Chapter 1: EXECUTIVE SUMMARY

1.1 Overview of this Position Paper

The auditor’s report is the instrument addressing the output of the audit process; likewise,

serving as the primary means of communication with an entity’s stakeholders. It is a short,

standardized report that describes the financial statements subject to audit, the audit itself,

and the respective responsibilities of management and the auditor.

For many years now, the auditor’s report has provided either a “clean” (unmodified) or

modified opinion with an explanation of the basis for such. This long-standing report remains to

be valuable; however, many believe that this is no longer sufficient. Users of audited financial

statements are calling for more pertinent information for their decision-making. Moreover,

global financial crisis has urged the users, particularly the investors, to want to know more

about individual audits and to gain further insights into the audited entity and as to how it is

performing.

The International Auditing and Assurance Standards Board (IAASB) embraced this need for

change and released an exposure draft entitled Reporting on Audited Financial Statements:

Proposed New and Revised International Standards on Auditing (ISAs) on July 25, 2013. The ED

proposes amendments to audit reports including the provision of more information on how

audits are performed. Along with the other revisions is the introduction of a ‘key audit matters’

section in the audit report on audits of listed entities which were developed after an earlier

research. These aim to include audit findings and insights which are expected to enhance the

auditor’s reports and contribute to the ongoing relevance of the financial statement audit and

the public interest.

Numerous organizations have responded positively to these proposals and international

firms even field tested the new audit report model which equally gained affirmative results. In

addition, with the encouraging feedback gained, it is likely that these proposed enhanced

auditor report models are months away from becoming an established international standard.

The adoption and application of this in the Philippines would then be reasonable and

without prejudice to the interest of the users of audited financial statements, particularly the

investors and stockholders, the entity owners, and other interested parties. In the same

positive manner, auditor reports would be of greater value with the inclusion of the “key audit

matters” without encroachment of any ethical standards. Moreover, the value of auditors

would be a notch higher for these additional requirements, in a way, would improve their

competence, credibility, and professionalism, thus, giving progress and a highly regarded

advancement to the accountancy profession.

The main objective of this paper is to justify the reasonableness of the application of this

proposal not only internationally but most of all, on a local perspective, i.e., its adoption and

application in the Philippines.

1.2 Summaries of Issues and Recommendations

The proposal for the proposed new auditing standard comes not without any impediments.

A table is provided below to sum up these issues with corresponding recommendations.

ISSUE EXPLANATION RECOMMENDATION

KAMS will expose

confidential matters of

an entity.

The auditor has the responsibility

of communicating matters of audit

significance to TCWG. Since KAMs

are to be taken from the matters

communicated, the section may

expose confidential matters of the

entity.

The reporting of the proposed

KAM section should be done

on a voluntary basis with the

discretion of such left to the

management and TCWG to be

able to obtain consent on the

said disclosure.

KAMS violate ethical

standards, particularly

confidentiality.

As mentioned, reporting this

section will expose confidential

matters about the entity.

Leaving the reporting choice

on the management will

enable the auditor to obtain

consent on such disclosure

and will not cause any

violation thereof. The Code of

Ethics provides that

confidentiality will not be

dishonored as long as there is

consent, juridical necessity to

and professional right to

disclose.

KAMS may result to

financial disclosure/

information overload.

With KAM section, the standard

auditor report will likely be

lengthier, may misguide the reader

in where to start reading and on

what to focus and cause

information overload.

The auditor should thoroughly

review his findings and

carefully select those which

are of greater importance to

be included in the report. He

should likewise include hints

and signs which to catch the

readers’ attention for them to

be able to focus on significant

areas in the report. Guidance

in selecting KAMs is also

provided in the proposed

standard.

KAMS are unnecessary

because of existing PSA

706 (ISA 706)

Proposed standard on KAM has

been built on the concept of PSA

706, therefore a commonality

between them is observed.

The underlying concept

between these standards may

be the same; however the

differences between them

should be considered. With

thorough examination, the

proposed section provides a

lower threshold of

communicating audit findings

and is of greater assistance.

KAMS will become the

new “boilerplate”

An accompanying feature of the

proposed standard is to avoid

audit reports from being

standardized. With the same

matters and audit findings likely to

be reported in consecutive years,

audit reports adopting the use of

KAM section are perceived to

become standardized overtime.

This issue should not be

viewed much as an

impediment because

reporting the same audit in

consecutive years simply

reveals how the entity is

dealing with them.

KAMS will substitute the

auditor’s opinion in the

FS.

Users may take key audit matters

as equivalent to the auditor’s

opinion and neglect

comprehending on the relevant

information in the report.

This issue should be treated

with proper communication

to the users and readers of

the auditor’s report to not

create confusion as to the

auditor’s opinion.

1.3 Acknowledgement

This position paper is made possible with the assistance and support of my parents Mr.

and Mrs. Uldarico M. Rosaupan.

To be God be the Glory.