New Auditor's Report in Sri Lanka

K.M. THARINDU NISHSHANKA MUHANDIRAM

B.Sc. Accounting (SJP), ACA, ACMA, SAT

+94712904158, +94770277580

[email protected]

05th Oct. 2016

mailto:[email protected]

New Auditor’s Report in Sri Lanka

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DISCLAIMER

This publication has been prepared for information purposes only. It does not form part of

the standard or other authoritative publications of The Institute of Chartered Accountants of

Sri Lanka and the IAASB. It has not been reviewed, approved, or otherwise acted upon by

the CA Sri Lanka or the IAASB. This document is a glance of new audit report. However,

this does not provide guidelines and effective dates with other implication to the new audit

report in Sri Lanka.

REASONS TO CHANGE THE AUDIT REPORT

Nature of business and its environment have been changed over past decade becoming

more complex. Newly introduced SLFRS / LKAS mainly in relation to financial instrument

and fair valuation, and revenue recognition involve higher number of judgement, estimates

which facilitates to board of directors for manipulation of accounting elements and

components of the financial statements to hide the uncertainty of going concern or financial

performance and financial position to accomplish the objectives of the management of the

company.

The international financial crisis of 2008 brought into focus the concerns of investors and

regulators about the auditor’s report on the financial statements. In particular, it was felt

that the binary ( pass / fail ) auditor’s report may not provide adequate transparency about

the audit and the auditor’s insights about the company based on its work.

Hence, investors and other users of financial statements are expecting the auditor’s report to

be transparency that is more informative and insight into the audit that is more relevant to

users for their decision-making. The auditor’s report is about to be revolutionised. The

International Auditing and Assurance Standards Board (IAASB) has, after a five-year

project, released new and amended International Standards on Auditing (ISAs) which will

transform the auditor’s report, and for listed entities, will include key information relating

to the audit of the entity to enhance the communicative value of the auditor’s report, to the

public interest.

The IAASB’s amended standards going to be effective for the years ending on or after 15th

December 2016. However, same effective date for the amended auditing standards and

audit report will be decided by the Institute of Chartered Accountants of Sri Lanka for the

Sri Lankan context. President of CA Sri Lanka declared that new audit report will be

applicable to Sri Lankan context with effect from March 2018.


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POSSIBLE SLAuSs GOING TO BE CHANGED

The new international auditing standard may require to be newly introduced into Sri Lanka:

1. New ISA 701, Communicating Key Audit Matters in the Independent Auditor’s

Report;

The existing auditing standards may require to be revised in Sri Lanka:

1. SLAuS 260, Communication with Those Charged with Governance;

2. SLAuS 570, Going Concern;

3. SLAuS 700, Forming an Opinion and Reporting on Financial Statements;

4. SLAuS 705, Modifications to the Opinion in the Independent Auditor’s Report;

5. SLAuS 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the

Independent Auditor’s Report;

6. SLAuS 720, The Auditor’s Responsibilities Relating to Other Information includes

new and revised reporting requirements relating to other information that is included

in an entity’s annual report.

Following auditing standards may be affected by above new and revised auditing

standards:

1. SLAuS 210, Agreeing the Terms of Audit Engagements

2. SLAuS 220, Quality Control for an Audit of Financial Statements

3. SLAuS 230, Audit Documentation

4. SLAuS 510, Initial Audit Engagements – Opening Balances

5. SLAuS 540, Auditing Accounting Estimates, Including Fair Value Accounting

Estimates, and Related Disclosures

6. SLAuS 580, Written Representation

7. SLAuS 600, Special Considerations- Audit of Group Financial Statements

(Including the Work of Component Auditors)

8. SLAuS 710, Comparative Information – Corresponding Figures and Comparative

Financial Statements


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EXPECTED BENEFITS ON THE AMENDED AUDITOR’S REPORT

The increased transparency and enhanced informational value of the auditor’s report, will

accomplish the following:

1. Transparency and reliability

Users are demanding the improved transparency into the audit, which improves trust

and reliability.

2. Relevance and credibility

The auditors’ reports of listed entities will contain relevant entity-specific information

on the most significant issues encountered during the audit. So far, users would merely

look out for the pass/fail opinion and ignore the rest of the report, but a more relevant

report may improve the user’s interest in the auditor’s report and their understanding of

the audit, adding to the credibility of the audit. Further, this may increase the attention

by management and those charged with governance (e.g., the audit committee) to the

disclosures in the financial statements to which reference is made in the auditor’s

report.

3. Comparability

Members of the audit committees will be able to compare well among different firms

and evaluate the audit quality. Comparison of the key audit matters for entities within

similar industries may provide greater industry insight.

4. Communication

It is expected to enhance communications between the auditor and the those charged

with governance, investors, including regulators, as well as communications between

the users and the entity which will improve audit quality as well as the financial

reporting.

5. Quality

This will improve the focus by the auditor on significant areas of the audit, including

going concern, impacting audit quality and the auditor’s professional scepticism.

Furthermore, the quality of financial reporting is expected to improve, as there will be

increased focus on going concern disclosures and the disclosures in the financial

statements to which the auditor’s report refers.


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POSSIBLE ENHANCEMENTS TO THE AUDITOR’S REPORT

1. Applicability to entities

It may be mandatory for statutory audits of financial statements of listed entities, but

voluntarily application may be allowed for entities other than listed entities in Sri Lanka.

2. New section to key audit matters

New section to communicate key audit matters (KAM). KAM are those matters that, in the

auditor’s judgment, were of most significant in the audit of the current period financial

statements related to subject matter.

3. Disclosure of the name of the engagement partner

Name of the engagement partner may require to be stated on the auditor’s report

4. Restructure of the report

Opinion section required to be presented first, followed by the Basis for Opinion section,

unless law or regulation prescribe otherwise

5. Reporting on going concern;

Description of the respective responsibilities of management and the auditor on

going concern.

A separate section when a material uncertainty exists and is adequately disclosed,

under the heading “Material Uncertainty Related to Going Concern”.

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

6. Affirmative statement on independence and ethics

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.


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7. Enhancing the responsibilities of the auditor, management and those charged with

governance

Enhancing the description of the auditor’s responsibilities and key features of an audit and

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.

STRUCTURE OF INDEPENDENT AUDITORS’ REPORT

Based on the circumstances, nature and extend of the key audit matters and uncertainty of

going concern, the format and length of the audit report may be varied. However, list of key

component of new audit report is given below;

1. Report on the Audit of the Financial Statements

2. Opinion

3. Basis for Opinion

4. Material Uncertainty Related to Going Concern (if applicable)

5. Emphasis of Matter (if applicable)

6. Key Audit Matters

7. Other Matters (if any)

8. Other Information (if applicable)

9. Responsibilities of Management for the Financial Statements

10. Auditors’ Responsibilities for the Audit of Financial Statements

11. Report on Other Legal and Regulatory Requirements

12. The Engagement Partner on the Audit [name].

13. Signature, Address and Date

Refer Appendix I for the sample format of new audit report.


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KEY AUDIT MATTERS

The auditor requires to communicate those matters that were of most significance in the

audit of the financial statements, known as key audit matters. The intention is not for the

auditor to provide a comprehensive list, as doing so would diminish the value of the

reporting. The point is to focus on a few key matters, in the context of the entity and the

audit.

As concerns have been raised about the communication of sensitive matters, the auditor

may decide not to communicate a key audit matter where:

In extremely rare circumstances, the adverse consequences of doing so would outweigh

the benefit of public disclosure; or

Laws and regulations preclude public disclosure about the matter.

Matters that require significant auditor’s attention:

Areas of higher assessed risks of material misstatements or significant risks;

Significant auditor judgements relating to areas in the financial statements that included

significant management judgement, including accounting estimates that have been

identified as having high estimation uncertainty;

Significant events or transactions that had a significant effect on the financial

statements or the audit; or

Other matters that required significant auditor attention which may / may not be

disclosed in the financial statements (e.g. the implementation of a new IT system).

Matters of most significance:

Factors the auditor would consider in determining which matters are of most significance:

Significance of interactions between the auditor, management and the audit committee;

The importance of the matter to understanding the financial statements as a whole;

The materiality of the matter;

Corrected and uncorrected misstatements relating to the matter and the nature of those;

Complexities relating to the accounting policy, for example subjectivity in selecting the

accounting policy or difference in the policy compared to industry norms;

The nature and extent of audit effort to address the matter, for example use of experts;

Difficulties in performing audit procedures and obtaining sufficient audit evidence;


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Severe control deficiencies;

Inter-relatedness with other matters, for example long-term contracts which affect

revenue recognition, impairments etc.

Key audit matters:

The auditor’s description of the key audit matters in the auditor’s report must include the

following:

Reference to the related disclosure in the financial statements (if any);

Explanation why the matter was considered to be one of most significance; and

Explanation of how the matter was addressed in the audit.


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CA SRI LANKA PRESIDENT’S VIEW ABOUT NEW AUDIT REPORT

President of CA Sri Lanka state his views about the new audit report and published

Newspaper article (Sunday Times 20th

November 2016) which is abstracted below:


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Appendix I

THE NEW AUDITOR’S REPORT

New audit report may be revised as per the revised ISA 700 (SLAuS -New) -Forming an

Opinion and Reporting on Financial Statements. The draft report is given below;

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of ABC PLC

Report on the Audit of the Consolidated Financial Statements

Opinion

We have audited the consolidated financial statements of ABC PLC and its subsidiaries

(the Group), which comprise the consolidated statement of financial position as at March

31, 201X, and the consolidated statement of comprehensive income, consolidated

statement of changes in equity and consolidated statement of cash flows for the year then

ended, and notes to the consolidated financial statements, including a summary of

significant accounting policies.

In our opinion, the accompanying consolidated financial statements give a true and fair

view of, (or present fairly, in all material respects) the consolidated financial position of

the Group as at March 31, 201X, and (of) its consolidated financial performance and its

consolidated cash flows for the year then ended in accordance with Sri Lanka Accounting

Standards.

Basis for Opinion

We conducted our audit in accordance with Sri Lanka Auditing Standards. Our

responsibilities under those standards are further described in the Auditor’s

Responsibilities for the Audit of the Consolidated Financial Statements section of our

report. We are independent of the Group and we comply with ethical requirements that are

relevant to our audit of the consolidated financial statements. We believe that the audit

evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most

significance in our audit of the consolidated financial statements of the current period.

These matters were addressed in the context of our audit of the consolidated financial

statements as a whole, and in forming our opinion thereon, and we do not provide a

separate opinion on those matters.


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[Description of each key audit matter in accordance with SLAuS 701 (To be newly

introduced]

Other Information

Management is responsible for the other information. The other information comprises the

[information included in the annual report (i.e., a more specific description of the other

information, such as “the management report and chairman’s statement,” may be used to

identify the other information), but does not include the financial statements and our

auditor’s report thereon.]

Our opinion on the financial statements does not cover the other information and we do

not express any form of assurance conclusion thereon. In connection with our audit of the

financial statements, our responsibility is to read the other information and, in doing so,

consider whether the other information is materially inconsistent with the financial

statements or our knowledge obtained in the audit, or otherwise appears to be materially

misstated. If, based on the work we have performed, we conclude that there is a material

misstatement of this other information, we are required to report that fact. We have

nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the

Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated

financial statements in accordance with LKAS/SLFRSs, and for such internal control as

management determines is necessary to enable the preparation of consolidated financial

statements that are free from material misstatement, whether due to fraud or error. In

preparing the consolidated financial statements, management is responsible for assessing

the Group’s ability to continue as a going concern, disclosing, as applicable, matters

related to going concern and using the going concern basis of accounting unless

management either intends to liquidate the Group or to cease operations, or has no realistic

alternative but to do so. Those charged with governance are responsible for overseeing the

Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial

statements as a whole are free from material misstatement, whether due to fraud or error,

and to issue an auditor’s report that includes our opinion.


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Reasonable assurance is a high level of assurance, but is not a guarantee that an audit

conducted in accordance with SLAuS will always detect a material misstatement when it

exists. Misstatements can arise from fraud or error and are considered material if,

individually or in the aggregate, they could reasonably be expected to influence the

economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with SLAuS, we exercise professional judgment and

maintain professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the consolidated financial

statements, whether due to fraud or error, design and perform audit procedures

responsive to those risks, and obtain audit evidence that is sufficient and appropriate to

provide a basis for our opinion. The risk of not detecting a material misstatement

resulting from fraud is higher than for one resulting from error, as fraud may involve

collusion, forgery, intentional omissions, misrepresentations, or the override of internal

control.

Obtain an understanding of internal control relevant to the audit in order to design

audit procedures that are appropriate in the circumstances, but not for the purpose of

expressing an opinion on the effectiveness of the Group’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of

accounting estimates and related disclosures made by management.

Conclude on the appropriateness of management’s use of the going concern basis of

accounting and based on the audit evidence obtained, whether a material uncertainty

exists related to events or conditions that may cast significant doubt on the Group’s

ability to continue as a going concern. If we conclude that a material uncertainty

exists, we are required to draw attention in our auditor’s report to the related

disclosures in the consolidated financial statements or, if such disclosures are

inadequate, to modify our opinion. Our conclusions are based on the audit evidence

obtained up to the date of our auditor’s report. However, future events or conditions

may cause the Group to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the consolidated financial

statements, including the disclosures, and whether the consolidated financial

statements represent the underlying transactions and events in a manner that achieves

fair presentation.


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Obtain sufficient appropriate audit evidence regarding the financial information of the

entities or business activities within the Group to express an opinion on the

consolidated financial statements. We are responsible for the direction, supervision

and performance of the group audit. We remain solely responsible for our audit

opinion.

We communicate with those charged with governance regarding, among other matters, the

planned scope and timing of the audit and significant audit findings, including any

significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied

with relevant ethical requirements regarding independence, and to communicate with them

all relationships and other matters that may reasonably be thought to bear on our

independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those

matters that were of most significance in the audit of the consolidated financial statements

of the current period and are therefore the key audit matters. We describe these matters in

our auditor’s report unless law or regulation precludes public disclosure about the matter

or when, in extremely rare circumstances, we determine that a matter should not be

communicated in our report because the adverse consequences of doing so would

reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

As required by section 163 (2) of the Companies Act No. 07 of 2007, we state the

following:

a) The basis of opinion and scope and limitations of the audit are as stated above

b) In our opinion:

we have obtained all the information and explanations that were required for the audit

and, as far as appears from our examination, proper accounting records have been kept

by the Company,

The financial statements of the Company give a true and fair view of its financial

position as at March 31, 201X, and of its financial performance and cash flows for the

year then ended in accordance with Sri Lanka Accounting Standards.

The financial statements of the Company and the Group comply with the requirements

of sections 151 and 153 of the Companies Act No. 07 of 2007.


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…………………………………

(Name & Signature of the Signing Partner)

CHARTERED ACCOUNTANTS

Colombo

05th

May, 201X

New Auditor's Report in Sri Lanka

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