. In light f the cmplexity and imprtance f disclsures, the quality f the audit may be enhanced if the auditr: Gives apprpriate attentin t disclsures early in the audit prcess; Takes int accunt hw management prepares the disclsures, including understanding the systems r prcesses fr ding s, including thse that are nt part f the general ledger system, and the related cntrls; Recgnizes the unique challenges in ding s, by cnsidering disclsures, including nnquantitative disclsures, when identifying risks f material misstatements and when evaluating misstatements identified; and Cnsiders disclsures in light f the facts and circumstance f the entity based n the auditr s knwledge f the entity and the audit evidence btained during the audit when evaluating the verall presentatin f the financial statements. 8. Disclsures are likely t be mre challenging t prepare and audit when the business mdel and transactins f the entity are cmplex. As such, the challenges relating t auditing disclsures may be mre significant fr these types f entities. Ntwithstanding that sme financial reprting framewrks fr small- and medium-sized entities (SMEs) may have less cmplex disclsure requirements, auditrs f SMEs may als encunter auditing challenges, and the guidance that fllws may als assist auditrs f SMEs. Financial Reprting Disclsure Trends 9. Financial reprting has evlved t prvide greater transparency abut an entity s financial and peratinal risks. Business and capital markets have als becme mre challenging, and there is 3

4 nw greater cmplexity in business mdels, and mre diversity in surces f risk and uncertainty, as well as greater sphisticatin in hw risk is managed. 10. This evlutin has led t a need fr entities t prvide new types f infrmatin that may be mre subjective but als mre relevant t users. Financial reprting standards, and in particular their disclsure requirements, and practices have respnded t these changes by shifting frm simply prviding breakdwns f line items n the face f the financial statements t prviding a brad variety f disclsures, sme f which are mre explanatry r narrative in nature. Tday, disclsures in the financial statements may include: Significant accunting plicies Descriptins f the accunting plicies adpted by the entity, relevant t understanding the line items n the face f the financial statements, including the basis f measurement used in preparing the financial statements. Cmpnents f line items Such as breakdwns f line items int smaller categries r recnciliatins. Judgments and reasns Nature f judgments made in the prcess f applying accunting plicies, and management decisins and the ratinale supprting them. Examples include hw an entity distinguishes investment prperties frm wner-ccupied prperties and frm prperty held fr sale in the rdinary curse f business. This categry may als include disclsures abut why an entity s wnership interest cnstitutes cntrl in respect f an investee where less than half f its vting rights r ptential vting rights are wned directly r indirectly. Mdels, including assumptins and inputs May include disclsures f infrmatin relevant t the calculatin f items in the financial statements, such as pssible ranges f values. This may als include frward-lking infrmatin, t the extent that it is used t supprt amunts recgnized in the balance sheet, such as discunt rates, effective interest rates and grwth rates used in impairment testing. Financial expsure t risks and uncertainties arising frm recgnized and unrecgnized resurces and bligatins Disclsures t enable users t understand the underlying measurement variability r estimatin uncertainty f an item in the financial statements, such as a sensitivity analysis. An example f a disclsure abut expsure t risks is value-at-risk disclsures. Material uncertainties in relatin t the entity s ability t cntinue as a ging cncern Disclsures abut material uncertainties related t events r cnditins that may cast significant dubt n the entity s ability t cntinue as a ging cncern. Related party disclsures Descriptins f related party relatinships and amunts f transactins, including key management cmpensatin. Unrecgnized assets and unrecgnized liabilities Disclsures abut assets r liabilities that d nt meet the criteria fr recgnitin in the financial statements, but that are useful fr the users f the financial statements. Pr frma financial infrmatin Disclsures may be required relating t business cmbinatins that have ccurred after the balance sheet date but befre the financial statements are issued. 4

5 Descriptins f internal prcesses Disclsures such as risk management plicies and practices f an entity. An example is the disclsure f the plicies and prcedures fr managing financial instrument risks. Disclsure f the fair value f an amunt recrded using a different measurement basis Such as a requirement t disclse fair values fr items measured using anther measurement basis than that which is presented n the face f the financial statements, fr example, histrical cst r amrtized cst. Objective-based disclsure requirements 4 Overarching requirements in financial reprting framewrks that set ut the bjectives f the disclsures t be prvided rather than require specific disclsures. Under this regime, preparers are expected t prvide additinal disclsures when cmpliance with the specific disclsure requirements in a standard wuld be insufficient fr users t be able t understand the impact f particular transactins, ther events and cnditins n the entity s financial psitin and perfrmance. Factual infrmatin abut the entity Such as addresses, names f grup entities, cmpsitin f share capital and dividend payments. Other Financial Reprting Cnsideratins 11. The requirements f the applicable financial reprting framewrk, 5 including thse relating t disclsures, determine the frm and cntent f the financial statements. 6 Althugh financial reprting framewrks d nt specify hw t disclse every transactin, event r accunt balance, brad principles underlying the preparatin and presentatin f financial statements may be embdied in an applicable cnceptual framewrk, 7 and may be used by auditrs t help assess whether the financial statements cmply with the financial reprting requirements. Whether infrmatin cmmunicated in the financial statements is useful t users f the financial statements in making ecnmic decisins is highly dependent n hw an entity presents and disclses such infrmatin. 12. In representing that the financial statements have been prepared in accrdance with the applicable financial reprting framewrk, management implicitly, r explicitly, is expected t make assertins regarding the recgnitin, measurement, presentatin and disclsure f the varius elements f financial statements and related disclsures. 8 Sme cnceptual framewrks call this the That is, disclsure requirements that establish the bjectives t be accmplished, while nt expressly requiring specific disclsure items Sme financial reprting framewrks are a fair presentatin framewrk, which requires cmpliance with the requirements f the framewrk and acknwledges explicitly r implicitly that, t achieve fair presentatin f the financial statements, it may be necessary fr management t prvide disclsures beynd thse specifically required by the framewrk (ISA 200, paragraph 13(a)). ISA 200, paragraph A6 Fr example, the Internatinal Accunting Standards Bard s (IASB) Cnceptual Framewrk fr Financial Reprting (Framewrk 2010). The IASB is currently in the prcess f revising parts f its Framewrk ISA 315 (Revised), paragraph A110 5

6 fundamental characteristics f useful infrmatin, 9 and in cntemprary accunting standards ften include relevance and faithful representatin, 10 r similar characteristics. 13. As accunting standards have cntinued t evlve, sme accunting standard setters have fund it necessary t make changes t their cnceptual framewrks. Fr example, in sme accunting framewrks, reliability was nce a principal qualitative characteristic f financial infrmatin but has been superseded by ther cncepts, such as faithful representatin. 14. Given this new emphasis n faithful representatin, it has been argued that, in sme circumstances, the disclsures that prvide further cntext t a financial statement line item may becme at least as imprtant, if nt mre useful and relevant, t users as the amunt disclsed n the face f the financial statements. The supprting disclsures are necessary t infrm users abut judgments and assumptins made in the measurement f the line item, the reasns fr these judgments, facts, and circumstances and the measurement uncertainty related t that line item. In effect, the disclsures in these cases are being used t achieve the principles f relevance r faithful representatin, r bth. Audit Cnsideratins Relating t Disclsures 15. The auditr addresses disclsures in the cntext f the auditr s verall bjectives in cnducting an audit in accrdance with the ISAs, which are t btain reasnable assurance abut whether the financial statements as a whle are free frm material misstatement, whether due t fraud r errr, and t express an pinin n whether the financial statements are prepared, in all material respects, in accrdance with an applicable financial reprting framewrk Thrughut the ISAs, the use f the term financial statements, by definitin, includes disclsures. 12 Accrdingly, where the requirements and guidance in the ISAs refer t financial statements, this is intended t include cnsideratins abut disclsures as well as classes f transactins and accunt balances. Hwever, althugh gathering sufficient apprpriate audit evidence fr disclsures is an integral part f the audit, it is nt the auditr s bjective t frm a separate pinin n each individual disclsure in the financial statements. 17. The auditr cnsiders the cmmn financial infrmatin needs f intended users f the financial statements, including when making decisins related t materiality. The determinatin f materiality under the ISAs assumes that users have a reasnable knwledge f business and ecnmic activities and accunting. It als assumes that they have a willingness t study the infrmatin in the financial statements with reasnable diligence; understand that the financial statements are prepared, presented and audited t levels f materiality; recgnize the uncertainties inherent in the The IASB s Framewrk 2010 ntes that the fundamental qualitative characteristics include the types f infrmatin that is mst useful t users fr making ecnmic decisins. Relevance and faithful representatin are the fundamental qualitative characteristics f the IASB s Framewrk 2010, and are used as examples t represent the characteristics f accunting infrmatin included in disclsures. Other accunting framewrks may use similar terms, which are t be cnsidered in a similar way when assessing the accunting requirements f infrmatin t be included in disclsures. Ntwithstanding that the IASB is currently revising its Cnceptual Framewrk, it is nt expected that further changes will be made t their fundamental qualitative characteristics. ISA 200, paragraph 11 ED: Revisins t ISA 200, paragraph 13(f) (The definitin has been revised t clarify what is meant by disclsures.) 6

7 measurement f amunts based n estimates, judgment and the cnsideratin f future events; and make reasnable ecnmic decisins n the basis f the infrmatin in the financial statements The cncepts f prfessinal judgment 14 and prfessinal skepticism 15 are fundamental t audits f financial statements and therefre apply t the audit wrk perfrmed n disclsures. The need fr prfessinal skepticism is essential when cnsidering disclsures, fr example with regard t: Evaluating whether sufficient apprpriate evidence has been btained, which can be particularly challenging fr sme disclsures, such as nn-quantitative disclsures. Evaluating management s judgment, and the ptential fr management bias, in applying the requirements f the applicable financial reprting framewrk, fr example in disclsing related party relatinships and transactins, r in mitting such disclsures. Drawing cnclusins based n the audit evidence btained, fr example, assessing whether the presentatin and disclsures achieve fair presentatin. A Fcus n Disclsures thrughut the Audit Prcess 19. Disclsures are an integral part f the financial statements. Accrdingly, it is imprtant fr the auditr t give attentin t disclsures thrughut the audit. Varius aspects f the ISAs are intended t help auditrs fcus n disclsures earlier in the audit prcess, and when relevant in perfrming audit prcedures n classes f transactins, events, accunt balances, and disclsures, in particular in relatin t: Terms f the engagement Additinal matters may be included in the audit engagement letter, fr example: 16 A descriptin f the respnsibilities f management relating t disclsures, particularly relating t making infrmatin available fr the audit, as well as the draft financial statements, including related disclsures, t allw sufficient time t cmplete the audit; and The expectatin that management will prvide written representatins. Cmmunicatin with thse charged with gvernance When cmmunicating abut the planned time and scpe f the audit, the auditr may als cnsider discussing the impact n the audit f significant changes t the applicable financial reprting framewrk, r the entity s envirnment, financial cnditin r activities, which may affect the required disclsures in the financial statements, t btain the views f thse charged with gvernance ISA 320, paragraph 4 ISA 200, paragraph 16 ISA 200, paragraph 15 ED: Revisins t ISA 210, paragraph A23 (new example n management making infrmatin available fr purpses f the audit included) and Example Audit Engagement Letter in Appendix 1 (ftnte added t highlight examples f additinal items that may be added t the audit engagement letter). ED: Revisins t ISA 260, paragraph A12 (additinal example added f disclsure related matters that may be discussed with thse charged with gvernance) 7

8 Planning Auditr cnsideratin earlier in the audit prcess abut sme f the challenges related t disclsures may als help meet the bjectives fr effective planning, in particular when disclsures may cntain infrmatin frm systems r prcesses that are nt part f the general ledger system, as this may als lead t additinal challenges. 18 Cnsideratin abut disclsures early in the audit prcess may als help the auditr t identify the impact n the audit frm: Significant new r revised disclsures arising frm changes in the entity s envirnment, financial cnditin r activities (fr example, that result in a change in the segments that shuld be identified and reprted if a significant new subsidiary has been acquired). Significant new r revised disclsures arising frm changes t the applicable financial reprting framewrk. The need fr the invlvement f an auditr s expert t assist with particular disclsures (fr example, disclsures related t pensin r ther retirement benefit bligatins). Matters relating t disclsures that the auditr may wish t discuss with thse charged with gvernance. 19 Understanding the Entity and Its Envirnment, and the Auditr s Risk Assessment and Respnse in Relatin t Disclsures ISA 300 requires the auditr t develp an audit plan that includes, amng ther things, a descriptin f the nature, timing and extent f planned further audit prcedures at the assertin level, as determined under ISA As part f planning the audit and develping the audit plan, the auditr is required t understand the entity and its envirnment, including internal cntrl Cnsideratin f the nature, timing and extent f wrk t be perfrmed n disclsures is integral t this prcess f develping an apprpriate audit plan. The fllwing areas may be particularly imprtant in the cntext f disclsures in understanding the entity and its envirnment: 22 Regulatry factrs, such as the required disclsures in a regulated industry r disclsure f envirnmental requirements affecting the industry and the entity s business; Disclsures abut investments and investment activities, such as investments in nncnslidated entities, including partnerships, jint ventures and special-purpse entities; Disclsures abut financing and financing activities such as debt structure and related terms, including ff-balance-sheet financing arrangements and leasing arrangements; and ED: Revisins t ISA 300, Para A12a (new guidance fr auditrs t cnsider the effect f disclsures n the nature, timing and extent f planned audit prcedures) ED: Revisins t ISA 300, paragraph A12b (new guidance t prvide examples f matters that may be dealt with n a mre timely basis in the audit if disclsures cnsidered earlier in the audit prcess) ISA 300, paragraph 9(b) ISA 315 (Revised), paragraphs See ISA 315 (Revised), paragraph 11(a). 8

9 Financial reprting practices, such as industry-specific disclsures; 23 as well as understanding whether an entity s cmplex business structures have been adequately disclsed, r whether related party disclsures prperly describe, as required, the relatinship and transactins between the wners f the entity and ther peple r entities Sme f the required understanding may als cme frm the auditr s previus experience with the entity and audit prcedures perfrmed in previus audits. Fr example, areas where the auditr previusly experienced difficulty in perfrming the necessary audit prcedures may infrm the auditr fr the current year s audit Understanding the infrmatin system, including related business prcesses, may als be imprtant fr auditrs in rder t understand the generatin f infrmatin and its prcessing fr disclsures. Disclsures may cntain sme infrmatin frm systems r prcesses that are nt part f the general ledger system this infrmatin may cme frm surces such as an entity s risk management system, a valuatin reprt prduced by an expert, mdels r ther calculatins used t develp estimates recgnized r disclsed in the financial statements, r sensitivity analyses derived frm financial mdels t demnstrate that management has cnsidered alternative assumptins. 26 ISA 315 (Revised) requires discussin by the engagement partner and ther key engagement team members abut the susceptibility f the entity s financial statements t material misstatement, and the applicatin f the applicable financial reprting framewrk t the entity s facts and circumstances Matters the audit engagement team may discuss, relating t disclsures, include: New financial reprting requirements that may result in significant new r revised disclsures. Changes in the entity s envirnment, financial cnditin r activities that may result in significant new r revised disclsures, fr example a significant business cmbinatin in the perid under audit. Disclsures fr which btaining sufficient apprpriate audit evidence may have been difficult in the past The discussin required by ISA 315 (Revised) places particular emphasis n hw and where the entity s financial statements may be susceptible t material misstatement due t fraud, including hw fraud might ccur. This als includes cnsideratin f the risk that management may attempt t bscure infrmatin by presenting disclsures that are nt clear and understandable. Examples f ED: Revisins t ISA 315 (Revised), paragraph A31 (revised t emphasize disclsure cnsideratins in specific areas already included in this paragraph) ED: Revisins t ISA 315 (Revised), paragraph A30 (revised guidance t emphasize disclsures) ED: Revisins t ISA 315 (Revised), paragraph A19 (example added abut matters arising frm disclsures in previus perid audits fr the auditr t cnsider in btaining an understanding f the entity) ISA 315 (Revised), paragraph A68 and ED: Revisins t ISA 315 (Revised), paragraph A89a (new guidance with examples f where this infrmatin may cme frm) ISA 315 (Revised), paragraph 10 ED: Revisins t ISA 315 (Revised), paragraph A21a (new guidance fr pssible related matters that culd be discussed) 9

10 areas where there may be an increased risk f misstatement resulting frm fraudulent financial reprting may include disclsure f related party relatinships and transactins; and areas f subjectivity r judgment (fr example, maturity analysis tables; sensitivity disclsures; and disclsures required t achieve fair presentatin). 29 The auditr is required by ISA 315 (Revised) t identify and assess the risk f material misstatement at the financial statement level; and at the assertin level fr classes f transactins, accunt balances, and disclsures This risk assessment prvides a basis fr designing and perfrming further audit prcedures. Deficiencies such as a lack f management cmpetence r inadequate cntrls ver the preparatin f the infrmatin (including disclsures) in the financial statements may have a mre pervasive effect n the financial statements, and require an verall respnse by the auditr, 31 such as cnsidering the knwledge and experience f the engagement team members respnsible fr reviewing the financial statements. 26. Since many disclsures are directly related t line items in the financial statements, cnsideratin f the risk f material misstatement at the assertin level fr disclsures may be dne at the same time as, and in cnjunctin with, the related line item. Fr example, when assessing the risk f material misstatement fr impairment amunts recgnized (fr example, relating t the valuatin f gdwill), the auditr may als assess the risk f material misstatement abut the related disclsures, such as the infrmatin abut the impairment mdel (mdel used, grwth rates, interest rates, etc.). Fr disclsures, the level at which the risk assessment is carried ut is a matter f the auditr s prfessinal judgment, and is perfrmed using the knwledge that the auditr has gained abut the entity and its activities such that the assessment is made at the apprpriate level Financial reprting framewrks may require disclsures that are nt directly related t a recrded transactin, event r accunt balance (fr example, disclsure f a cntingent liability). The auditr s assessment f the risks f material misstatement als extends t these disclsures, and the same assertins described fr classes f transactins and events and accunt balances, and related disclsures, may be used (adapted as apprpriate) The auditr s risk assessment determines the nature, timing and extent f further audit prcedures. 34 As explained in paragraph A1 f ISA 320, materiality and audit risk are cnsidered when identifying and assessing the risks f material misstatement in classes f transactins, ED: Revisins t ISA 240, paragraph A11 (guidance n the discussin enhanced t include cnsideratin f disclsures where the risks f material misstatement arising frm fraud may be increased) ISA 315 (Revised), paragraph 25 ISA 315 (Revised), paragraph A118 and ED: Revisins t ISA 315 (Revised), paragraph A119 (new example added t explain when a matter relating t disclsures is pervasive t the financial statements) ED: Revisins t ISA 315 (Revised), paragraphs A124 (a) (b) (assertins fr classes f transactins and events, and accunt balances, revised t include assertins fr related disclsures and presentatin) ED: Revisins t ISA 315 (Revised), paragraph A124a (new guidance fr thse disclsures that are nt necessarily cvered by paragraphs A124(a) (b)) ISA 315 (Revised), paragraph 25 10

11 accunt balances and disclsures. The auditr s determinatin f materiality is a matter f prfessinal judgment, and is affected by the auditr s perceptin f the financial infrmatin needs f users f the financial statements In identifying the risks f material misstatement, the auditr als cnsiders nn-quantitative disclsures. 36 A misstatement in nn-quantitative disclsures may be significant enugh t affect the ecnmic decisin f users f financial statements. Fr example, nn-disclsure abut a pssible liability that des nt meet the recgnitin criteria may be imprtant enugh t affect such decisins. When planning the audit, the auditr nt nly makes judgments abut the size f amunts disclsed, but als cnsiders the nature f quantitative and nn-quantitative disclsures that reasnably culd be expected t influence the ecnmic decisins f users. Depending n the circumstances f the entity and the engagement, examples culd include disclsures abut: Liquidity and debt cvenants f an entity in financial distress. Events r circumstances that have led t the recgnitin f an impairment lss. Key surces f estimatin uncertainty, including assumptins abut the future. The nature f a change in accunting plicy, and ther relevant disclsures required by the applicable financial reprting framewrk where, fr example, new financial reprting requirements are expected t have a significant impact n the financial psitin and financial perfrmance f the entity. Share-based payment arrangements, including infrmatin abut hw any amunts recgnized were determined, and ther relevant disclsures. Related parties, and related party transactins. Sensitivity analyses intended t enable users t understand the underlying measurement uncertainty f a recrded r disclsed amunt Appendix 2 f ISA 315 (Revised) prvides examples f cnditins and events that may indicate the existence f risks f material misstatement. Amng ther things, events r transactins that invlve significant measurement uncertainty, and the pssibility f missin f, r bscuring, useful and relevant infrmatin, may be particularly relevant in the cntext f the auditr s wrk n disclsures The timing f the preparatin f the financial statements, particularly fr thse disclsures that d nt relate t a line item n the balance sheet, incme statement, cash flw statement r statement f changes in equity, may be a relevant cnsideratin in the auditr s determinatin f when t ED: Revisins t ISA 315 (Revised), paragraph A128a (guidance added fr assessing the risks f material misstatements in disclsures) ED: Revisins t ISA 315 (Revised), paragraph A128b (new guidance t emphasize that nn-quantitative disclsures are als included in the auditr s identificatin and assessment f the risks f material misstatement) ED: Revisins t ISA 315 (Revised), paragraph A128c (new guidance prviding examples f material nn-quantitative disclsures) ED: Revisins t ISA 315 (Revised), paragraph A128 and Appendix 2 (new examples added t emphasize disclsures) 11

12 perfrm audit prcedures in accrdance with ISA There may be varius reasns why disclsures may be prepared late in the financial reprting prcess, including that: management s fcus may initially be n the line items in the financial statements (i.e., the amunts recgnized) as these may ften be used fr preliminary annuncements; r the financial statements may be prepared in a separate prcess which is dne after the infrmatin generated by the general ledger is cmpleted. Nnetheless, as indicated in paragraph 19 abve, emphasizing management s respnsibilities relating t the preparatin f the draft financial statements, including disclsures, when agreeing the terms f engagement is an imprtant cnsideratin fr the auditr. 32. When designing audit prcedures in relatin t disclsures, the auditr may als cnsider: The cntrls ver the preparatin f the financial statements, 40 such as the adequate review f the preparatin f the financial statements, including fr infrmatin fr thse disclsures frm systems r prcesses that are nt part f the general ledger system. Fr example, thse charged with gvernance have respnsibility fr verseeing the preparatin f the financial statements but there may be ther cntrls invlving review f the disclsures that are directly related t the underlying amunts recgnized, with any discrepancies being fllwed up. Prcedures perfrmed n the related line items in the financial statements. Fr example, sme parts f the required disclsures may already have been audited when the underlying numbers have been audited. The assessed risks fr the disclsures, which may affect the disclsures selected fr testing. 33. The audit prcedures perfrmed n disclsures are based n the auditr s assessment f risk and materiality fr the financial statements as a whle r the materiality fr particular financial statement items, when applicable. Fr example, the disclsure f the bjectives, plicies and prcesses fr managing credit risk 41 may nt be cnsidered a risk f material misstatement fr sme entities and therefre the auditr may cnsider it apprpriate t refer t relevant risk manuals, minutes f meetings etc. in rder t assess the accuracy with which the disclsure describes the entity s prcess. Hwever, fr entities with banking and insurance activities, the bjectives, plicies and prcesses fr managing credit risk are mre fundamental t the entity, and the wrk effrt required wuld likely be mre cmprehensive. In this case, the auditr s fcus may be mre n whether the disclsure prperly describes the prcess the entity has fllwed, and audit prcedures culd include detailed testing f the surces frm which the disclsed infrmatin was derived r testing the perating effectiveness f cntrls ver the infrmatin used in the preparatin f these disclsures. The auditr s prcedures may als invlve using thse with specialized skills and knwledge in this area ED: Revisins t ISA 330, paragraph A14 (new example added relating t disclsures when cnsidering the planned timing f audit prcedures n disclsures) ED: Revisins t ISA 315 (Revised), paragraph A99a (example f a cntrl activity added relating t the preparatin f the financial statements) Fr example, IFRS 7, Financial Instruments: Disclsures, paragraph 33(b) requires qualitative disclsures fr risks arising frm financial instruments, such as credit risk, t be disclsed. 12

13 ISA 330 als requires the auditr t agree r recncile the financial statements, including disclsures, with the underlying accunting recrds, including infrmatin frm systems r prcesses that are nt part f the general ledger system The auditr uses prfessinal judgment, taking int accunt the risks f material misstatement, in determining the nature and extent t which the disclsures are agreed r recnciled. 43 In respnding t the risks f material misstatement, the auditr is als required t perfrm audit prcedures t evaluate whether the verall presentatin f the financial statements, including the related disclsures, is in accrdance with the applicable financial reprting framewrk This evaluatin relates t whether the financial statements, including related disclsures, are presented in a manner that reflects: The apprpriate classificatin and descriptin f financial infrmatin and the underlying transactins and events; and The apprpriate frm, arrangement, and cntent f the financial statements. This includes, fr example, the terminlgy used as required by the applicable financial reprting framewrk, the level f detail prvided, the aggregatin and disaggregatin f amunts, and the classificatin f items in the financial statements and the bases f amunts set frth. 45 Sufficient Apprpriate Audit Evidence fr Disclsures The auditr is required t design and perfrm audit prcedures that are apprpriate in the circumstances fr the purpse f btaining sufficient apprpriate audit evidence Audit evidence is necessary t supprt the auditr s pinin and reprt. Whether sufficient apprpriate audit evidence has been btained t enable the auditr t frm an pinin is a matter f prfessinal judgment. The requirement fr the auditr t btain sufficient apprpriate audit evidence fr disclsures is the same as fr btaining audit evidence fr classes f transactins and accunt balances, which in sme cases will be dne cncurrently. 37. Fr example, prcedures fr btaining audit evidence fr amunts recgnized in the financial statements may als satisfy the auditr s cnsideratin f whether the disclsure is an accurate prtrayal f the basis fr the calculatin, recgnizing that the disclsure is ften an integral part f the presentatin f the related financial statement amunt (fr example, the mdel used, the assumptins such as grwth rates, discunt rates, etc.) ED: Revisins t ISA 330, paragraph 20 (requirement revised t make clear that the recnciliatin applies t the financial statements, regardless f where the infrmatin cmes frm) ED: Revisins t ISA 330, paragraph A52 (revised guidance t make clear that the auditr uses prfessinal judgment when deciding the wrk effrt in agreeing r recnciling the financial statements) See ISA 330, paragraph 24. ED: Revisins t ISA 330, paragraph A59 (revised guidance fr additinal cnsideratins fr the auditr when perfrming the verall evaluatin f the presentatin f the financial statements) ISA 500, paragraph 6 13

14 38. Varius ISAs, in particular ISA 500, ISA 501, ISA 540 and ISA 550, establish requirements and prvide guidance abut btaining audit evidence fr the wide variety f disclsures in financial statements, fr example: Requirements and guidance fr btaining sufficient apprpriate audit evidence, including types f prcedures, the relevance and reliability f audit evidence, and cnsideratins where audit evidence is prepared by management s expert. 47 Obtaining audit evidence fr selected items, such as litigatin and claims, 48 and segment infrmatin. 49 Requirements and guidance fr disclsures related t accunting estimates. 50 Requirements and guidance fr auditing related party disclsures. 51 Requirements and guidance fr btaining evidence fr events between reprting date and the date f the financial statements, including adequate disclsures in the financial statements. 52 The auditr s respnsibilities relating t disclsures abut ging cncern required by a financial reprting framewrk. 53 Hw Misstatements in Disclsures Are Evaluated ISA 450 requires the accumulatin f misstatements identified during the audit Misstatements in disclsures can be as imprtant t users as misstatements f line items in the financial statements. Fr example, in the recent financial crisis, users placed heavy emphasis n the maturity analysis f liabilities t ascertain the difficulty the entity may have in rlling ver debt facilities. A misstatement in this disclsure culd affect users decisins t buy, hld, r sell investments in that entity, extend finance r take anther ecnmic actin. 40. ISA 450 applies equally t classes f transactins, accunt balances and disclsures. Misstatements in disclsures may result frm: An missin f a disclsure, including nn-quantitative disclsures and bjective based disclsures 55 required by certain financial reprting framewrks See ISA 500 ISA 501, paragraphs 9 11 ISA 501, paragraph 13 ISA 540, paragraphs and A120 A123. In additin, Internatinal Auditing Practice Nte (IAPN) 1000, Special Cnsideratins in Auditing Financial Instruments, prvides further guidance fr btaining sufficient apprpriate audit evidence fr accunting estimates, including fair value accunting estimates. See ISA 550. See ISA 560. See ISA 570. ISA 450, paragraph 5 Fr example, IFRS 7, paragraph 42H, states that an entity shall disclse any additinal infrmatin that it cnsiders necessary t meet the disclsure bjectives 14

15 An inapprpriate classificatin, aggregatin r disaggregatin, f infrmatin. Fr financial statements prepared in accrdance with a fair presentatin framewrk, the missin f disclsures beynd that specifically required by the applicable financial reprting framewrk necessary fr fair presentatin. 56 Misstatements in disclsures (ther than thse that are clearly trivial) are als accumulated, and aggregated where apprpriate, t assist the auditr in evaluating their effect n the disclsures and the financial statements as a whle In additin t assessing misstatements individually, prfessinal judgment is used in aggregating misstatements t determine whether they are material. Althugh misstatements in nn-quantitative disclsures cannt be aggregated in the same manner as misstatements f amunts, they are still evaluated individually, and cllectively, with ther misstatements As part f the auditr s cnsideratins abut misstatements in disclsures, the auditr may als cnsider whether individual misstatements culd be indicative f bias in management s judgments that results in misleading infrmatin, r a trend twards duplicative r uninfrmative disclsures that may bscure imprtant financial infrmatin. 59 Frming an Opinin n the Financial Statements In frming an pinin n the financial statements, the auditr is required t evaluate whether, in view f the requirements f the applicable financial reprting framewrk, the financial statements adequately disclse the significant accunting plicies selected and applied; the infrmatin presented in the financial statements is relevant, reliable, cmparable and understandable; and the financial statements prvide adequate disclsures t enable the intended users t understand the effect f material transactins and events n the infrmatin cnveyed in the financial statements When evaluating the financial statements, the auditr exercises prfessinal skepticism in assessing whether disclsures are, in the auditr s view, insufficient r inapprpriate, and cnsequently whether t challenge management. Therefre, in additin t cnsideratins abut the individual and aggregated effect f misstatements in disclsures, in accrdance with ISA 700, the auditr als cnsiders whether: 61 The financial statements adequately disclse the significant accunting plicies selected and applied. This may include the relevance f the accunting plicies t the entity, and the clarity ED: Revisins t ISA 450, paragraph A1 (additinal examples added t illustrate pssible misstatements in disclsures) ED: Revisins t ISA 450, paragraph A2a (new paragraph t emphasize that misstatements in disclsures are als accumulated, and aggregated where apprpriate, and assessed fr material misstatements) ED: Revisins t ISA 450, paragraph A2a (new paragraph t emphasize that misstatements in nn-quantitative disclsures are als accumulated and assessed ntwithstanding that they cannt be aggregated in the same way as misstatements in amunts) ED: Revisins t ISA 450, paragraph A17a (new guidance added fr pervasive issues that may be fund in disclsures) ISA 700, paragraphs 13 (a), (d) and (e) ED: Revisins t ISA 700, paragraphs A3a A4 (new and revised guidance n cnsideratins relating t disclsures fr the auditr when carrying ut this evaluatin) 15

16 with which they have been presented. The infrmatin in the financial statements is relevant, reliable, cmparable and understandable. This may include whether: The financial statements, including disclsures, are apprpriately classified and characterized and presented in a clear and cncise manner, but d nt mit relevant infrmatin. The disclsures undermine the verall presentatin f the financial statements by including infrmatin that is nt relevant r in a manner that may bscure a prper understanding f the matters disclsed. The placement f significant disclsures gives apprpriate prminence t them (fr example when there is perceived value f entity-specific infrmatin t users), and whether the disclsures are apprpriately crss-referenced t draw attentin t related matters, where apprpriate. 62 In additin, the auditr may cnsider whether the financial statements are cmparable t the entity s financial statements f previus perids. The financial statements prvide adequate disclsures t enable the intended users t understand the effect f material transactins and events n the infrmatin cnveyed in the financial statements. This may include the extent t which the infrmatin in the financial statements is useful and specific t the circumstances f the entity. Fr example, the auditr may cnsider whether the disclsures are adequate t assist the intended users t understand: The nature and extent f the entity s ptential assets and liabilities arising frm thse transactins r events that d nt meet the criteria fr recgnitin (r the criteria fr derecgnitin) established by the applicable financial reprting framewrk. The nature and extent f risks arising frm thse material transactins and events, fr example, disclsure f the financial risks t which an entity may be expsed if it undertakes derivatives trading. The methds used and the assumptins and judgments made, and changes t them, that affect amunts presented r therwise disclsed, including relevant sensitivity analysis ED: Revisins t ISA 700, paragraph A3b (new paragraph t prvide guidance n the auditrs effrts in relatin t the evaluatin f the understandability and relevance f infrmatin presented in the financial statements) ED: Revisins t ISA 700, paragraph A4 (revised t include examples f the matters t cnsider when evaluating whether financial statements are relevant and specific t the entity) 16

17 Evaluating Whether the Financial Statements Achieve Fair Presentatin If the auditr is required t evaluate whether the financial statements are prepared in accrdance with a fair presentatin framewrk, the auditr als cnsiders the verall presentatin, structure and cntent f the financial statements, and whether the financial statements, including the related ntes, represent the underlying transactins and events in a manner that achieves fair presentatin in accrdance with ISA The auditr s evaluatin abut whether the financial statements achieve fair presentatin, bth in respect f presentatin and disclsure, is a matter f prfessinal judgment. This evaluatin takes int accunt matters such as the facts and circumstances f the entity, including changes theret, based n the auditr s knwledge f the entity and the audit evidence btained during the audit. The evaluatin als includes cnsideratin, fr example, f the disclsures needed t achieve a fair presentatin arising frm matters that may be relevant t the ecnmic decisins f the users f the financial statements, such as evlving financial reprting requirements r the changing ecnmic envirnment In perfrming this evaluatin, the auditr cnsiders what is needed in rder t achieve fair presentatin f the financial statements. Sme financial reprting framewrks explicitly address the cncept f fair presentatin. Fr example, IFRSs nte that fair presentatin requires the faithful representatin f the effects f transactins, ther events and cnditins in accrdance with the definitins and recgnitin criteria fr assets, liabilities, incme and expenses. As nted in paragraph 7(b) f ISA 700, fair presentatin invlves nt nly cmpliance with the requirements f the applicable financial reprting framewrk, but als the pssibility that additinal disclsures may be necessary, regardless f whether there is a specific requirement fr that infrmatin in the framewrk Finally, thse charged with gvernance may have an imprtant rle t play in relatin t the entity s disclsures. The auditr may discuss with management and thse charged with gvernance, as apprpriate, their views n why a particular presentatin was chsen, as well as alternatives that may have been cnsidered, including: The degree t which the amunts in the financial statements are aggregated r disaggregated, and whether the presentatin f amunts r disclsures bscures useful infrmatin, r results in misleading infrmatin. Cnsistency with apprpriate industry practice, r whether any departures are relevant t the entity s circumstances and therefre warranted See ISA 700, paragraph 14. ED: Revisins t ISA 700, paragraph A4b (new guidance added t emphasize that the evaluatin f whether the financial statements achieve fair presentatin is a matter f prfessinal judgment) ED: Revisins t ISA 700, paragraph A4a (new guidance t emphasize that, when evaluating whether the financial statements achieve fair presentatin, cnsideratin is given t whether additinal disclsures are required in additin t thse required by the applicable financial reprting framewrk.) ED: Revisins t ISA 700, paragraph A4c (new guidance abut the types f matters that may be discussed with management r thse charged with gvernance when evaluating whether fair presentatin has been achieved) 17

18 This dcument was prepared by the Staff f the Internatinal Auditing and Assurance Standards Bard (IAASB). This IAASB develps auditing and assurance standards and guidance fr use by all prfessinal accuntants under a shared standard-setting prcess invlving the Public Interest Oversight Bard, which versees the activities f the IAASB, and the IAASB Cnsultative Advisry Grup, which prvides public interest input int the develpment f the standards and guidance. The bjective f the IAASB is t serve the public interest by setting high-quality auditing, assurance, and ther related standards and by facilitating the cnvergence f internatinal and natinal auditing and assurance standards, thereby enhancing the quality and cnsistency f practice thrughut the wrld and strengthening public cnfidence in the glbal auditing and assurance prfessin The structures and prcesses that supprt the peratins f the IAASB are facilitated by the Internatinal Federatin f Accuntants (IFAC ). Internatinal Standards n Auditing, Internatinal Standards n Assurance Engagements, Internatinal Standards n Review Engagements, Internatinal Standards n Related Services, Internatinal Standards n Quality Cntrl, Internatinal Auditing Practice Ntes, Expsure Drafts, Cnsultatin Papers, and ther IAASB publicatins are published by, and cpyright f, IFAC. The IAASB and IFAC d nt accept respnsibility fr lss caused t any persn wh acts r refrains frm acting in reliance n the material in this publicatin, whether such lss is caused by negligence r therwise. The IAASB lg, Internatinal Auditing and Assurance Standards Bard, IAASB, Internatinal Standard n Auditing, ISA, Internatinal Standard n Assurance Engagements, ISAE, Internatinal Standards n Review Engagements, ISRE, Internatinal Standards n Related Services, ISRS, Internatinal Standards n Quality Cntrl, ISQC, Internatinal Auditing Practice Nte, IAPN, the IFAC lg, Internatinal Federatin f Accuntants, and IFAC are trademarks and service marks f IFAC. Cpyright [June 2014] by the Internatinal Federatin f Accuntants (IFAC). All rights reserved. Permissin is granted t make cpies f this wrk prvided that such cpies are fr use in academic classrms r fr persnal use and are nt sld r disseminated and prvided that each cpy bears the fllwing credit line: Cpyright [June 2014] by the Internatinal Federatin f Accuntants (IFAC). All rights reserved. Used with permissin f IFAC. Cntact permissins@ifac.rg fr permissin t reprduce, stre r transmit this dcument. Otherwise, written permissin frm IFAC is required t reprduce, stre, transmit, r make ther similar uses f this dcument, except as permitted by law. Cntact permissins@ifac.rg. Published by:

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