In an interview, Philipp Hallauer talks about the new audit report format and explains what it means to auditing.
We’re bidding farewell to the standard wording of an audit report and are providing information on the focus areas of our audit for the first time. So the reader finds out which elements of the annual financial statements are at increased risk of misstatement. These might be items in the balance sheet or income statement that come up every year. Alternatively, though, they could be specific transactions of a certain complexity that require judgement to be exercised concerning how to recognize and measure them for financial reporting purposes.
Every industry has its own distinguishing features. In heavily regulated ones such as pharmaceuticals or finance, regulatory risks and the provisions that need to be set aside to cover them are likely to be an issue. The plant engineering sector, meanwhile, faces the challenge of applying the percentage of completion method required under IFRS and US GAAP for valuing large-scale medium- to long-term projects based on the progress made on them. However, there are also some matters that apply to all industries, such as testing the recoverability of goodwill, determining the fair value of non-marketable financial instruments and assessing off-balance sheet transactions or other complex transactions like takeovers or joint ventures.
The reader’s eyes are drawn more readily to the critical elements, risks and discretionary powers relating to the annual financial statements. In that respect, the Key Audit Matters could serve as an introduction to a more focused analysis of the financial statements. They will also foster more in-depth discussions of these issues between the auditor and the audit committee or the board of directors, as appropriate. This might also promote the disclosure of additional relevant information in the notes.
There will still be impairment losses, going concern problems or instances of fraud that result in special or non-recurring effects in the annual financial statements, which the auditor did not or would have been unable to detect in the previous year. Although the new report explicitly does not guarantee that a properly conducted audit will detect a possibly material misstatement, whether due to fraud or error, the detailed reporting on the key issues of the audit will leave the auditor much more exposed if irregularities later emerge and a company gets into difficulties. After all, it must be remembered that the auditor only issues a statement on the financial statements taken as a whole, rather than on each of the individual Key Audit Matters.
A further challenge lies in describing what are sometimes highly complex matters concisely and in a way the reader will understand. Ultimately, only the auditor and the board of directors are able to have a comprehensive discussion of these key issues.
Our work as auditors serves the public interest. We used to have limited options as regards giving the recipients of our reports an insight into our auditing and explaining our thoughts on material aspects of a specific audit. Now anyone reading our audit report will get an idea of what was really important when auditing a specific set of financial statements. The readers will learn more about the challenges facing the auditors in their work. In other words, auditing is becoming more relevant and attractive.
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