NZAuASB Update 7/2020

FMA and External Reporting Board release joint review of key audit matters reporting

The Financial Markets Authority (FMA) and External Reporting Board (XRB) have released their second joint review of key audit matters, after audit reporting standards were lifted three years ago.

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Key audit matters (KAMs) are issues that, in the auditor’s view, were of most significance to the audit of a company’s financial statements. For example, a company’s valuation of goodwill or its revenue recognition. KAMs are intended to provide transparency and give users of the financial statements a better understanding of how the audit was conducted and complexities that arose.

In December 2016 new standards for auditors were introduced, requiring them to extend the auditor’s report to include KAMs^[1].

The FMA and XRB report — Enhanced auditor reporting: A review of the third year of the revised auditor’s report — is a follow-up review of the trends and changes in KAMs reporting in the three years since the new standards were introduced. The review analyses KAMs reported in 2019 audit reports and was conducted prior to COVID-19.

A large sample of audit reports were analysed to determine what changes, if any, have been made since the first joint review released in 2017. Trends by sector were analysed for banking and finance, and insurance, as well as common KAMs reported within other sectors. Investors and analysts were also interviewed to share their views.

FMA Chief Executive, Rob Everett, said the report is a timely reminder that the reporting of KAMs in the current environment should provide useful insights into how auditors see the impact of COVID-19 on businesses.

“Auditing during COVID-19 will be challenging for auditors but we encourage them to see the crisis as an opportunity to illustrate the value of the new standards. They should look for opportunities to describe the risks in the current environment and how these were addressed with the appropriate audit procedure. The role of an auditor is to provide an independent view on the financial statements so investors will be keenly interested in what auditors see as matters of significance at this time.”

XRB Chief Executive, April Mackenzie, said the new standards were intended to enhance the communicative value of the auditor’s report. She said this will serve the market well through the COVID-19 reporting season if auditors use the KAM to clearly highlight the key areas of most significance to investors.

“We have been actively monitoring the implementation of the new standards and were pleased to hear investors say that they have found KAMs to be a useful addition. We are encouraging auditors to think about ways they can innovate their reports and make them more informative and accessible to investors, especially during these uncertain times.”