Ensuring transparency of financial statements

As per companies act and other statutory requirements, it is common across the world that all entities involved in commercial activities are audited by Chartered Accountants. The objective of this audit is to provide confidence to the investors by expressing an independent opinion on financial statements. To give the opinion about the financial statements, the auditor examines them to understand the truth and fairness of financial position and operating results of the enterprise. The framework and guidelines of an audit report are given by the International Auditing and Assurance Standards Board (IAASB) under the facilitation of the International Federation of Accountants (IFA). IFA is the global organisation for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies.

Normally, the framework and guidelines about audit report as issued by the IAASB are followed by professional bodies all over the world in addition to local laws of respective countries. In general, the contents of the audit report are: a) title which indicates that the report is an independent auditor's report; b) introductory paragraph where auditors mention the title of each component of financial statements, significant accounting policies and period of financial statements. In the auditor's report, the auditor describes the responsibilities of those organisations which are responsible for the preparation of the financial statements. The most important content of the auditor's report is a separate section with the heading 'Opinion'.

NEW AUDITOR'S REPORTING STANDARDS FOR LISTED ENTITIES: IAASB has recently issued new auditor's reporting standards for listed entities with effect for audits of financial statements for periods ending on or after December 15, 2016. In Bangladesh, the Institute of Chartered Accountants of Bangladesh (ICAB) has adopted the new auditor's report with effect for audits of financial statements for the period ending on or after December 31, 2018.

Some changes have been brought in the Auditor's Report format:

n First, a new section has been inserted to communicate 'key audit matters' (KAM) which, in the auditor's judgment, are very significant in the audit of the current period of financial statements. At present, the auditor is only required to express his 'opinion' along with 'basis of opinion'. As per new auditor's reporting standards, in addition to the 'opinion' and 'basis of opinion', auditor shall mention key audit matters. The purpose of communicating key audit matters is to enhance the communicative value of the auditor's report by providing greater transparency about the audit that has been performed. The communication of key audit matters may also provide intended users a basis for further engagement with management.

n Second, at present, the auditor's report is signed by the partner in the name of firm. But, as per new standards, auditor's report shall be signed in the name of the engagement partner. In case of exceptions, it is not required.

n Third, opinion section is required to be presented first followed by the basis for opinion section, unless laws or regulations prescribe otherwise.

n Fourth, enhancement of auditor's reporting on going concern. This is the part where the auditor describes the respective responsibilities of the management and the auditor about the issue of going concern. If it appears to the auditor that in view of the applicable financial reporting framework, there is a significant doubt on an entity's ability to continue as a going concern, a separate section needs to be incorporated with the heading "Material uncertainty related to going concern".

n Fifth, affirmative statement about the auditor's independence and fulfilment of relevant ethical responsibilities, with disclosure of the jurisdiction of origin of those requirement or reference to the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants has been included.

n Finally, based on the amount of contents, certain components of enhanced description of the auditor's responsibilities and key features of an audit can be presented in an appendix in the auditor's report.

One of the main reasons behind revising the auditor's reporting standards was to increase the confidence in the audit and the financial statements. It is expected that in addition to the increased transparency and enhanced informational value of the auditor's report, changes to auditor's reporting will also have the benefit of enhanced communication between investors and the auditor.

Additionally, the new changes will enhance the responsibility of the auditor as well as the management of the entity. However, ultimate success of the objectives of the new audit report will depend on proper understanding of the users of the financial statements about the content of the auditor's report. If the users of the financial statements do not understand and apply the issues as described in the key audit matters and about going concern before investing or any other decision based on financial statements, the whole exercise will be defeated. So, the economic success of new auditor's reporting standards depend not only on the auditor and management of the entity but also on the users of the financial statements.

Md Shahadat Hossain, FCA is Member Council and former Vice-President, Institute of Chartered Accountants of Bangladesh.

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