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Assurance on Sustainability Reporting

The IAASB is developing a new overarching standard for assurance on sustainability reporting. Proposed International Standard on Sustainability Assurance^TM ISSA 5000, General Requirements for Sustainability Assurance Engagements (ISSA 5000). A project proposal to develop the new standard was approved in September 2022. The IAASB discussed this project in its March, June, September and December meetings in 2022. Among the key matters discussed to date are:

• The scope of the standard, and how it fits within the structure of the IAASB’s standards: The standard will be stand-alone from ISAE 3000 (Revised), Assurance Engagements Other Than Audits or Reviews of Historical Financial Information. It will be principles-based so that it is suitable across all sustainability topics, information disclosed about those topics, and reporting frameworks, and will address both limited and reasonable assurance.
• Key areas that need to be considered in developing the standard: The standard will address the conduct of an assurance engagement in its entirety. However, the IAASB intends to pay particular attention to six priority areas.
• The structure of the proposed new overarching standard: The IAASB plans to develop a single standard, comprising various parts that follow the flow of the engagement.
• Definitions: Development will include adapting definitions from existing IAASB terminology to sustainability assurance engagements.
• The approach to drafting the new standard: The standard will be developed using material adapted from existing IAASB standards and guidance, including ISAE 3000 (Revised), ISAE 3410, Assurance Engagements on Greenhouse Gas Statements, and the IAASB’s non-authoritative guidance on sustainability and other extended external reporting assurance engagements. Certain ISAs will also be considered, to the extent the material is relevant to sustainability assurance engagements, is appropriate for an overarching standard, and is at an appropriate degree of specificity.
• The draft requirements and application material for certain parts of proposed ISSA 5000: The parts discussed to date include acceptance and continuance, evidence and documentation, planning, risk identification and assessment and evaluating misstatements.

The next discussion will be at the March 2023 IAASB meeting. The IAASB will discuss the requirements and application material for additional parts of the standard not presented in December 2022, and further proposals on key issues arising from the December 2022 discussion.

Fraud

The IAASB is revising ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. The IAASB approved a project proposal to develop the new standard in December 2021. Since the approval of the project proposal, the IAASB discussed this project at its March, June, September, and December meetings in 2022. Among the key matters discussed to date are:

• The role and responsibilities of the auditor for fraud in an audit of financial statements. Changes are being proposed to emphasize and clarify the auditor’s responsibilities, and reduce the ambiguity between the inherent limitations of an audit, and the auditor’s responsibilities.
• Identifying and assessing risks of material misstatement due to fraud. The IAASB has proposed revisions to enhance and clarify requirements and application material to incorporate changes as a result of ISA 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement.
• The overall approach when fraud or suspected fraud is identified by the auditor.
• Transparency of fraud-related matters in the auditor’s report. The IAASB agreed that additional disclosures on fraud should be included in the auditor’s report of listed entities, and clearly signposted such that the users of the financial statements are able to find matters relating to fraud. It has been proposed that a filter, similar to that used for key audit matters in ISA 701, Key Audit Matters, is used for determining the risks of material misstatement due to fraud to be communicated.
• Enhancements in relation to communications with those charged with governance, the need for specialized skills, the presumed risk of fraud in revenue recognition, and journal entry testing.

The next discussion is in June 2023, when the IAASB will discuss an (almost complete) draft of proposed ISA 240 (Revised), The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. The IAASB is working towards approval of the exposure draft in December 2023.

Concurrently with revisions to ISA 240, in May 2022, the IAASB released non-authoritative guidance that illustrates the relationship between ISA 240 and other ISAs when planning and performing an audit engagement and reporting thereon.

Going Concern

In March 2022, the IAASB approved a project proposal to develop targeted revisions to ISA 570 (Revised), Going Concern. The IAASB discussed this project in its June, September, and December meetings in 2022. Key matters discussed to date include:

• Defining the term “material uncertainty” (related to going concern) and providing clarity for other terminology used in the standard (e.g., for “significant doubt”).
• Changes to the period of the auditor’s evaluation of management’s assessment of going concern to at least twelve months from the date the financial statements are approved.
• Strengthening requirements that:
• Drive the auditor to obtain information that is relevant to the timely identification of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern; and
• Require a more robust evaluation of management’s assessment of going concern, including evaluating the method, assumptions and data used by management.
• New requirements for the auditor to evaluate the intent and ability of a third or related party, including the entity’s owner-manager, when financial support by such parties is necessary to support management’s assessment of going concern.
• Enhancing requirements and application material to enable a more robust exercise of professional skepticism when performing procedures related to going concern.
• Scalability, which may be addressed by providing examples that demonstrate how the nature and extent of the auditor's procedures may vary based on the nature and circumstances of the entity and considerations specific to public sector entities.
• Emphasizing how information from sources external to the entity can be leveraged in the auditor’s work related to going concern and modernizing the standard for the impact of technology on the auditor’s work related to going concern.
• Strengthening the requirements for communication with those charged with governance and including new requirements for communication with appropriate external parties.
• Enhancing transparency to intended users for matters related to going concern in the auditor’s report, including:
• Providing explicit statements about going concern in all instances (i.e., for audits of all entities); and
• For audits of listed entities, describing how the auditor evaluated management’s assessment of the entity’s ability to continue as a going concern.

The next discussion will be at the March 2023 IAASB meeting, where it is anticipated the IAASB will vote to approve the exposure draft for the revision of ISA 570 (Revised), Going Concern.

Audits of Financial Statements of Less Complex Entities

The IAASB is developing a separate standard for audits of financial statements of less complex entities (LCEs). The Exposure Draft (ED-ISA for LCE) was published in July 2022, and the public consultation ended January 31, 2022.

Since the public consultation, the IAASB has been considering feedback from respondents in progressing the finalization of this standard. The IAASB discussed this project in its June, September, and December meetings in 2022. Among the key matters discussed are:

• Group audits: In the ED-ISA for LCE, group audits were excluded from the scope. Based on feedback, the IAASB explored including requirements for less complex group audits in a new part, Part 10, Audits of Group Financial Statements. The IAASB approved an exposure draft for Part 10 in December 2022, which will be published in January 2023 with a 90-day comment period.
• Part A, Authority of the proposed standard: Respondents to the ED-ISA for LCE expressed concerns that the proposed Authority involved too much judgment and may, therefore, lead to inconsistent or inappropriate use of the standard. To clarify the scope, the IAASB agreed to enhance the description of the qualitative characteristics and include an expectation for jurisdictions to determine quantitative thresholds.
• The approach to proportionate requirements for LCEs: Respondents to the ED-ISA for LCE encouraged the IAASB to further consider how the requirements reflect the principles of scalability and proportionality appropriate to the typical nature and circumstances of LCEs. In response, the IAASB has discussed revisions to Part 6, Risk Identification and Assessment.

The next discussion will be at the March 2023 IAASB meeting. The IAASB will discuss proposed changes to various areas where more significant revisions may be needed (e.g., engagement and firm-level quality management, accounting estimates, and documentation). The IAASB intends to discuss the revised draft of the full proposed standard (excluding Part 10, Group Audits) in June 2023, and is anticipating final approval of the standard in December 2023. 

Listed Entities and Public Interest Entities (PIEs)

The IAASB is considering narrow-scope revisions to the ISAs and International Standards on Quality Management (ISQMs), to respond to recent revisions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code) regarding listed entities and PIEs. The project has two tracks:

• Track 1: A fast-moving track focused on enhancing transparency about independence in the auditor’s report.
• Track 2: Exploring revisions to the ISAs and ISQMs regarding the differential requirements for listed entities and the definition of listed entities, including whether the differential requirements should apply to PIEs. 

Track 1

At its June 2022 meeting, the IAASB unanimously approved an Exposure Draft (ED) for proposed narrow-scope amendments to:

• ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements; and
• ISA 260 (Revised), Communication with Those Charged with Governance.

The proposed revisions to these ISAs is in response to revisions to the IESBA Code that require a firm to publicly disclose when a firm has applied the independence requirements for PIEs. 

The 90-day public comment period for the ED closed in October 2022. In March 2023, the IAASB will discuss respondents’ feedback from the public consultation and the proposed way forward. Final approval is planned for June 2023.

Track 2

In December 2022, the IAASB discussed proposals related to Track 2, including:

• Adopting the objective in paragraph 400.8 of the IESBA Code, which supports the purpose for establishing differential requirements for PIEs.
• Extending the differential requirements in the ISQMs and ISAs for listed entities to apply to PIEs. The IAASB agreed to propose extending the differential requirements, with the exception of those in ISA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information.
• Adopting the IESBA definitions of PIE and “publicly traded entity” in the ISQMs and ISAs.
• Incorporating a central list of factors and examples in ISQM 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements or Other Assurance or Related Services Engagements, and ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing. The factors and examples would be:
• Used to guide a firm or auditor in determining whether it is appropriate to apply differential requirements applicable to PIEs to entities other than PIEs.
• Relevant to all differential requirements across the ISQMs and ISAs, to support consistency in application and judgment.

The IAASB has deferred further discussions on this project until June 2024 to enable the completion of other projects that had to be prioritized at this time, including the balancing of various needs and demands in the environment.  

Audit Evidence

The IAASB is revising ISA 500, Audit Evidence. Proposed changes to ISA 500 were issued for public comment in October 2022, with feedback requested by April 24, 2023.

The proposed changes include:

• Clarifying the purpose and scope of the standard, and explaining its relationship with other standards. This includes clarifying that ISA 500 is a “reference framework” for auditors when making judgments about audit evidence throughout the audit.
• An enhanced principles-based approach to considering the relevance and reliability of information intended to be used as audit evidence, given the variety of information available to an auditor, and the various sources of such information.
• Clarification of the notion of sufficient appropriate audit evidence and evaluating whether sufficient appropriate audit evidence has been obtained.
• Modernizing the standard to be adaptable to the current business and audit environment, including recognizing the increasing use of technology by the entity and the auditor.
• More emphasis on exercising professional skepticism.