Invitation to Comment
Auditing and Assurance Standards Board
Implementation Considerations for
New Auditor Reporting Standards
June 2015
COMMENTS TO THE AASB MUST BE RECEIVED BY
FEBRUARY 5, 2016
A PDF response form has been posted with this document to assist you in submitting your comments to the
AASB. Alternatively, you may send comments via email (in Word format), to: ed.assurancestds@cpacanada.ca
addressed to:
Eric Turner, CPA, CA
Director, Auditing and Assurance Standards
Auditing and Assurance Standards Board
277 Wellington Street West
Toronto ON M5V 3H2
This Invitation to Comment reflects proposals made by the Auditing and Assurance Standards Board.
Individuals and organizations are invited to send written comments on the Invitation to Comment proposals.
Comments are requested from those who agree with the Invitation to Comment as well as from those who do
not.
Any comments that express disagreement with the proposals in the Invitation to Comment should clearly
explain the problem and include a suggested alternative, supported by specific reasoning. All comments
received by the AASB will be available on the website shortly after the comment deadline, unless
confidentiality is requested. The request for confidentiality must be stated explicitly within the response.
Introduction and purpose
The Auditing and Assurance Standards Board (AASB) intends to adopt as Canadian
Auditing Standards (CASs) new auditor reporting standards recently issued by the
International Auditing and Assurance Standards Board (IAASB). These standards
(referred to as “the new auditor reporting standards”) comprise:
•
CAS 700, Forming an Opinion and Reporting on Financial Statements;
•
CAS 701, Communicating Key Audit Matters in the Independent Auditor’s Report;
•
CAS 705, Modifications to the Opinion in the Independent Auditor’s Report;
•
CAS 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report;
•
CAS 570, Going Concern;
•
CAS 260, Communication with Those Charged with Governance; and
•
conforming amendments to other CASs.
The AASB has tentatively decided that the above CASs should have a later effective
date than that of the corresponding International Standards on Auditing (ISAs) (referred
to as “the auditor reporting ISAs”). Stakeholders are asked to provide input on these and
other related considerations affecting implementation of the new auditor reporting
standards.
The AASB will take into account comments received on this Invitation to Comment in
finalizing its decisions regarding the new auditor reporting standards. The AASB
expects that the final standards will be issued in the first half of 2016 to permit their use
for 2017 calendar year-end audits. Early adoption will be permitted.
The Invitation to Comment discusses:
•
significant changes to auditor’s reports internationally;
•
adoption in Canada of the auditor reporting ISAs;
•
Canadian implementation considerations;
•
Canadian amendments to the auditor reporting ISAs;
•
specific questions on which the AASB would like input from stakeholders,
and links to the CASs the AASB expects to issue.
Implementation Considerations for New Auditor Report Standards | i
Significant changes to auditor’s reports internationally
The IAASB issued the auditor reporting ISAs in January 2015, effective for audits of
financial statements for periods ending on or after December 15, 2016, resulting in
significant changes.
Mandatory for audits of financial statements of listed entities, voluntary application
allowed for entities other than listed entities
•
A new section to communicate key audit matters. Key audit matters are those
matters that, in the auditor’s judgment, were of most significance in the audit of the
current period financial statements.
•
Disclosure of the name of the engagement partner.
For all audits
•
An opinion section required to be presented first, followed by the Basis for Opinion
section, unless law or regulation prescribes otherwise.
•
Enhanced auditor reporting on going concern, including:
o
a description of the respective responsibilities of management and the auditor
for going concern;
o
a separate section when a material uncertainty exists and is adequately
disclosed under the heading “Material Uncertainty Related to Going Concern”;
and
o
a new requirement to challenge adequacy of disclosures for “close calls“ in view
of the applicable financial reporting framework when events or conditions are
identified that may cast significant doubt on an entity’s ability to continue as a
going concern.
•
An affirmative statement about the auditor’s independence and fulfilment of relevant
ethical responsibilities, with disclosure of the jurisdiction of origin of those
requirements or reference to the International Ethics Standards Board for
Accountants’ Code of Ethics for Professional Accountants.
•
An enhanced description of the auditor’s responsibilities and key features of an
audit. Certain components of the description of the auditor’s responsibilities may be
presented in an appendix to the auditor’s report or, where law, regulation or national
auditing standards expressly permit, by reference in the auditor’s report to a website
of an appropriate authority.
The AASB will also be issuing an exposure draft of proposed Canadian amendments to
ISA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information, in
adopting it as CAS 720. CAS 720 will result in additional auditor reporting requirements.
ii | Invitation to Comment – June 2015
The AASB intends final CAS 720 to have the same effective date as the new auditor
reporting standards.
Adoption in Canada of the auditor reporting ISAs
During consultations on the IAASB’s Exposure Draft of the proposed auditor reporting
ISAs, Canadian stakeholders indicated strong support for the AASB’s existing approach
of adopting the ISAs as CASs. However, stakeholders expressed some concerns with
respect to the IAASB’s proposals. In responding to the IAASB’s Exposure Draft, the
AASB raised a number of these concerns.
The AASB carefully reviewed the changes made by the IAASB in finalizing the auditor
reporting ISAs and believes the AASB’s concerns have been substantively addressed.
Accordingly, and respecting the strong support from Canadian stakeholders for the
continued adoption of ISAs as CASs, the AASB intends to adopt the auditor reporting
ISAs as CASs with limited Canadian amendments.
However, while supportive of the adoption of the full suite of auditor reporting ISAs, the
AASB identified the following challenges that affect the implementation of the new
auditor reporting standards:
•
the large number of Canadian listed entities;
•
the large number of Canadian listed entities also listed in the United States; and
•
determining which Canadian entities will fall within the scope of key audit matters
reporting requirements.
Canadian implementation considerations
The large number of listed entities
Implementing the CASs effectively will require the engagement of key stakeholders. The
Canadian listed entity market includes the Toronto Stock Exchange (TSX)
(approximately 1,500 issuers of which nearly 10 per cent have a market capitalization of
less than $10 million), and the TSX Venture Exchange (TSXV) (approximately 2,000
issuers of which nearly 75 per cent have a market capitalization of under $10 million,
many of which are in the resource sector or are in start-up mode).
The AASB notes that in 2012 the United Kingdom implemented new reporting
requirements similar to the auditor reporting ISAs for a subset of its listed entities,
virtually all of which are audited by large firms. Further, most other jurisdictions do not
face the same challenge as Canada in having to implement the revised reporting
standards for such a large number of listed entities.
The AASB believes that the preparation of auditor’s reports containing key audit matters that
are meaningful for readers will require additional time for auditors, audit committees and
management, particularly in the first year, for reasons that include the following:
Implementation Considerations for New Auditor Report Standards | iii
•
The auditor will need to determine which of the matters communicated with those
charged with governance required significant auditor attention and, of those, which
matters were of most significance in the audit and therefore are key audit matters.
Having identified key audit matters, the auditor needs to provide a succinct and
balanced explanation to enable readers to understand why a matter was one of
most significance and how the matter was addressed in the audit. It is important that
the auditor’s description of key audit matters relates the matter to the specific
circumstances of the entity, while avoiding generic or standardized language. This
process will require significant professional judgment that will be time consuming on
initial implementation.
•
The auditor will need to discuss the auditor’s report with management and the audit
committee in the context of the disclosures in the financial statements. However,
key audit matters are not intended to be a reiteration of what is disclosed in the
financial statements. Accordingly, there may be significant discussion among the
parties as to what information is included in the financial statements and to what
extent key audit matters refer to or pinpoint that information.
Because of the large number of listed entities in Canada and the challenges of key audit
matters reporting, the AASB believes that significant efforts will need to be made to
engage stakeholders so that they understand the benefits and challenges of the new
auditor reporting standards and will collaborate to implement the standards for the
benefit of users of the financial statements and the auditor’s report. The AASB
recognizes that this may take time because many stakeholders may not have been
following the auditor reporting project closely.
The large number of Canadian listed entities also listed in the United States
There are nearly 300 Canadian entities registered and reporting with the U.S. Securities
and Exchange Commission (SEC). This is well over twice the number from any other
country and over a third of all foreign registrants. These entities also constitute a large
proportion of the Canadian marketplace in terms of market value.
Under Canadian securities legislation, entities listed in the U.S. are permitted to have
their audits conducted in accordance with U.S. Public Company Accounting Oversight
Board (PCAOB) standards, recognizing the strong interrelationship between Canadian
and U.S. markets. At this point, Canadian generally accepted auditing standards and
the PCAOB standards have similar reporting standards and Canadian auditors are able
to conduct their audits and issue an auditor’s report expressing compliance with both
sets of standards.
The PCAOB issued a proposed rule for auditor reporting in 2013 and intends to issue a
revised proposal in the third quarter of 2015. The final PCAOB standards and their
effective date may not be known for another year. However, it seems likely that their
effective date would be after the effective date of the auditor reporting ISAs. If there are
significant differences between the new auditor reporting standards and the final
iv | Invitation to Comment – June 2015
PCAOB reporting standards this could have significant implications. For example,
Canadian auditors may not be able to issue a single auditor’s report for their SECregistered entity clients. Instead, they may need to issue two different reports in
accordance with the respective auditing standards. Further, depending on the
circumstances, such entities that are not otherwise obligated to have their audits
conducted in accordance with Canadian generally accepted auditing standards, may
instead decide to have their audits conducted only in accordance with PCAOB
standards as permitted.
The AASB’s approach to setting standards for audits of financial statements is to adopt
ISAs with limited Canadian amendments. However, when implementing the new auditor
reporting standards, the AASB wishes to understand the implications for Canadian
auditors of any significant differences between the new auditor reporting and PCAOB
reporting standards.
Determining which Canadian entities fall within the scope of key audit matters reporting
requirements
The key audit matters reporting requirements apply to “listed entities”. “Listed entity” is
defined in the ISAs and the CASs as: “An entity whose shares, stock or debt are quoted
or listed on a recognized stock exchange, or are marketed under the regulations of a
recognized stock exchange or other equivalent body.” Since some aspects of the new
auditor reporting standards apply only to listed entities, it is now more important than in
the past for Canadian stakeholders to understand which entities meet the definition and,
as a consequence, whether, for example, key audit matters reporting applies to their
audits.
Canadian amendments to the auditor reporting ISAs
Effective date of the new auditor reporting standards
The auditor reporting ISAs are effective for audits of financial statements for periods
ending on or after December 15, 2016. The AASB has tentatively concluded, after
considering input from various stakeholders, that it is necessary to develop an effective
date for the new auditor reporting standards that takes into account the implementation
considerations discussed above. In this respect, the AASB considered whether there is
a need for a deferral of the effective date for all entities and, further, with respect to key
audit matters reporting, whether there should be a staged implementation of CAS 701.
In discussing a staged implementation of CAS 701, the AASB considered different
potential cutoff approaches, for example:
•
requiring auditors of entities listed on a particular recognized stock exchange to
apply CAS 701 before entities listed on other recognized stock exchanges;
Implementation Considerations for New Auditor Report Standards | v
•
setting a size threshold below which auditors would not be required to apply
CAS 701 (for example, entities with a market capitalization and total assets less
than $10,000,000);
•
setting a size threshold such that auditors of the largest Canadian listed entities
(which would be defined) would be required to apply CAS 701; and
•
requiring auditors of listed entities that are listed in multiple jurisdictions to apply
CAS 701 before other listed entities.
The AASB concluded that there was no ideal approach for determining a cutoff for
staged implementation because each approach is somewhat arbitrary. On balance, the
AASB believes that making CAS 701 initially applicable for audits of TSX-listed entities
has the benefits of not being subject to interpretation and recognizes that investors in
TSX-listed entities are likely to benefit most from the new key audit matters reporting.
The AASB has tentatively decided to set effective dates different from that of the auditor
reporting ISAs as follows:
•
CASs other than CAS 701 will be effective for audits of financial statements for
periods ending on or after December 15, 2017; and
•
CAS 701 will be effective for audits of financial statements of TSX-listed entities for
periods ending on or after December 15, 2017, and for audits of financial
statements of other entities for periods ending on or after December 15, 2018.
The following table illustrates how the requirements of the new auditor reporting
standards would apply to audits of financial statements in the stated periods:
Audits of financial
statements for
periods ending on
or after
CASs other than
CAS 701
Key audit matters reporting under
CAS 701
All entities
Auditors of TSXlisted entities
Auditors of other
than TSX-listed
entities
December 15, 2016
Not required; early
adoption permitted.
Not required; early
adoption permitted.
Not required; early
adoption permitted.
December 15, 2017
Required.
Required.
Not required; early
adoption permitted.
December 15, 2018
Required.
Required.
Required.
The deferred effective date and staged implementation mean that an auditor performing
an audit for financial statement periods ending on or after December 15, 2016 would not
be able to represent compliance with the ISAs if the auditor did not comply with all the
requirements of the new auditor reporting standards. For many audits, this will be the
vi | Invitation to Comment – June 2015
case for only one year. However, for listed entities other than TSX-listed entities, this
may be the case for two years.
The AASB believes that its approach to the effective dates is appropriate to driving a
high-quality implementation of the new auditor reporting standards because the
amendments would:
•
provide additional time for all entities and their auditors to prepare for the changes
to auditor reporting;
•
enable listed entities other than TSX-listed entities and their auditors to learn from
the experiences of TSX-listed entities while providing more time for their
stakeholders to implement the new auditor reporting standards;
•
still permit early adoption, which means that an entity can engage the auditor to
report in compliance with the ISAs when this is necessary to meet legal or
regulatory requirements, or is otherwise important to the entity’s stakeholders; and
•
allow time for stakeholders to understand the direction that the PCAOB intends to
move for its reporting standards and for the AASB to assess the implications for
Canadian auditor reporting.
For the benefits of the deferral of the effective dates to be realized, the AASB notes that
it will be important:
•
for auditors to use the extra time to develop meaningful reports that are specific to
the circumstances of the entity and do not contain generic or standardized wording;
and
•
for auditors, audit committees and management to begin now to become familiar
with the standards and the implications in the specific circumstances of their
entities.
Determining which entities fall within the scope of the key audit matters reporting
requirements
In Canada, there are a limited number of recognized stock exchanges under securities
legislation. There are currently four such exchanges in Canada:
•
Toronto Stock Exchange;
•
TSX Venture Exchange;
•
Canadian Securities Exchange; and
•
Aequitas NEO Exchange.
There are also a number of other marketplaces in operation in Canada that are not
recognized stock exchanges. However, these marketplaces do not share the same
Implementation Considerations for New Auditor Report Standards | vii
characteristics as stock exchanges, particularly as regards the setting of prices and the
ability of the public to trade in an open market.
Further, securities legislation uses the definition “reporting issuer”. However, there are
many reporting issuers that are not listed on a recognized stock exchange. For
example, mutual funds, issuers offering exempt market securities under National
Instrument NI 45-106, Prospectus and Registration Exemptions, or those issuing debt to
accredited investors and the regulatory reporting requirements may be different from
those of listed entities.
The AASB concluded that auditors of entities listed on the four recognized stock
exchanges should apply the requirements of the new auditor reporting standards for
listed entities. The AASB does not intend to make a Canadian amendment with respect
to the definition of listed entity.
Comments requested
Any comments that express disagreement with the proposals in the Invitation to
Comment should clearly explain the problem and include a suggested alternative,
supported by specific reasoning. When a respondent agrees with proposals in the
Invitation to Comment, it will be helpful for the AASB to be made aware of this view.
The AASB would welcome views on the following questions:
1. Do the effective dates provide enough time for stakeholders to implement the new
auditor reporting standards?
2. Will the staged implementation of CAS 701 address concerns about the ability for
auditors, preparers and audit committees of listed entities to implement key audit
matters reporting appropriately?
3. Do you agree that TSX-listed entities are the appropriate cutoff point for the staged
implementation?
4. Are there any types of entities not listed on a recognized stock exchange that you
believe should be considered to be listed entities within the definition in the new
auditor reporting standards?
5. Are there any unintended consequences of the AASB’s interpretation of the
definition of listed entity?
The deadline for providing your comments to the AASB on the above is February 5,
2015.
For your convenience, a PDF response form has been posted with this document. You
can save the form both during and after its completion for future reference. Alternatively,
written comments may be submitted by email (Word format preferred) to:
ed.assurancestds@cpacanada.ca
viii | Invitation to Comment – June 2015
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