A new International Auditing and Assurance Standards Board (IAASB) proposal would require auditors to read and consider information in certain documents that accompany audited financial statements.
If this additional information leads the auditor to identify a material inconsistency, or a misstatement in the audited financial statements, the auditor would be required to respond appropriately.
The proposal is called International Standard on Auditing (ISA) 720 (Revised), The Auditor’s Responsibilities Relating to Other Information in Documents Containing or Accompanying Audited Financial Statements and the Auditor’s Report Thereon.
Depending on the nature of a material inconsistency discovered, the auditor’s responses could include:
- Requesting that management correct the other information, and making sure the correction is made.
- Reporting the matter to those charged with governance to get a correction made.
- Considering the reporting implications of the inconsistency.
- Withdrawing from the engagement, where possible under law.
A discovery that audited financial statements may be materially misstated could lead an auditor to report the inconsistencies in the auditor’s report. If the discovery occurs after the date of the auditor’s report, the auditor would be required to follow the guidance in ISA 560 regarding such discoveries.
The IAASB is an international body that develops auditing and assurance standards and guidance. It has set a due date of March 14 for comments on ISA 720 (Revised).
IAASB Chairman Arnold Schilder said in a news release that financial reporting users are attaching increased importance to disclosures that are being disseminated through a diverse range of documents. He said it is in the public interest to ask whether the auditing standard does enough to ensure that auditors review other information in the context of their understanding of the audited entity.
“Our proposals for an enhanced ISA 720 seek to evolve the requirements so that they remain relevant and sufficient in today’s financial reporting environment,” Schilder said.
The proposed standard would expand the types of documents considered as “other information,” and clarify and enhance the auditor’s responsibilities with respect to reading and considering other information.
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.