Revised Auditing Standard Puts Onus on Auditor to Read Annual Reports

The International Auditing and Assurance Standards Board has released a revised International Standard on Auditing that encourages auditors to thoroughly read through a company’s annual report when auditing, as it provides critical information to the auditor and is ultimately beneficial to the public interest.

The revisions in ISA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information, aim to clarify and increase the auditor’s involvement with “other information”—defined in the standard as financial and non-financial information, other than the audited financial statements, that is included in entities’ annual reports. The IAASB operates under the auspices of the International Federation of Auditors.

“The annual report is a critical document for investors,” said IAASB chairman Prof. Arnold Schilder in a statement. “It is in the public interest that an auditor undertakes an ‘intelligent read’ of an annual report, in the context of the  knowledge obtained in the audit, and perform certain procedures to ensure the annual report is not materially inconsistent with the audited financial statements.”

The standard also includes new requirements related to auditor reporting on other information that complement the changes arising from the IAASB’s new and revised Auditor Reporting standards, issued earlier this year. Concurrent with those standards, ISA 720 (Revised) will be effective for audits of financial statements for periods ending on or after Dec. 15, 2016. 

“Which documents have been read and considered by the auditor and the results of the auditor’s work on those documents will now be transparent to auditor report users,” said IAASB technical director Kathleen Healy. “Specifically articulating the auditor’s responsibilities for other information, including the fact that the auditor’s opinion does not cover this information, will also give users the appropriate context in which to consider an entity’s annual report.”

The standard also seeks to address the practical challenges that may arise when some or all of the other information is not available as of the date of the auditor’s report, and prescribes additional communications in auditor’s reports for listed entities in these circumstances.

The staff-prepared Basis for Conclusions, which explains the IAASB’s rationale for its decisions, and an At a Glance document, which explains the main changes from the extant ISA, are also available.