Auditor Reporting FAQs

  • Auditing

Enhanced auditor reporting requirements came into mandatory effect for audits of financial statements for periods ending on or after 15 December 2016. 

The changes impact all auditors’ reports for audits conducted in accordance with the International Standards on Auditing (New Zealand) (ISAs (NZ)).  

Listed issuer auditors’ reports have additional requirements effective for the December 2016 reporting season, with delayed mandatory application for auditor’s reports of all other FMC reporting entities considered to have a higher level of public accountability by 2018.

These Frequently Asked Questions (FAQs) prepared by the NZAuASB are intended to assist auditors, directors, audit committee members, chief financial officers and other stakeholders in understanding the enhanced auditor reporting requirements in New Zealand.  These FAQs do not create new, amend or override the requirements of the International Standards on Auditing (New Zealand).


* Acknowledgement: 

Some information in these FAQs has been drawn from the Frequently Asked Questions prepared by the Australian Auditing and Assurance Standards Board, and from the Frequently Asked Questions prepared by the International Auditing and Assurance Standards Board.

These changes are being made to ensure that the auditing standards that apply in New Zealand are consistent with the International Standards on Auditing. The intended benefits of these changes are to:

  • increase the communicative value of the auditor’s report;
  • enhance communication between the auditors, management and those charged with governance;
  • improve disclosures in the financial statements;
  • enhance audit quality.

Similar changes have been in effect in other jurisdictions, for example the United Kingdom, for a few years and have been very well received.

Every auditor’s report will change in order to:

  • enhance its communicative value;
  • give prominence to the most important matters by re-ordering the content;
  • enhance reporting on going concern matters (if applicable);
  • provide enhanced descriptions of the respective responsibilities of those charged with governance and the auditor, in relation to going concern;
  • provide an affirmative statement on auditor’s independence and fulfilment of relevant ethical responsibilities;
  • provide more information to users on the auditor’s responsibilities, and the key features of an audit.  There is additional flexibility as to where this information is positioned;
  • provide greater clarity around the auditor’s responsibilities in respect to – and the status of their consideration of – the other information that is included in an entity’s annual report (if applicable).

For some auditors’ reports, there are additional new requirements to:

  • communicate matters of most significance to the audit (Key Audit Matters) of the current period and how the auditor addressed these;
  • provide details of other information the auditor has received at the date of the auditor’s report, and is expected to receive after the date of the auditor’s report;
  • provide the name of the engagement partner.

Details of who these additional requirements apply to and when they become effective are explored in more detail under the question 'Do the changes apply to all auditor’s reports?'.

An FMC reporting entity considered to have a higher level of public accountability is defined as:

  • an FMC reporting entity or a class of FMC reporting entity that is considered to have a higher level of public accountability than other FMC reporting entities:

Types of FMC reporting entities considered to have a higher level of public accountability include:

and other FMC reporting entities considered to have a higher level of public accountability including unlisted:

  • equity issuers who make a regulated offer (and have more than 50 shareholders);
  • debt issuers who make a regulated offer;
  • licensed derivative issuers;
  • licensed Managed Investments Scheme (MIS) managers (for the financial statements of the MIS they manage);
  • recipients of money from a conduit issuer;
  • registered banks;
  • licensed insurers;
  • credit unions;
  • building societies;
  • any other entity designated by the FMA as having a higher level of public accountability.

Information on FMC designations is available on the FMA website.

A listed issuer is defined in the transitional provisions of ISA (NZ) 700 (Revised) as 

a person that is party to a listing agreement with a licensed market operator in relation to a licensed market (and includes a licensed market operator that has financial products quoted on its own licensed market) (as defined in the Financial Markets Conduct Act 2013 section 6(1)).

The term listed issuer is used in New Zealand instead of listed entity.  The International Standards on Auditing define a listed entity as 

an entity whose shares, stock or debt are quoted or listed on a recognised stock exchange, or are marketed under the regulation of a recognised stock exchange or equivalent body.

A recognised stock exchange includes those in New Zealand (including the NZX) or in another jurisdiction.

If an entity is delisted during the year, the entity is not considered a listed entity for the purposes of the auditor reporting requirements.

All auditors’ reports prepared in accordance with the ISAs (NZ) will change. Some changes however, apply only to FMC reporting entities considered to have a higher level of public accountability. In addition, the mandatory application date of the additional reporting requirements for FMC reporting entities considered to have a higher level of public accountability is determined by whether the entity is a listed issuer or not. Below is a summary of the changes by type of entity (showing the effective date and the transitional period). All changes are effective for the December 2016 reporting season going forward unless indicated otherwise. The question 'What standards are affected?' provides details of the changes. 

Summary of changes applicable to

Listed issuers

Other FMC reporting entities considered to have a higher level of public accountability

All other entities

Order of paragraphs including prominent placement of audit opinion first followed by the basis of opinion

Key Audit Matters (KAMs)


mandatory from December 2016


mandatory from December 2018. Voluntary early adoption.

Optional

Other information section included in the auditor’s report

(additional reporting regardless of whether the other information has been received by the date of the auditor’s report) (additional reporting regardless of whether the other information has been received by the date of the auditor’s report)

Only if the auditor has received some other information at the date of the auditor’s report

Increased description of the responsibilities of those charged with governance (including going concern)

Increased description of the auditor’s responsibilities with optional placement in the body of the report, in an appendix to the report or by reference to the XRB website


(additional reporting requirements when compared to other entities)


(additional reporting requirements when compared to other entities)

Statement of existence of any relationship that the auditor has with, or interests the auditor has in, the entity or any of its subsidiaries

Statement that the auditor is independent in accordance with Professional and Ethical Standard 1 (Revised)

Going concern (if applicable)

Name of engagement partner

Not required

 

Changes are also required for auditor’s reports:

  • of financial statements prepared in accordance with special purpose frameworks;
  • of single financial statements and specific elements, accounts or items of a financial statement;
  • of summary financial statements;
  • to regulators if the audit is conducted in accordance with the ISAs (NZ).

The changes do not relate to reporting when performing review engagements or other assurance engagements (i.e., assurance engagements other than audits or reviews of historical financial information).

There are early adopters of the revised requirements in New Zealand and internationally.  There are illustrative examples in ISA (NZ) 700 (Revised) that illustrate the mandatory requirements for different entities.  The IAASB has also prepared Illustrative Key Audit Matters to illustrate how the concept of KAM may be applied.

The changes also apply to auditors’ reports of registered charities.  The NZAuASB has illustrated the application of the revised requirements for tier 3 not-for-profit public benefit entities in supplementary illustrative reports in EG Au9.1.  These auditors’ reports illustrate the new reporting requirements where service performance information is within the scope of the audit.

These changes arise as a result of the issue of:

The following additional standards have been revised to align with the revised reporting requirements:


In addition there were conforming amendments to almost all of the rest of the ISAs (NZ).  For this reason, there are now multiple versions of almost all of the ISAs (NZ) available on the XRB website.  If you are conducting an audit of financial statements with a reporting period ending on or after 15 December 2016, the revised standards and the remaining compiled ISAs (NZ) with an effective date from December 2016 are the applicable auditing standards to apply.  The previous versions of the ISAs (NZ) will be archived at an appropriate date.

The format of the new auditor’s report includes prominent placement of the audit opinion first followed by the basis of opinion paragraph. There is flexibility in the order of the remaining sections of the auditor’s report. The ISAs (NZ) provide guidance on the order with the overall principle being to give prominence to the matters of most importance.  The order of content in ISA (NZ) 700 (Revised) Forming an Opinion and Reporting on Financial Statements and the illustrative auditor’s reports are structured to achieve this, and it is advisable that this order is followed.  Refer to the question 'When are the changes effective?' for further details.

Auditor’s opinion

The first section of the auditor’s report is required to include the auditor’s opinion and shall have the heading “Opinion”.  The auditor may identify the page numbers on which the audited financial statements are presented, but is not required to do so.

The ISAs (NZ) require that the auditor identify the applicable financial reporting framework.  Where the applicable financial reporting framework is not IFRS or IPSAS, the auditor is required to identify the jurisdiction of origin.  E.g., “in accordance with Public Benefit Entity Standards issued by the New Zealand Accounting Standards Board.”

The audit opinion must identify the applicable financial reporting requirements, and the form of opinion will differ depending on whether the framework is a fair presentation framework or a compliance framework.

Key Audit Matters (KAMs)

  • Auditors of listed issuers, and from December 2018 all other FMC reporting entities considered to have a higher level of public accountability, will include information in respect of those matters which in their judgement, were of most significance in the audit of the financial statements in the current year.
  • Auditors of other entities can elect to include KAMs but are not required to do so.

Refer to the Key Audit Matters section.

Other information

More detail is provided on the directors’ and auditor’s responsibilities in respect to other information, and on the status of the auditor’s consideration of other information, at the date of the auditor’s report. Other information is financial and non-financial information included in the annual report (excluding the financial statements and auditor’s report thereon). This is included in the auditor’s report under a heading ‘Other Information’ or other appropriate heading.  The reporting requirements differ according to the type of entity and what information has been received at the date of the auditor’s report.

Refer to the Other Information section.

Responsibilities of those charged with governance

The auditor’s report includes a section with a heading “Responsibilities of those charged with governance”. The report must use the term that is appropriate in the context of the legal framework for the entity. The appropriate reference is usually to those charged with governance, but in some circumstances, may be to management.

In New Zealand, the statutory (and direct legal) responsibility for ensuring financial statements are prepared has shifted from the directors to the company or FMC reporting entity. The directors (or those charged with governance) continue to have responsibility (albeit not as a matter of express legal duty relating to the approval of financial statements) for ensuring that compliant financial statements are prepared in respect of an entity. The illustrative auditors’ reports have been amended to clarify the statements in respect of responsibilities, following the legislative change, by adding the words “on behalf of the entity”. While it is not the role of the auditing standards or the auditor’s report to explain the legal responsibilities of those charged with governance in New Zealand, such clarification reduces the risk that users of the report may imply that those charged with governance are under a legal duty to prepare financial statements. Further explanation for the clarifications made can be found in the Explanations for Decisions made.

There are additional details on the responsibility of those charged with governance for assessing whether the use of the going concern basis of accounting is appropriate, and whether any relevant disclosures are adequate. These responsibilities are not new, but are now described in the auditor’s report.

Auditor’s responsibilities

The auditor’s responsibilities section has been expanded to provide more information about the key features of an audit.

This section is no longer ‘boiler plate’ across all audits and is amended depending on whether:

  • the entity is a single entity or a group;
  • the entity is a FMC reporting entity considered to have a higher level of public accountability or not;
  • the auditor is communicating KAMs;
  • the entity uses a fair presentation or compliance framework to prepare the financial statements;
  • the audit is a group audit;
  • the auditor is issuing a qualified opinion.

New options are now available to present parts of the auditor’s responsibility section:

  • within the body of the auditor’s report (as is current practice);
  • within an appendix to the auditor’s report with a reference in the auditor’s report to the appendix;
  • with reference to the XRB website by including a reference to the Auditor’s Report page.

Should the auditor use the option to refer to the XRB website rather than include the description within the auditor’s report, the auditor’s report should refer to the correct webpage, as there are several options (currently 8) describing the auditor’s responsibilities which differ depending on the engagement circumstances, determined by whether the report is in respect of a FMC reporting entity considered to have a higher level of public accountability, whether KAM is reported, whether it is an audit of a group or a single entity, etc.

The XRB website is the only website in New Zealand to which reference can be made.

At this stage, if the audit covers both financial information and the service performance information, there is no option to refer to the XRB website.

Going concern

There is an expanded description of the responsibilities of those charged with governance and the auditor in relation to going concern which is mandatory for all auditor’s reports. These responsibilities are not new, but are now included for the first time in the auditor’s report.

If there are events or conditions that cast significant doubt on an entity’s ability to continue as a going concern, there are changes to the way this is reported:

  • If the auditor concludes that a material uncertainty exists and disclosure within the financial statements is adequate, the auditor expresses an unmodified opinion and the auditor’s report includes a separate section headed ‘Material Uncertainty Related to Going Concern’ instead of the previous ‘Emphasis of Matter’ paragraph. Where the auditor is reporting KAM, while such a material uncertainty is by its nature a KAM, it is not described in the KAM section.
  • If the auditor concludes a material uncertainty does not exist and there is adequate disclosure in the financial statements, in the case where the auditor is reporting KAM, this is likely to be reported as a KAM as it is likely that it was a matter of most significance to the audit. This is often referred to as a ‘close call’ situation. If the auditor is not communicating KAMs, the matter is not reported in the auditor’s report.

Refer to the question 'What has changed in relation to ‘Going Concern’?' for further details on going concern.

The changes are effective for financial reporting periods ending on or after 15 December 2016. E.g., auditors’ reports for entities with a 31 December 2016 year end are required to comply with the new requirements. A number of auditors have elected to report under the new requirements early.

In New Zealand, the requirement to report KAM applies to auditors’ reports for all FMC reporting entities considered to have a higher level of public accountability. There is however a transitional provision that defers the mandatory reporting of KAM for FMC reporting entities considered to have a higher level of public accountability that are not listed issuers until December 2018.

The auditor’s opinion and the basis for opinion paragraphs must be presented first.

There is flexibility in the order of the remaining sections of the auditor’s report, however the intention is that sections are presented in order of importance to the users of the financial statements. The order of content and the illustrative auditors’ reports contained in ISA (NZ) 700 (Revised), are structured to achieve this.  Other ISAs (NZ) provide guidance on the order of the sections as follows:

  • if an Emphasis of Matter paragraph on an alternative basis of accounting is required, it may be appropriate to include immediately following the ‘Basis of Opinion’ section to provide appropriate context to the auditor’s opinion 
  • placing the KAM section close to the auditor’s opinion may give prominence to such information.

The order of the presentation of individual KAMs is a matter of professional judgement.  It is however, advisable that the KAMs are ordered in a logical manner, for example in order of importance, or that KAMs which are inter-related are placed close together.

The following paragraph headings are stipulated by the ISAs (NZ):

  • Opinion
  • Basis for Opinion
  • Material Uncertainty Related to Going Concern
  • Key Audit Matters
  • Responsibilities of Those Charged with Governance for the Financial Statements
  • Auditor’s Responsibilities for the Audit of the Financial Statements

The ISAs (NZ) do not prohibit the auditor from reporting additional information in the auditor’s report.  ‘Emphasis of Matter’ paragraphs may be used to communicate matters that the auditor determines are important to users’ understanding of the financial statements, and ‘Other Matter’ paragraphs may be used to communicate matters which the auditor determines are important to users understanding of the audit.  These may still be used and provide flexibility to the auditor to report any relevant matters, however, if ISA (NZ) 701 applies, matters that are determined to be KAMs are reported as KAMs, not as an Emphasis of Matter or Other Matter.

The International Standards on Auditing (United Kingdom) require the auditor to report on materiality in all auditor’s reports of listed entities, and group scoping where applicable. These matters are not required by the International Standards on Auditing or the ISAs (NZ) however, some auditors in New Zealand and other countries are voluntarily reporting these.

Auditors of entities that are not FMC reporting entities considered to have a higher level of public accountability may voluntarily communicate KAMs, but must fully comply with ISA (NZ) 701 Communicating Key Audit Matters in the Independent Auditor’s Report.

The ISAs (NZ) will now require the engagement partner’s name to be included in the auditor’s report for all FMC reporting entities considered to have a higher level of public accountability.

The International Standards on Auditing require the auditor’s name to be included in the auditor’s report of listed entities only.

The ISAs (NZ) adopt and have been revised to incorporate the revisions to the International Standards on Auditing (ISAs).  Very few compelling reason amendments have been made to ISAs (NZ).  Any differences to the international standards are summarised at the back of each ISA (NZ).  Of the few changes made, none of the changes:

  • conflict with the international requirements;
  • would lead the auditor to form a different opinion or not include an EOM or OM as required by the ISAs;

In addition, the ISAs (NZ) include all of the elements required by ISA 700 (Revised).

The ISAs (NZ) require that the auditor’s report identify that the audit was conducted in accordance with the ISAs (NZ). 

The auditor may wish to, and is permitted but not required by the ISAs and the ISAs (NZ) to, refer to both the ISAs and the ISAs (NZ).

KAMs are those matters that in the auditor’s professional judgement were of most significance to the audit of the financial statements of the current period.

The overall objective of communicating KAMs is to provide insight to the users of the financial statements as to the most significant and/or challenging aspects of the audit for the current period.

KAMs are selected from matters communicated with those charged with governance.

KAMs are likely to be the matters that:

  • require significant auditor attention;
  • are of higher risk of material misstatement or have been identified as significant risks;
  • are complex and/or require significant auditor judgement relating to areas that involve significant management judgement, including critical accounting estimates that have been identified as having high estimation uncertainty, and related disclosures;
  • are the effect of significant events or transactions;
  • may have involved specialists or experts (management’s or the auditor’s);
  • posed challenges to obtain sufficient appropriate audit evidence.

The final identification of KAMs occurs at the end of the audit. It is advisable to make an initial determination during the planning stages of the audit and to start discussions with those charged with governance early to avoid surprises. Refer to the question 'When should an auditor discuss KAMs with those charged with governance?'.

ISA (NZ) 701 explains that areas of significant management judgement and significant unusual transactions may often be identified as significant risks and significant risks are often areas that require significant auditor attention.

However it is not intended that all significant risks or all matters communicated to those charged with governance will be KAMs. E.g., the ISAs (NZ) stipulate that the risk of management override of controls and the risk of fraud in the recognition of revenue are significant risks. It is however not intended that these are KAMs unless the auditor determines that they are of most significance to the audit.

A KAM may be a matter relevant to the audit that is not required to be disclosed in the financial statements under accounting standards or the applicable regulatory or legal framework. E.g., the implementation of a new IT system may have required significant audit attention and the auditor may identify this as a KAM. If a matter giving rise to a KAM has not been disclosed in the financial statements but is publicly available information, the auditor may make reference to the publicly available information if it is considered appropriate and helpful to users, noting that this information has not been audited.

There is no specific guidance on how many KAMs should be communicated. ‘Early adopter’ reports issued to date in New Zealand, contained between 1 and 5 KAMs with an average of around 3 KAMs. Other matters that may impact the number of KAMs communicated are the nature of an entity’s business and environment. The intention however, is to communicate the areas of most significance in the audit and a long list of matters may detract from this.

Auditors of FMC reporting entities considered to have a higher level of public accountability are/or will be required to communicate KAMs.  (Auditors of listed issuers are required to include KAM for the December 2016 reporting season going forward, while there is an extended transition period for other FMC reporting entities considered to have a higher level of public accountability until December 2018).

Auditors of entities that are not FMC reporting entities considered to have a higher level of public accountability may voluntarily elect to communicate KAMs.

It is expected to be extremely rare for an auditor of a listed issuer not to have a matter which was of most significance.

KAMs are specific to each audit and it is expected there will be at least one matter that will require more focus and effort than other matters.

The auditor is required by the ISAs (NZ) to communicate certain matters to those charged with governance and should select from these the matters of most significance to the audit.

In the rare circumstance that the auditor has determined that there were no matters that require significant auditor attention and accordingly there are no KAMs to communicate, the auditor’s report details this as follows:

Key Audit Matters

“We have determined that there are no key audit matters to communicate in our report.”

In the rare scenario where there are no KAMs identified, the audit documentation must detail the matters considered and the rationale for the conclusions made.

Matters giving rise to a modified opinion, or a ‘Material Uncertainty Related to Going Concern’, are by definition KAMs, however these are not described in the KAM section of the auditor’s report, but are reported in accordance with the requirements of the relevant standards:

The auditor’s report details this as follows:

Key Audit Matters

“In addition to the matter described in the Basis for Adverse/Qualified opinion section or the ‘Material Uncertainty Related to Going Concern’ section, we have determined the matters described below to be the key audit matters to be communicated in our report.”

Note that the description of, and why the matter was considered to be a KAM, and how it was addressed in the audit, is not required to be included in the ‘Basis for Adverse/ Qualified’ opinion section.

A KAM section is not included in the auditor’s report when a disclaimer of opinion is issued due to concerns that communicating KAMs would suggest that the auditor was able to conclude on that topic.

If a disclaimer of opinion is issued there is no Other Information section in the auditor’s report.

While it is expected to be very rare, there may be scenarios where it is not appropriate to communicate a matter that is identified as a KAM in the auditor’s report.  These are:

  • if there is a law or regulation precluding the public communication of a matter
  • if there are adverse consequences that would reasonably be expected to outweigh the public interest benefits of communicating a matter.

It will be extremely rare for a matter determined to be a KAM not to be communicated in the auditor’s report, as it is presumed to be a public interest benefit in providing greater transparency about the audit for intended users. Accordingly, the judgement not to communicate a key audit matter is appropriate only where the adverse consequences are viewed as so significant that they would reasonably be expected to outweigh the public interest benefits of reporting. Importantly, this does not apply if the entity has publicly disclosed information about the matter.

The issues to consider in deciding whether or not to communicate a KAM are complex and can involve significant judgement.  In these scenarios the auditor considers:

  • obtaining legal advice;
  • requesting a representation from those charged with governance detailing the reasons why it is not appropriate to communicate the KAM;
  • whether the matter results in additional reporting obligations (e.g., to a regulator).

In the rare scenario where matters identified as KAMs are not communicated, the audit documentation details the matters considered and the rationale for the conclusions reached.

Communicating KAMs is an opportunity for the auditor to demonstrate the value of the audit, exercise of professional scepticism and sound professional judgement. This should be paramount in mind when writing KAMs.

The following is required to be described:

  • why the matter is considered to be one of most significance in the audit and therefore determined to be a KAM;
  • what the auditor did to address the matter and form their conclusions;
  • reference to the disclosures, if any, in the financial statements.

The description of a KAM is in the context of the responsibility of the auditor to provide useful information to users, and avoids inappropriately providing original information about the entity. Original information is any information about the entity that is not publicly available. The description should avoid including information about the entity that has not been disclosed in the financial statements, or otherwise made public by the entity, unless this is considered appropriate in the circumstances and is not precluded by law or regulation. In this scenario the auditor encourages management or those charged with governance to disclose additional information rather than the auditor providing original information in the auditor’s report.

If there is insufficient disclosure in the financial statements, the KAM cannot be used to communicate matters that are required to be disclosed.  In this scenario the auditor requests those charged with governance to include appropriate disclosure, and if not rectified, considers the impact on the auditor’s opinion.

There is no requirement to detail the outcome of audit procedures undertaken however some auditors may elect to do so. If the outcome of procedures is included within the KAM, it is important that the wording does not imply discrete opinions on separate elements of the financial statements.

If an external or internal expert (the auditor’s or management’s) has been used the auditor may detail the type of expert and the procedures the expert and the auditor performed.

The auditor’s report may refer to the use of component auditors where it is considered appropriate.  However the group auditor is ultimately responsible for the conclusions reached and the audit opinion.

KAM descriptions:

  • are succinct, relate to the audit for the current year, and avoid boilerplate language and jargon;
  • are referenced to relevant disclosures in the financial statements rather than repeating that information;
  • are specific to the circumstances and are not copied from other KAMs/audit reports;
  • communicate the factors that led to the matter being identified as a KAM. E.g., changes in the entity’s business, the nature of the matter and any inherent uncertainty that exists, new or complex accounting policies etc.;
  • are specific about the exact matter e.g., recoverability of an asset;
  • describe the key audit procedures actually performed to address the matter. It is not necessary or advisable to list all procedures performed. Example wording is ‘our procedures included’;
  • are very precise in their description of what the auditor actually did, and are not embellished. For example if certain controls were tested this is described as ‘key controls were tested’ not ‘controls were tested’, and for substantive testing ‘we tested on a sample basis’ and not ‘we tested’;
  • avoid terms such as ‘verified’, ‘ensured’ and ‘reviewed’, as they are unlikely to accurately reflect what was done;
  • do not imply a matter has not been appropriately resolved;
  • demonstrate how the auditor was sceptical and how key assumptions used by management were challenged.

The order of the presentation of individual KAMs is a matter of professional judgement. It is however, advisable that the KAMs are ordered in a logical manner, for example in order of importance, or that inter-related KAMs are placed close together.

As well as complying with ISA (NZ) 230 Audit Documentation, the following is required to be documented:

  • the identification of which matters required significant auditor attention and the determination as to whether or not they are KAMs;
  • if there are no KAMs, the rationale why;
  • the rationale for not including a matter in the auditor’s report if it was determined to be a KAM.

From the matters communicated to those charged with governance, the auditor determines those that require significant auditor attention. Professional judgement is used when determining the matters that require significant auditor attention and are likely to be those that require auditor judgement and attention from the senior members of the audit team. The audit documentation needs to include why these matters are, or are not KAMs. There is no requirement to document why all matters communicated to those charged with governance were not matters that required significant auditor attention and are not KAMs.

It is advisable that the auditor discusses their preliminary views about matters that may be areas of significant auditor attention – and therefore may be KAMs – as early as possible with those charged with governance. The assessment of KAMs may change during the audit so the auditor updates those charged with governance throughout the audit. At the end of the audit the final determination and communication of KAMs occurs.

When discussing likely KAMs with those charged with governance, it is advisable to highlight/illustrate how the KAM may be described in the auditor’s report.

Early communication about KAMs also assists those charged with governance in considering whether there is adequate disclosure on the matter in the financial statements.

Where the mandatory reporting of KAM is deferred until 2018, it may be useful for the auditor to “dry run” the requirements before they become mandatory.

‘Emphasis of Matter and/or Other Matter’ paragraphs are still used and the definitions have not changed.

For FMC reporting entities considered to have a higher level of public accountability, the frequency of ‘Emphasis of Matter and/or Other Matter’ paragraphs is expected to decline as many will be reported as KAMs or a ‘Material Uncertainty Related to Going Concern’.

If KAMs are reported and a matter meets the definition of a KAM and an ‘Emphasis of Matter and/or Other Matter’, it is reported as a KAM only.

For all entities, if a material uncertainty related to going concern exists, and disclosure is adequate, this is now reported under the heading ‘Material Uncertainty Related to Going Concern’ instead of the previous Emphasis of Matter paragraph.

Examples of where an ‘Emphasis of Matter’ paragraph may be used:

  • If the use of the going concern basis of accounting is not appropriate and the financial statements have been prepared using an alternative basis of accounting, and there is adequate disclosure in the financial statements.
  • If the financial statements have been prepared under a Special Purpose Framework.

Examples of where an ‘Other Matter’ paragraph may be used:

  • If the previous year’s financial statements were not audited.
  • If reporting on materiality and/or group scoping.

The placement of ‘Emphasis of Matter and/or Other Matter’ paragraphs in the auditor’s report depends on the nature of the information to be communicated, and the relative significance of the matter.

In certain circumstances under ISA (NZ) 560, the auditor may be required to issue a new auditor’s report or amend the auditor’s report previously issued.  For example, the auditor may determine that a new or amended auditor’s report is appropriate when facts become known to the auditor after the financial statements have been issued.  In this circumstance, ISA (NZ) 560 requires that an Emphasis of Matter (EOM) paragraph or Other Matter (OM) paragraph may be included in the new or amended auditor’s report that refers to a note to the financial statements that more extensively discusses the reason for the amendment of the previously issued financial statements and to the earlier report provided by the auditor.

In circumstances where the auditor reissues a new auditor’s report, the auditor would need to determine (i) whether the matter that has resulted in a new or amended auditor’s report is an additional KAM that should be communicated, or (ii) if it relates to a matter previously communicated as a KAM, whether any revisions to the description of the KAM are necessary.  It is unlikely that other matters previously communicated as a KAM would be affected since, at the time of the previous auditor’s report, such matters were considered to be matters of most significance in the audit.

When an EOM or OM paragraph is required to be included in accordance with ISA (NZ) 560 and the matter is also determined to be a KAM in accordance with ISA (NZ) 701, the auditor includes the necessary EOM or OM paragraph in the new or amended auditor’s report, as well as the KAM.  The KAM description is intended to provide additional information to intended users of the financial statements beyond what is included in an EOM paragraph (i.e., more than a reference to the matter being emphasised and to relevant disclosures in the financial statements).  The auditor may consider cross-referencing the respective descriptions in the auditor’s report to clarify that both are in respect of the same matter.

ISA (NZ) 701 indicates that the auditor shall determine which of the matters were of most significance in the audit of the financial statements of the current period. The auditor’s determination of KAM is limited to those matters of most significance in the audit of the financial statements of the current period, even when comparative financial statements are presented. The IAASB’s decision to limit the KAM to the audit of the current period was primarily because users are interested in the most recent information to make informed decisions, and therefore are more likely to value information from the auditor about matters of significance in the audit of the current period. Furthermore, the IAASB believed that there are practical challenges in communicating KAM in relation to the prior period, which could also result in further lengthening the auditor’s report and a presentation that could be potentially confusing to users.

Nevertheless, the auditor is not precluded from communicating KAM in respect of the previous period, although in such circumstances consideration should be given to the presentation of the KAM to make sure that matters related to the current period are clearly differentiated from matters relating to the prior period.

The reporting of key audit matters in the auditor’s report is a significant change. The International Standards on Auditing only require the reporting of Key Audit Matters for listed entities. The IAASB is committed to considering a broader application as part of its post implementation review.  The NZAuASB considers that the benefits of reporting KAM in the auditor’s report apply to all FMC reporting entities considered to have a higher level of public accountability in New Zealand.  Given the unique nature of the New Zealand economy, and the comparatively larger proportion of unlisted entities that have public accountability, the NZAuASB decided to mandate the reporting of KAMs for all of the most significant and publicly accountable entities in New Zealand.  However, in recognition, that the requirements are new, and pose additional challenges and costs, agreed that a cautious phased approach would be appropriate, and therefore introduced a two-year transitional period. However, early adoption is permitted and encouraged. 

The general purpose financial report of some entities (including registered charities and public sector entities) in New Zealand includes both financial and non-financial information that is subject to audit. Where service performance information is included within the scope of the audit and the auditor is required or elects to report KAM, the KAM may be in respect of the service performance information, where, in the auditor’s judgement, such matters were of most significance to the audit of the general purpose financial report.

ISA (NZ) 701 indicates that the standard applies to audits of complete sets of general purpose financial statements of FMC reporting entities considered to have a higher level of public accountability. ISA (NZ) 700 (Revised) states “the requirements of the applicable financial reporting framework determine the form and content of the financial statements, and what constitutes a complete set of financial statements”.

Accordingly, the determination of whether the communication of KAM is required in the separate parent or holding company financial statements (hereinafter referred to as separate financial statements) depends on whether the separate financial statements are viewed as a complete set of general purpose financial statements under the requirements of the applicable financial reporting framework.

In circumstances where the separate financial statements are not a complete set of general purpose financial statements under the applicable financial reporting framework, the auditor could voluntarily communicate KAM. For example, parent entity financial information is usually presented within consolidated group financial statements by way of a note.

In consolidated financial statements, which includes parent entity information in a note only, KAMs do not need to be identified and communicated separately for the parent entity. However, if there is a matter relative to the parent entity which is considered to be a KAM at the consolidated financial statements level, the auditor communicates this in the auditor’s report on the consolidated financial statements.

In New Zealand, the requirement to prepare financial statements for both the parent and the group was removed when the Financial Reporting Act 2013 was enacted.  There are still limited instances where parent and group financial statements are prepared.

There are a variety of possible scenarios regarding the presentation of the consolidated and separate financial statements and the related auditor’s report, with resulting implications for how KAM are communicated and presented in these circumstances. For example, the consolidated and separate financial statements could be presented in completely separate annual reports, presented as discrete financial statements in a single document (e.g., in separate sections of a single annual report), or presented combined in a single annual report (also known as a four-column format).

For example, if an entity elects to prepare 4 column consolidated financial statements including general purpose parent entity financial statements, they must be prepared in accordance with the New Zealand Accounting Standards. The auditor identifies and communicates KAMs addressing the audits for both the parent entity and the consolidated entity separately.

In circumstances where the KAM address both the audit of the consolidated financial statements and the separate financial statements in an auditor’s report, the KAM should clearly explain how they relate to each audit. In some cases, the KAM might affect the audit of the financial statements of the separated and consolidated financial statements in different ways. For example, a matter relating to goodwill impairment in the consolidated financial statements might be different from the goodwill impairment in the separate financial statements (e.g., it is more likely that the impairment in the separate financial statements may relate to the valuation of the underlying investment).

If the financial statements are presented in a single document (columnar format) because the auditor in this case would likely issue a single auditor’s report addressing both the consolidated and separate financial statements, the single report would include KAM relating to the audits of both sets of financial statements.  This could be presented in a variety of ways, for example:

  • Indicating for each KAM how it applies to each audit, i.e., the audit of the consolidated and separate financial statements
  • Presenting the KAM for the consolidated financial statements in one section, and those for the separate financial statements in another section (the auditor could cross-refer to the related KAM in the respective sections if the auditor believes it appropriate to do so).

If in the auditor’s judgement there are no KAMs relevant to the parent entity (e.g., if the parent entity has limited operations) the auditor’s report reflects this as:

Key Audit Matters

We have determined there are no Key Audit Matters to communicate in our report for the parent entity.

If the parent entity prepares a separate set of special purpose financial statements, KAMs are not required to be communicated.

Subsequent events which are adjusted or disclosed in the financial statements are matters relevant to the financial statements of the current period.  Therefore, where ISA (NZ) 701 applies, they may be identified as a KAM if, in the auditor’s judgement, they are a matter of most significance to the audit of the financial statements. 

ISA (NZ) 706 (Revised) paragraph A5 includes a significant subsequent event as an example of where an emphasis of matter (EOM) paragraph may be necessary.  However, in accordance with ISA (NZ) 706 (Revised) paragraph 8(b), an EOM is only communicated if the matter is not determined to be a KAM.  In this scenario, the auditor may choose to highlight or draw further attention to the matter’s relative importance by presenting it first in the KAM section, or include additional information in the KAM to highlight that it is fundamental to users’ understanding of the financial statements [1].

If ISA (NZ) 701 does not apply, or if the matter is not a matter of most significance to the audit (i.e., not a KAM), the auditor uses judgement and considers whether an EOM is appropriate in accordance with ISA (NZ) 706 (Revised)[2].

KAMs are matters that, in the auditor’s judgement, were of most significance in the audit of the financial statements of the current period.  ISA (NZ) 560  Subsequent Events requires the auditor to obtain sufficient appropriate audit evidence about whether events occurring between the date of the financial statements and the date of auditor’s report are appropriately reflected in the financial statements in accordance with the applicable financial framework. 

NZ IAS 10 Events after the Reporting Period and PBE IPSAS 14  Events after the Reporting Date both require the following accounting treatment in the financial statements: 

  • Events that provide evidence on conditions that existed at reporting date are adjusted. 
  • Events that provide evidence on conditions that arose after the date of the financial statements, are not adjusted, however if material, are disclosed.

[1]     ISA (NZ) 706 (Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report, paragraph 8, A2

[2]     ISA (NZ) 706 (Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report, paragraph 8, A1 – A3

If KAMs are communicated, a matter meets the definition of a KAM and in the auditor’s judgement is of such importance that it is fundamental to a user’s understanding of the financial statements (i.e., where the auditor contemplates communicating an emphasis of matter paragraph), the matter is communicated as a KAM in the auditor’s report.  

In this scenario, the auditor may choose to highlight or draw further attention to the matter’s relative importance by presenting it first, or more prominently, in the KAM section, or include additional information in the description of the KAM to highlight the importance of the matter to users’ understanding of the financial statements[1].


[1]    ISA (NZ) 706 (Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report, paragraph 8, A2

KAMs are those matters that in the auditor’s professional judgement were of most significance to the audit of the financial statements of the current period. KAMs are determined based on the audit performed in the current year. They may, or may not, cover the same type of KAM as reported upon in the prior year audit. 

KAMs are likely to be the matters that:

  • require significant auditor attention;
  • are of higher risk of material misstatement or have been identified as significant risks;
  • are complex and/or require significant auditor judgement relating to areas that involve significant management judgement, including critical accounting estimates that have been identified as having high estimation uncertainty, and related disclosures;
  • are the effect of significant events or transactions;
  • may have involved specialists or experts (management’s or the auditor’s);
  • posed challenges to obtain sufficient appropriate audit evidence.

In many cases the type and number of KAMs reported for an entity will not change. This is expected as the sector, business environment, and the areas that require significant auditor attention may be consistent year on year for many entities. If the KAM item is the same as the prior year, the auditor’s description of why the matter was of most importance and how the matter was addressed in the audit may differ.  These descriptions are drawn from the conditions impacting the audit focus, such as external conditions, business model, structural and process changes, leading to risk of misstatement etc.  These descriptions therefore are dependent on the actual audit approach conducted in that year.

However, in some circumstances it may be appropriate for the KAMs reported to either completely change or partly change from the prior year. Some examples of KAMs which have changed from year to year are those related to legal provisions, new IT systems implemented during the year, and business acquisitions.

KAMs may change as the economic and business environment changes. It is expected that if an entity’s areas of focus change the KAMs will also evolve.

The auditor’s responsibilities section in the auditor’s report differs depending on the type of entity being audited:

All auditor’s reports include the content required by ISA (NZ) 700 (Revised) paragraphs 37, 38 and 39 (a) and (b)(i) to (iv), and 40(a). 

ISA (NZ) 700 (Revised) reference

When it applies

Paragraph 39 (b)(v)

Applicable for auditor’s reports of financial statements prepared in accordance with a fair presentation framework

Paragraph 39 (c)

Applicable for audits where ISA (NZ) 600 applies

Paragraph 40 (b)

Applicable for audits of FMC reporting entities considered to have a higher level of public accountability and relates to communication with those charged with governance related to compliance with relevant ethical requirements.

Paragraph 40(c)

Applicable for audits for which key audit matters are communicated.

 

Where service performance information is included within the scope of the audit, additional matters will be covered in the auditor’s responsibility statements.

Auditor’s may elect to present parts of the auditor’s responsibility section (ISA (NZ) 700 (Revised), paragraph 41) by including a reference within the Auditor’s Report to a specific webpage on the External Reporting Board’s (XRB) website. 

In this scenario, the auditor’s report refers to the specific webpage that applies to the auditor’s responsibilities applicable in the context of the engagement. (ISA (NZ) 700 (Revised), paragraph NZ A57.1). 

When referring to the responsibilities statements the auditor includes the URL https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-#/

(where # represents the specific number of the relevant statement).

The URL has recently changed as a result of the XRB website upgrade.  References to the URL from the former site still work and automatically redirect to the correct page on this new site. 

No responsibility section has yet been added to the XRB website for an auditor to refer to where the audit includes the audit of service performance information.  Such responsibilities will be added once the NZAuASB has completed its project to develop an auditing standard on the audit of service performance information.

ISA (NZ) 720 (Revised) The Auditor’s Responsibilities Relating to Other Information has been revised to provide increased clarity in the auditor’s report on the auditor’s responsibility in relation to, and the status of the auditor’s consideration of, the other information reported in the annual report.

'Other Information' is defined as financial or non-financial information included in an entity’s annual report. Refer to the question 'What information is considered to be other information and does it include information presented in the annual report or just in the lodged financial statements?' for further detail.

The auditor does not express any form of assurance conclusion on the other information.

The auditor is required to read and consider whether there is a material inconsistency between the other information and the financial statements, and/or the auditor’s knowledge obtained during the audit. This responsibility applies regardless of whether the other information is obtained before or after the date of the auditor’s report.

As a basis for considering whether there is a material inconsistency between the other information and the financial statements, the auditor is required to compare selected amounts or items in the other information to such amounts or items in the financial statements. This is a new requirement.

The nature and extent of the amounts or items to compare is a matter of professional judgement. It is however, intended that the auditor selects amounts or items which are significant in size or importance to the financial statements.

The requirements of ISA (NZ) 720 (Revised) apply to all audits when 'Other Information' is presented in an annual report (as defined).  The auditor’s responsibilities with respect to 'Other Information' are described in the answer to the previous question and apply regardless of when the 'Other Information' is received. The requirement to include a section on 'Other Information' in the auditor’s report however differs according to the type of entity and whether the information is available at the date of the auditor’s report as follows:

Status of the other
information received

FMC reporting entities considered
to have a higher level
of public accountability

Other entities
(Not a FMC reporting entity
considered to have a h
higher level of public accountability)

The auditor has received some or all of the 'Other Information' at the date of the auditor’s report

Identify information obtained prior to the date of the auditor’s report

The auditor has not received any 'Other Information' at the date of the auditor’s report but expects to receive this information at a later date

Identify information not yet obtained but expected to be obtained after the date of the auditor’s report

Voluntary reporting

 

If no information has been received, the auditor’s report is not required to include an 'Other Information' section

 

It is not uncommon for an entity to prepare its full annual report after the audit opinion on the financial statements have been signed by the auditor.  In this scenario the auditor’s report for a FMC reporting entity considered to have a higher level of public accountability details the 'Other Information' which is expected to be received after the date of the auditor’s report.

When detailing the 'Other Information' received, and not yet received for FMC reporting entities considered to have a higher level of public accountability, the auditor can refer to the specific name of the documents to avoid any confusion as to the 'Other Information' which the auditor has read and considered as at the date of the auditor’s report.

Auditors should discuss their responsibility for 'Other Information' with those charged with governance as early as possible, to ensure they are aware of the additional detail that will be provided in the auditor’s report if the other information is not available to the auditor before the date the audit report is signed.

When some of the 'Other Information' will not be available until after the date of the auditor’s report, the auditor is required to request a representation from management/those charged with governance that the final version of the documents will be provided to the auditor when available and prior to its issuance by the entity.

Audit documentation includes details of the procedures performed and the final version of the 'Other Information'.

 

When the auditor is required to include an 'Other Information' section, in all cases this section must include:

  • a statement that those charged with governance are responsible for the other information;
  • a statement that the auditor’s opinion does not cover the other information and, accordingly, that the auditor does not express (or will not express) an audit opinion or any other form of assurance thereon; and
  • a description of the auditor’s responsibilities relating to reading, considering and reporting on the other information as required by ISA (NZ) 720 (Revised).

Where some or all of the 'Other Information' has been received at the date of the auditor’s report, the auditor’s report:

  • Identifies the other information that has been received; and
  • In respect of this other information already received:
    • A statement that the auditor has nothing to report; or
    • A statement that describes the uncorrected material misstatement of the other information.

For FMC reporting entities considered to have a higher level of public accountability, the other information section is required to identify the other information that is expected but has not been received at the date of the auditor’s report.

'Other Information' is defined as financial or non-financial information included in an entity’s annual report. The annual report contains or accompanies the financial statements and the auditor’s report, and may include the Chairman’s report, CEO’s report, disclosures relating to corporate governance and statutory information and may also include additional non-compulsory reporting for example sustainability reports, overview of strategy etc.

'Other Information' does not include:

  • Reports which are issued as stand-alone documents and are not part of the combination of documents which comprise the annual report.  For example, separate industry or regulatory reports, corporate social responsibility reports, and sustainability reports if not issued within the annual report.
  • Preliminary announcements of financial information.
  • Security offering documents including prospectuses.
  • Unaudited supplementary information.

If a material inconsistency is identified between the other information and the financial statements and/or the other information and the auditor’s understanding of the entity, the auditor performs audit procedures to conclude whether:

  • a material misstatement exists in the 'Other information';
  • a material misstatement exists in the financial statements;
  • the auditor’s understanding of the entity needs to be updated.

If a material misstatement is identified in the 'Other Information' received before the date of the auditor’s report, the auditor requests that the other information is amended.  If the entity does not make appropriate amendments, the auditor includes in the auditor’s report details of the uncorrected material misstatement of the other information.

If a material misstatement is identified in the other information received after the date of the auditor’s report and the entity does not make appropriate amendments, the auditor considers their legal rights and obligations and seeks to have the uncorrected material misstatement appropriately brought to the attention of users. The auditor uses professional judgement to determine how to bring this to the attention of users.

If as a result of reading the 'Other Information' received after the date of the auditor’s report, a material misstatement is identified in the financial statements, the auditor considers their responsibilities under ISA (NZ) 560 Subsequent Events, including requesting those charged with governance to amend the financial statements. If the financial statements are not amended the auditor uses professional judgement to determine how to bring this to the attention of users and considers seeking legal advice.

If a material inconsistency is identified in the auditor’s understanding of the entity before the date of the auditor’s report, the auditor considers the impact on the audit including whether the identified risk of material misstatements are still appropriate, and performs additional procedures as appropriate for the circumstances.

If a material inconsistency is identified in the auditor’s understanding of the entity after the date of the auditor’s report, the auditor considers their responsibilities under ISA (NZ) 560.

In certain circumstances under ISA (NZ) 560, the auditor may be required to issue a new auditor’s report or amend the auditor’s report previously issued. For example, the auditor may determine that a new or amended auditor’s report is appropriate when facts become known to the auditor after the financial statements have been issued. How this impacts the auditor’s consideration of the 'Other Information' depends on the circumstances and whether or not the auditor restricts the audit procedures for subsequent events to the amendment of the financial statements. For example:

  1. The auditor does not restrict the audit procedures on subsequent events to the amendment of the financial statements.

    Paragraph 15(c)(i) of ISA (NZ) 560 indicates that the auditor shall extend the audit procedures as indicated in paragraphs 6 and 7 of ISA (NZ) 560. This includes performing audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statement and the auditor’s report that required adjustment of, or disclosure in, the financial statements have been identified. Accordingly, in such a case, the auditor would be expected to consider any impact on the auditor’s procedures in relation to 'Other information' arising from the subsequent event, including whether further work is necessary on 'Other information' that was obtained prior to the date of the auditor’s original report, particularly when management intends to amend 'Other information' previously issued. The auditor’s report would need to be updated, as appropriate, to reflect 'Other Information' that has now become available as at the date of the auditor’s report and the auditor’s conclusions thereon (i.e., nothing to report / material misstatement) and for FMC reporting entities considered to have a higher level of public accountability, any further 'Other information' that may not have previously been identified, which the auditor still expects to obtain.

    The auditor would still be responsible for 'Other information' obtained after the date of the auditor’s report, as set out in paragraph 19 of ISA (NZ) 720 (Revised).

  2. The auditor restricts the audit procedures on subsequent events to the amendment of the financial statements (including the situation that is sometimes referred to as “dual-dating” the auditor’s report).

    Paragraph 12 of ISA (NZ) 560 permits the auditor to restrict the audit procedures on subsequent events to the amendment to the financial statements in certain circumstances. In such a case, the auditor’s report indicates that the procedures were restricted solely to that amendment (either by amending the existing auditor’s report or providing a new or amended auditor’s report). Where the amendment impacts the 'Other information' , the auditor would need to also perform the necessary procedures in relation to the other information, specific to the amendment. In such a case, the auditor may need to indicate this in the auditor’s report as part of the procedures performed on the amendment, particularly if management intends to amend other information previously issued. Furthermore, the auditor would identify the other information affected by the amendment and the auditor’s conclusions thereon (i.e., nothing to report / material misstatement). However, if the other information was unaffected by the amendment, the auditor would make no further amendments to the auditor’s report in respect of other information.

    The auditor would still be responsible for 'Other information' obtained after the date of the auditor’s report, as set out in paragraph 19 of ISA (NZ) 720 (Revised).

The annual report contains or accompanies the financial statements and the auditor’s report thereon. This may be a single document or a combination of documents that are prepared to provide owners with information on the entity’s operations, financial results and financial position. 

The annual report includes material required by statutory and regulatory requirements (for example, NSX listing rules) and may include additional voluntary reporting. 

Determining the documents that comprise the annual report is often clear as they are required by statutory and regulatory requirements, or are within the one document called “Annual Report”. 

If this is not the case the auditor uses professional judgement when determining what comprises the annual report considering the timing, purpose of the documents and for whom they are intended.

Yes, the Director’s Report forms part of 'Other information'.

ISA (NZ) 720 (Revised) defines 'Other information' as financial and non-financial information (other than the financial statements and the auditor’s report there on) included in an entity’s annual report.  An Annual Report is information prepared to provide owners (or similar stakeholders) with information on the entity’s operations and the entity’s financial results and financial position as set out in the financial statements, and contains or accompanies the financial statements.  

ISA (NZ) 720 (Revised) requires auditors' reports on financial statements of entities that are not FMC HLPAs to include an 'Other information' section if the auditor has obtained some or all of the 'other information' as at the date of the auditor’s report. 

If no 'other information' has been received as at the date of the auditor’s report, an 'Other information' section is not included in the auditor’s report.  

ISA (NZ) 570 (Revised) Going Concern has been reissued and in combination with ISA (NZ) 700 (Revised) and ISA (NZ) 701 there are changes to how going concern matters are reported by the auditor. Appendix 1 to ISA (NZ) 570 (Revised) includes a helpful flowchart to assist in determining the appropriate reporting when going concern issues exist.

There is a new requirement to challenge the adequacy of disclosures for 'close calls’ where events are identified that may cast significant doubt on an entity’s ability to continue as a going concern. When assessing the adequacy of disclosures, the auditor considers whether there is appropriate detail on the principal events or conditions that have caused the going concern issue.

If events or conditions exist that cast significant doubt on the entity’s ability to continue as a going concern, the type of audit opinion issued is dependent on the conclusions the auditor makes as follows:

  • If use of the going concern basis of accounting is not appropriate and the financial statements have been prepared using an appropriate alternative basis of accounting, and there is adequate disclosure in the financial statements, this may be reported as an Emphasis of Matter paragraph.
  • If use of the going concern basis of accounting is not appropriate, and the financial statements have been prepared using the going concern basis of accounting, an Adverse opinion is issued.
  • If the auditor concludes a material uncertainty related to going concern exists, and there has been appropriate disclosure in the financial statements, it is reported under a new separate section in the audit report under the heading ‘Material Uncertainty Related to Going Concern’. For FMC reporting entities considered to have a higher level of public accountability this is also a KAM, however the KAM section does not include details of the matter and is referenced to the ‘Material Uncertainty Related to Going Concern’ section.
  • If the auditor concludes a material uncertainty related to going concern exists, and the disclosure in the financial statements is not appropriate, a Qualified or Adverse opinion is issued.

If there is a material uncertainty related to going concern, and adequate disclosure in the financial statements, the auditor’s report includes a section which is now required to be titled “Material Uncertainty Related to Going Concern” (MURGC) (i.e., no longer as an Emphasis of Matter).

ISA (NZ) 570 (Revised) Going Concern, paragraph 22 establishes the minimum information to be presented in the auditor’s report under the MURGC heading which is to:

  • Draw attention to the note in the financial statements which includes the required disclosures; and
  • State that these events or conditions indicate that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern, and that the auditor’s opinion is not modified in respect of the matter. 

Sample wording is contained in Illustration 1 of the Appendix 2 of ISA (NZ) 570 (Revised).

A MURGC is by its nature a KAM , however the MURGC is to be reported in a separate section of the auditor’s report.  The introductory sentences to the KAM section of the auditor’s report includes a cross reference to the MURGC section, where the matter is described.

The description of the matter required to be included in the MURGC section is less than what is required in the KAM section of the auditor’s report.  However, the auditor may provide additional information in the MURGC section to supplement the required ISA (NZ) 570 (Revised) paragraph 22 statements, for example to explain;

  • That the existence of a material uncertainty is fundamental to user’s understanding of the financial statements, or
  • How the matter was addressed in the audit .

If there is an event or condition which may cast significant doubt on the entity’s ability to continue as a going concern, but the auditor concludes the uncertainty is not material and that the use of the going concern assumption is appropriate, no additional disclosure or additional paragraph in the auditor’s report is required.  However, the auditor considers whether this is a KAM in accordance with ISA (NZ) 701 Communicating Key Audit Matters, paragraphs 9 and 10.

ISA (NZ) 800 (Revised) Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks has been revised to reflect the changes to auditor reporting. 

Auditor’s reports on special purpose financial statements are not within the scope of ISA (NZ) 701, and therefore there is no requirement for the auditor to communicate KAMs unless required by law or regulation. However, the auditor may elect to communicate KAMs. 

ISA (NZ) 720 (Revised) deals with the auditor’s responsibilities relating to other information.  Reports containing or accompanying special purpose financial statements with the purpose of providing owners with information on matters presented in the special purpose financial statements, are considered to be annual reports, and the requirements in ISA (NZ) 720 (Revised) apply. (ISA (NZ) 800 (Revised), paragraph A17).

ISA (NZ) 810 (Revised) Engagements to Report on Summary Financial Statements has been revised to reflect the changes to auditor reporting. 

Where the auditor’s report on the complete financial statements includes KAMs, the auditor’s report on the summary financial statements states that the auditor’s report on the complete financial statements includes communication of KAMs. 

The intention is to draw to the users’ attention that there are KAMs in the auditor’s report on the complete financial statements, however the auditor is not required to describe in detail or repeat the KAMs in the auditor’s report on the summary financial statements.

For audits of summary financial statements, the auditor complies with the requirements of ISA (NZ) 810 (Revised) Engagements to Report on Summary Financial Statements.

ISA (NZ) 810 (Revised) requires the auditor to read and consider the information included in documents containing summary financial statements, and consider whether there is a material inconsistency between that information and the summary financial statements. (ISA (NZ) 810 (Revised), paragraph 14).  

If the auditor identifies a material inconsistency, the auditor discusses this with management and determines whether the summary financial statements or the information included in the document containing the summary financial statements needs to be revised.  If management does not make appropriate amendments to address the material inconsistency, the auditor considers the impact on the auditor’s report. (ISA (NZ) 810 (Revised), paragraph 15).  

If the other information included with summary financial statements, is the same as the other information included in the annual report, the work already performed by the auditor in accordance with ISA (NZ) 720 (Revised) may be adequate.

If the other information included with summary financial statements, is not included in the annual report, the auditor may still find the requirements of ISA (NZ) 720 (Revised) helpful, and follows the requirements of ISA (NZ) 810 (Revised) detailed above.