Audit Reporting: Impact on Audit Practice

This assignment analyzes the impact of revised audit reporting standards on audit practices. It delves into the implications for auditors, including increased documentation requirements, heightened emphasis on independence, and the need for enhanced professional skepticism in identifying and reporting critical audit matters. The goal is to demonstrate how these new standards aim to improve audit quality and transparency for public companies, investors, and shareholders.

Running Head: New Standards on Audit Reporting
CHANGES IN THE AUDIT
REPORTING
REQUIREMENTS

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 The key changes to audit report. With focus on the similarities as well as any
differences between PCAOB and the International Auditing and Assurance
Standards Board (IAASB) auditing reporting requirements.
Public company accounting oversight board is a statutory body which exists for the
regulation of audits of public companies. The board was formed with the objective of
protection of investors and shareholders interest in the company. To achieve the basic
purpose PCAOB ensures that the auditors of public company auditors complies with the strict
set of guidelines issued by it while conducting the audit of entity’s financial statements.
PCAOB has recently adopted audit reporting standard with the aim of increasing the
reporting requirements of the audit reports. The auditors conducting the audits of the public
companies under the regulatory framework of PCAOB are required to communicate the
critical audit matters through their report to the users of audit reports (Gramling, Krishnan &
Zhang, 2011). The concept of critical audit matters (CAMs) has been defined in the new
standards issued by the board. Along with the CAMs the auditors are also required to disclose
the tenure for which they will be providing their professional services in the field of auditing
to the concerned company. Moreover, there are number of changes made to the existing
reporting requirements such as requiring the auditors to add a new phrase in the audit report
‘whether due to frauds and errors’ so as to clarify their duties and responsibilities while
providing the reasonable assurance as to whether financial statements of the company are free
from material statements or not, inclusion of the statement that the auditor is independent,
audit report format standardisation (Kiss, Fülöp & Cordoş, 2015). In order to comply with the

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new auditing standards the auditors are required to identify those audit matters that are
critical enough for the communication, describe the considerations leading the auditor to
identify the matters as CAM, describe how those matters are dealt during audit the report. If
no matter is identified as critical for the reporting purpose then auditor must the same fact in
the auditor’s report (Mock, et al., 2012).
Both the boards are intended to communicate significant and relevant audit matters only from
the current year, which are likely to be of intended user’s interest, through the audit report.
The approaches followed by IAASB and PCAOB are quite similar for improving the quality
of auditor’s report as both the regulatory bodies are aimed to enhance the degree of
transparency of the financial reports presented to the investors and other stakeholders
(Christensen et al., 2016). Both the bodies restricts the reporting of KAM/CAM in case where
disclaimer of information is issued by the auditor. If there exists no KAM or CAM then the
auditors are just required to include a statement of the fact in the audit report according to
both the boards. Further, IAASB and PCAOB provides flexibility to the auditors to enable
them to act as entity wise and audit wise.
IAASB requires the auditors to report the key audit matters in the audit report and defines the
KAM as the matters that are of high significance in the financial statement audit as per the
professional judgement of auditor (Bédard, Gonthier & Schatt, 2014). These matters are
selected from those matters which were communicated to those charged with governance.
However, PCAOB requires the auditors to identify and disclose the critical audit matters.
CAM are defined as those matter which are identified by the auditors while carrying out the
audit engagement and required to be communicated to the company’s audit committee
(Christensen, Glover &Wolfe, 2014). These matters involves highly subjective and complex
judgement of auditors as they relate to the material disclosures to be made in the financial
statements. Moreover, IAASB’s standards requires the auditors to documents those matters

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which required their significant attention. Whereas PCAOB’s standards requires each and
every audit matter that is communicated to the concerned audit committee. PCAOB restricts
the communication of critical audit matters when the auditor of the company expresses
qualified (adverse) opinion on the financial statements of the company. However, IAASB
requires the auditor to report on the key audit matters even in case of adverse opinion
(Simnett & Huggins, 2014).
 Explain the reasons/motivation for the changes and critique whether these changes
are likely to achieve their aims.
The complexities of public companies as well as their audits are increasing in today’s era and
hence the existing audit practices are not sufficient to cope up with the complexities. The
investors in current market demands more information about the company to take the
important decisions relating to company. As the audit report is the only possible means of
communication between the auditors and the investors of the company it has to be made
qualitative and informative (Gunny & Zhang, 2013). The additional requirements in audit
reporting that are brought into the scope are intended to make the audit report more relevant
and easier to understand. Additional information provided through the expanded reports will
assist the investors to know better about the company’s financial performance so that they
can take informed decisions about their investments. With the widened scope of audit
reporting the PCAOB is aiming to sought the greater degree of transparency to be maintained
by the company in preparation and presentation of financial statements.
The changes in the reporting requirements are definitely going to achieve the purposes of
protection of invertor’s and shareholder’s interests in the public companies. As the changes
are introduced to provide additional information to the intended users of the audit reports, it
will ultimately enhance the quality of professional services of the auditors. As the new

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standards are adopted keeping in mind the interests of public companies, their auditors,
investors and shareholders they will positively achieve their core purposes.
 Outline the likely impact of the audit reporting on audit practice.
The new reporting requirements will require the auditors to apply additional procedures to
identify the material and significant matters that requires reader’s attention. The additional
reporting needs will increase the documentation requirements on part of auditors of the
company to document the key and critical matters. The principle of auditor’s independence
will gain more importance as the fact that auditor is independent is to be stated in the
auditor’s report as per the new reporting requirements. Moreover, the auditors will have to
apply their professional scepticism and professional judgment in more comprehensive way
whenever they identify the critical matters to be reported. The overall quality of audit and
audit report will therefore be improved with the adaptation of new standards.

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References
Bédard, J., Gonthier-Besacier, N. and Schatt, A., 2014. Costs and benefits of reporting Key
Audit Matters in the audit report: The French experience. In International Symposium on
Audit Research. Available at: http://documents. escdijon.
eu/pdf/cig2014/ACTESDUCOLLOQUE/BEDARD_GONTHIER_BESACIER_SCHATT. pdf.
Christensen, B.E., Glover, S.M. and Wolfe, C.J., 2014. Do critical audit matter paragraphs in
the audit report change nonprofessional investors' decision to invest?. Auditing: A Journal of
Practice & Theory, 33(4), pp.71-93.
Christensen, B.E., Glover, S.M., Omer, T.C. and Shelley, M.K., 2016. Understanding audit
quality: Insights from audit professionals and investors. Contemporary Accounting
Research, 33(4), pp.1648-1684.
Gramling, A.A., Krishnan, J. and Zhang, Y., 2011. Are PCAOB-identified audit deficiencies
associated with a change in reporting decisions of triennially inspected audit
firms?. Auditing: A Journal of Practice & Theory, 30(3), pp.59-79.
Gunny, K.A. and Zhang, T.C., 2013. PCAOB inspection reports and audit quality. Journal of
Accounting and Public Policy, 32(2), pp.136-160.
KISS, C., FÜLÖP, M.T. and CORDOŞ, G.S., 2015. Relevant Aspects Regarding the Changes
of the Statutory Audit Report in the Light of International Regulations. Audit
Financiar, 13(126).
Mock, T.J., Bédard, J., Coram, P.J., Davis, S.M., Espahbodi, R. and Warne, R.C., 2012. The
audit reporting model: Current research synthesis and implications. Auditing: A Journal of
Practice & Theory, 32(sp1), pp.323-351.

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Simnett, R. and Huggins, A., 2014. Enhancing the auditor's report: to what extent is there
support for the IAASB's proposed changes?. Accounting Horizons, 28(4), pp.719-747.