FRC makes changes significant changes to audit reports

THE FRC has made significant changes to the UK’s auditing regime through a revised standard.

The financial reporting watchdog has issued a revised auditing standard, which it claims will enhance transparency in the auditor’s report, on the premise of increasing communication with investors.

Revisions to ISA 700 (UK and Ireland) “the Independent Auditor’s Report on Financial statements” requires auditors’ reports on companies which are applying the UK corporate governance code to explain more about their work.

Board engagement will also be included in the changes. The FRC is requiring boards to describe the work of the audit committee in annual reports and for the auditor to report if the board’s disclosures do not address matters it has communicated to the audit committee.

Auditors will also have to inform the committee about significant audit judgements and for the committee to report their activities and their communication with the auditor.

The revisions received strong support during the consultation process, said the FRC, and are therefore being adopted with only minor amendments.

Nick Land (pictured), chairman of the FRC’s Audit and Assurance Council, said: “The provision of a fuller description of the work the auditor has undertaken will give far more insight to investors than the binary pass/fail model of the current audit report.

“The improved report will be a better basis for engagement by investors with companies, and we encourage auditors and companies to work together to develop succinct communication to do so.”

Among the requirements, auditors will be asked to provide an overview of the scope of the audit showing how it addressed the risk and materiality considerations.

They will also have to describe the risks which have the greatest effect on: the overall audit strategy; allocation of resources in the audit; and directing the efforts of the engagement team. The FRC is asking that the report include an explanation of how auditors applied the concept of materiality when planning and performing the audit.

The changes will affect audits of financial statements for reporting periods on or after 1 October 2012.