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The key changes to audit report Essay Sample

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The key changes to audit report Essay Sample

With focus on the similarities as well as any differences between PCAOB and the International Auditing and Assurance Standards Board (IAASB) auditing reporting requirements. The Key Changes to Audit Report The significant change under the PCAOB Standard and the IAASB Standard is the disclosure of Critical Audit Matters (CAM) and Key Audit Matters (KAM) in the audit report with focus on: The communication of the CAM and KAM. The considerations in determining the CAM and KAM.

Comparison between the PCAOB Standard and the IAASB Standard Under the new regulation, the framework for determining CAM by the PCAOB Standard and KAM by the IAASB Standard is primarily related and begin with what matters should be communicated or needed to be communicated by the auditor to the audit committee (IAASB 2017). The Communication The IAASB and PCAOB indicate that there would be at least one KAM and CAM to be communicated, and the auditor must involve a statement if there is no KAM and CAM recognised in the audit report.

In the condition when such communication may be expected to provide the unfavourable results to the public interest, the IAASB Standard under ISA 701 states that KAM may not be communicated (IAASB 2017). Related to this, the PCAOB declares that the auditor is not required to provide any information related to the company if such information has not been made publicly available by the company itself (IAASB 2017). Unless auditor needs such information to explain the considerations in deciding the matter is a CAM or how it was addressed in the audit (Zietsman et al. 2017).

The Consideration KAM and CAM under both standards are also needed to be communicated in the audit of the current period. The PCAOB, however, presents examples of circumstances when it may be appropriate to report CAM in the previous term. In contrast, the IAASB Standard has not considered these examples. Explain the reasons/motivation for the changes and critique whether these changes are likely to achieve their aims.

The Objectives of The Changes

The aim of the changes is to improve the relevance and usefulness of the audit practice and the audit report, as well as to enhance the transparency about the audit that was performed by the auditor so that it would be more informative for investors and other financial statement users (Lawson 2017). In particular, the PCAOB Standard states that the changes would help prevent the auditor from being the primary source of the disclosures of CAM (Lawson 2014). The Effectiveness of The Changes

The communication of the KAM and CAM may increase the information value of the audit report to financial statement users as they will have more information about the company’s actual condition compared to the prior ‘pass/fail’ form of the audit report which has only provided inadequate information. Even though the previous rule can provide a standardised format and promotes consistency across companies, it does not provide accurate information of the significant judgements, such as company’s financial risks (Lawson et al. 2014).

In light of this, disclosing the KAM and CAM could increase the amount of company-specific information contained in the audit report and thus increase its usefulness. At the same time, the greater quantity and quality report as a result of the disclosures of CAM and KAM would promote better investment decisions. As auditors have unique and relevant insight based on their audits, the disclosures of CAM and KAM provide a greater chance for auditors to express their ideas in the audit report; therefore, the reports would be more relevant and useful for the investors.

Nevertheless, by disclosing CAM and KAM, auditors may be the only source of the disclosures. The traditional reporting model primarily relies on managers to prepare the financial statements and auditors to attest to their conformity with accepted accounting practices (Lawson et al. 2014). However, the new requirements may blur the line between weather management or auditors have primary responsibility for disclosures, and therefore cause auditors to become the only source of information for the users since they have to report company information initially.

Outline the likely impact of the audit reporting on audit practice. The PCAOB and IAASB Standards are required auditors to communicate any matters that have potential as a CAM and KAM. It may result on the managers would be less likely to share information with the auditor if they were required to disclose accounting estimate information. Another impact is related to auditor legal liability as the disclosure requirement may decrease auditor’s legal exposure when audit fails to detect a material misstatement.

As CAM and KAM disclosures would alert users of financial statement about any potential misstatement, jurors may view this as a forewarning of a heightened risk of undetected misstatement. For example, if the auditor disclosed a CAM and KAM because it is difficult for them to gain adequate and relevant evidence to test the company’s investment account, jurors may view that disclosing CAM and KAM as a de facto warning to the users. This is because the auditor has already highlighted that misstatement in the company’s investment account may have gone undetected or uncorrected.

It is important as jurors will be less likely to hold the auditor liable for losses if they believe that the auditors have given advanced warnings of risk to the users (Grennier and Reffett 2016). Importantly, in a condition when audit fails to disclose a material misstatement, jurors will be less likely to detect the auditors negligent when the audit report published a related CAM and KAM compared to when there is no disclosing CAM and KAM in the audit report (Posner 2016).


Grenier, Jonathan H and Adrew Reffett 2016 ‘Risk Disclosure Preceding Negative Outcomes: The Effects of Reporting Critical Audit Matters on Judgements of Auditor Liability’, Current Issues in Auditing, Vol. 10 No. 2, pp. P1-P10, July 2016, accessed 25 September 2017, < http://web. a. ebscohost. com/ehost/pdfviewer/pdfviewer? vid=1&sid=63d7f094-ff33-4c0f-8208-b50b716bd5ac%40sessionmgr4009>

IAASB 2017, ‘A Comparison Between The IAASB and The US PCAOB Standards’, The New Auditor’s Report, July 2017, accessed 20 September 2017, <https://www. ifac.org/publications-resources/new-auditor-s-report-comparison-between-iaasb-and-us-pcaob-standards > Lawson, Bradley P. et. all. 2014, ‘PCAOB Proposes Significant Changes to Auditor’s Reporting Model’, The Journal of Corporate Accounting and Finance, November/December 2014, accessed 20 September 2017, < http://onlinelibrary. wiley. com/doi/10. 1002/jcaf. 22005/epdf > Lawson, Bradley P. et al. 2017, ‘Updates and Comparisons Regarding Changes to the Audit Reporting Model in the United States, United Kingdom, and the European Union’, The Journal of Corporate Accounting and Finance’, July/August 2017, accessed 20 September 2017,

< http://onlinelibrary. wiley. com/doi/10. 1002/jcaf. 22278/epdf > Posner, Cydney 2016, ‘Study Finds Disclosure of Critical Audit Matters May Reduce Legal Exposure for Auditors’, Cooley PubCo, 12 September 2016, accessed 1 October 2017, <https://cooleypubco. com/2016/09/12/study-finds-disclosure-of-critical-audit-matters-may-reduce-legal-exposure-for-auditors/> Zietsman, Megan et. all 2017, ‘PCAOB Adopts Changes to the Auditor’s Report’, Heads Up, Volume 24, Issue 16, June 2017, accessed 20 September 2017, <http://deloitte. wsj. com/cfo/2017/07/07/pcaob-adopts-changes-to-the-auditors-report/>

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