The Financial Reporting Council (FRC) has published various amendments to the wording of auditor’s reports that are immediately applicable.
The amendments to the illustrative auditor’s reports published by the FRC result from recent developments in UK company law, the UK listing rules and ISAs (UK and Ireland), namely:
a) the introduction of the Strategic Report in Companies Act 2006
b) changes in the requirements of the Listing Rules with respect to directors’ remuneration disclosures
c) various changes to ISA (UK and Ireland) 700 ‘The Independent Auditor’s Report on Financial Statements’.
The developments are discussed and illustrated in FRC’s Bulletin 4 “Recent Developments in Company Law, The Listing Rules and Auditing Standards that affect United Kingdom Auditor’s Reports”, which also include two examples of the modified report.
The Bulletin also discusses the auditor’s responsibilities and duties in respect of the ‘Strategic Report with Supplementary Material’ and the amendment of the Regulations that specify the information to be included in a quoted company’s Directors’ Remuneration Report.
‘The Strategic Report with Supplementary Material’, which a company may provide to its members in place of the company’s full accounts and reports, replaces the previous option under Companies Act 2006 of providing members with a Summary Financial Statement.
The Strategic Report
Companies Act 2006 has been amended to provide for the preparation by all companies, apart from those entitled to small companies’ exemption, of a Strategic Report, whose purpose is that to inform members of the company and help them assess how the directors have performed their duty under section 172 (duty to promote the success of the company) of the Act.
The strategic report provisions are effective for financial years ending on or after 30 September 2013 and ACCA has produced guidance on their application, including on the aspects relevant to charities.
Under section 496 of Companies Act, the auditor must state in his report whether the information given in the strategic report (if any) for the financial year for which the accounts are prepared is consistent with those accounts. This is the same statutory reporting responsibility as that which applies to the Directors’ Report.
When reporting on the strategic report, the auditor should apply the same requirements and application and other explanatory material in ISA 720 Section B - ‘The Auditor’s Statutory Reporting Responsibility In Relation To Directors’ Reports’- to the extent that they are applicable to the strategic report.
Alternatively, under subsection (5)(b) of section 498 of CA 2006, if the directors of a company have taken advantage of the small companies exemption from the requirement to prepare a strategic report and in the auditor’s opinion they were not entitled to do so, the auditor is required to state that fact in the auditor’s report.
In terms of the implications for the illustrative auditor’s reports in FRC’s Bulletin 2010/2, where the company prepares a strategic report the bullet point relating to the Directors’ Report in the section headed ‘Opinion on other matters prescribed by the Companies Act 2006’ is amended to:
- ‘The information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.’
This change applies to examples 2 to 11 in Bulletin 2010/2.
Where the directors of a company have claimed exemption from preparing a strategic report and in the auditor’s opinion they were entitled to do so the final bullet point of the auditor’s report is amended as follows:
‘We have nothing to report in respect of the following matters where the Companies
Act 2006 requires us to report to you if, in our opinion:
- the directors were not entitled to prepare the financial statements in accordance with the small companies regime and take advantage of the small companies’ exemption in preparing the directors’ report and take advantage of the small companies exemption from the requirement to prepare a strategic report’.
This change is applicable to example 1 in Bulletin 2010/2.
Changes to listing rules
In December 2013 the Financial Conduct Authority (FCA) deleted two listing rules that required premium listed companies to ensure that their auditors reviewed certain disclosures of directors’ remuneration and to provide in the auditor’s report details of any non-compliance.
As a result of the deletion of the requirements, the corresponding disclosures in the auditor’s report have been removed and that affects illustrative examples 4, 8 and 9 in Bulletin 2010/2. The changes apply to premium listed companies with a financial year ending on or after 30 September 2013 that had not published their annual financial report on or before 13 December 2013.
Changes to ISA (UK and Ireland) 700
The required description of the scope of an audit prescribed by ISA (UK and Ireland) 700 has been changed and the following underlined wording has been added to the penultimate sentence of the description:
‘In addition, we read all the financial and non-financial information in the [describe the annual report] to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit.’
This change is required to be made to all of the example auditor’s reports set out in Bulletin 2010/2.
ISA (UK and Ireland) 700 has also been modified to include a number of further disclosures in the auditor’s report of entities that apply the UK Corporate Governance Code.
In particular the auditor is now required to report, by exception, if the board’s statement that the annual report is fair, balanced and understandable is inconsistent with the knowledge acquired by the auditor in the course of performing the audit, or if the matters disclosed in the report from the audit committee do not appropriately address matters communicated by the auditor to the committee.
Additionally, auditors reporting on entities which apply the UK Corporate Governance Code, are now required to explain more about their work in the auditor’s report and specifically need to:
(a) Describe those assessed risks of material misstatement identified by the auditor that had the greatest effect on:
a. The overall audit strategy;
b. The allocation of resources in the audit;
c. Directing the efforts of the engagement team.
(b) Provide an explanation of how the auditor applied the concept of materiality in planning and performing the audit; and
(c) Provide an overview of the scope of the audit, showing how this addressed the risk and materiality considerations.
All of the above changes to ISA (UK and Ireland) 700 are effective for audits of financial statements for periods commencing on or after 1 October 2012.
The modified example 1 auditor’s report, published in Bulletin 4, which applies to a non-publicly traded company preparing financial statements under the FRSSE is reproduced below:
Example 1 – Non-publicly traded company preparing financial statements under the FRSSE.
- Company qualifies as a small company.
- Company does not prepare group financial statements.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF XYZ LIMITED
We have audited the financial statements of (name of company) for the year ended ... which comprise [specify the titles of the primary statements such as the Profit and Loss Account, Balance Sheet, [the Cash Flow Statement], the Statement of Total Recognised Gains Losses, [the Reconciliation of Movements in Shareholders’ Funds]] and the related notes. The financial reporting framework that has been applied in their preparation is applicable and the Financial Reporting Standard for Smaller Entities [(Effective April 2008)](United Kingdom Generally Accepted Accounting Practice applicable to Smaller Entities).
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement [set out [on page ...]], the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s [(APB’s)] Ethical Standards for Auditors[, including ‘‘APB Ethical Standard – Provisions Available for Small Entities (Revised)’’, in the circumstances set out in note [x] to the financial statements].
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is [provided on the APB’s website at www.frc.org.uk/auditscopeukprivate ] / [set out [on page ...] of the Annual Report].
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the [describe the annual report] to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the financial statements:
- give a true and fair view of the state of the company’s affairs as at ........ and of its profit[loss] for the year then ended;
- have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice applicable to Smaller Entities; and
- have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
- adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
- the financial statements are not in agreement with the accounting records and returns; or
- certain disclosures of directors’ remuneration specified by law are not made; or
- we have not received all the information and explanations we require for our audit; or
- the directors were not entitled to [prepare the financial statements in accordance with the small companies regime] [and] [take advantage of the small companies’ exemption in preparing the directors’ report] [and] [take advantage of the small companies exemption from the requirement to prepare a strategic report].
John Smith (Senior statutory auditor) Date
for and on behalf of ABC LLP, Statutory Auditor