Investors to Benefit from Much-Improved Auditor’s Report

Good news for investors. Starting next year, independent auditors issuing audit reports in accordance with international auditing standards will be required to provide greater transparency into the results of the financial statement audit. The International Auditing and Assurance Standards Board (IAASB) approved a new model audit report standard effective in 2016. This is a welcome development for investors who for years have been calling for the auditor to provide more relevant information regarding the annual audit.

The most significant change is that there will be a new section included in the audit report to communicate key audit matters, or KAMs. They are defined as those audit areas or matters that were of the greatest significance to the audit work — essentially, those matters that kept the auditor awake at night. In determining whether something is a KAM, the auditor will consider and communicate the following:

• Risk Areas: Areas of higher assessed risk of material misstatement, or significant risks.
• Judgments: Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates that have been identified as having a high estimation of uncertainty.
• Events: The effect on the audit of significant events or transactions that occurred during the period.

The new auditor’s report will greatly improve communications between investors and the auditor. This renewed focus on KAMs should improve financial statement disclosures and result in enhanced audit quality, both of which will make financial statements more reliable for investors.

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