Auditor’s report revamped from 2016 financial year

By Szabolcs Szeles, Audit Partner of HLB Hungary

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Few people among the general public probably know that the relatively uniform and standard auditor’s report has been renewed for audits relating to financial periods ending on or after 15 December 2016. The change comes on the back of EU recommendations and regulations, which are aimed at making the auditor’s report more understandable as well as increasing the clarity and independence of auditing as a service.

 

Why was it necessary to introduce a new type of auditor’s report?

The requirement for the auditor’s report to have more content and a changed structure in future came about primarily following the scandals that hit the auditing industry and due to the differing expectations of users of financial statements.

 

What was the result of the audit reform?

A directly applicable EU regulation entered into force in 2016 for public-interest entities. The main elements are the rotation of auditors every 8 years, the prohibition o non-audit services, restrictions on the fees for such services, the upper limit on audit fees from one client, and the new component of the auditor’s report, “key audit matters”.

 

How much has the auditor’s report changed?

In terms of structure, the report has been turned upside down. The “opinion” section with probably the most important judgement on whether the financial statements give a true and fair view has been moved from the end of the report to the first paragraph. This is to emphasise the main information. The “opinion” section is followed by a new part, “basis of opinion”, which outlines the ethical rules and the standards underlying the procedures carried out to express the “opinion”.

The report still contains disclosures regarding the responsibility of management and the auditor, but goes into much more detail so that readers of the auditor’s report get a better understanding of what they can expect from the audit.

The following aspects are presented much more emphatically:

• The declaration of independence in the report.

• Management’s responsibility with regard to the entity as a going concern. Here, the management is responsible for assessing the entity’s ability to continue as a going concern and for the accuracy of related disclosures.

• The auditor’s responsibility in relation to the entity as a going concern is mainly limited to collecting information about pertinent management assessments and assumptions, conducting related audit procedures, and gaining assurance that the disclosures are appropriate. The auditor’s report is then prepared on this basis.

• Statement that the risk of identifying fraud is high.

The “key audit matters” paragraph covers the audit areas deemed most significant, the audit procedures carried out in this context, and a presentation of the conclusions. This is mandatory for audits of public-interest entities, and optional for everyone else.

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