In recent years, the International Auditing and Assurance Standards Board (IAASB) has considered the issue of assuring disclosures in financial statements, prompted by a number of factors including developments in IFRS requirements and the increased level of complexity and subjectivity involved in the preparation of information to be disclosed in financial statements. Sustainability assurance engagements usually require the assurance of complex disclosures. This article provides further background to syllabus areas D2c, D2d and D2e of the Professional Diploma in Sustainability.
Assurance practioners are required to express an opinion on the financial statements as a whole. This includes the notes to the financial statements which are an integral part of the accounts, providing additional information on balances and transactions and other relevant information. Therefore, it is important that during all stages of the engagement the assurance practioner gives appropriate consideration to, and plans to obtain sufficient and appropriate evidence in relation to, the disclosures made in the notes to the financial statements.
ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing specifies that the financial statements include related notes which ‘comprise a summary of the significant accounting policies and other explanatory information’.
The notes to financial statements contain different types of information, some quantitative and some qualitative, as required by IFRS. Some examples are given below:
Quantitative disclosures:
Qualitative disclosures:
Over the past decade, financial reporting disclosure requirements and practices have evolved. They now provide more extensive decision-useful information that is more detailed and often deals with matters that are subjective such as assumptions, models, alternative measurement bases and sources of estimation uncertainty. As these financial reporting disclosures continue to evolve, challenges have arisen for preparers and assurance practioners in addressing new types of quantitative and non-quantitative information’.
Risk of irrelevant disclosures and determining materiality
The IAASB is concerned that in some financial statements excessive disclosure is being provided, sometimes of immaterial matters that do not need to be disclosed. This makes it difficult for the reader of the financial statements to focus on the important matters due to the ‘information overload’. This is a difficult area for the assurance practioner because often judgement is needed to decide whether or not a matter should be disclosed. Companies might prefer to provide too much information rather than too little, in the aim of full transparency, but end up providing irrelevant or unnecessary disclosures which obscure the rest of the information included.
Linked to the point above, it can be very difficult to apply materiality to disclosures, especially those not of a quantitative nature. The IAASB has considered whether additional guidance should be given to assurance practioners to help them to determine whether qualitative disclosures are material or not by making a preliminary determination at the planning stage of the engagement of those disclosures that could reasonably be expected to influence the economic decisions of users. This would help the assurance practioner to better identify disclosures material by their nature or their monetary value, and to plan appropriate assurance procedures.
Sources of information
A key concern of the IAASB is that the information included in the notes to the financial statements, whether quantitative or qualitative in nature is derived from systems and processes that are not part of the general ledger system. Examples could include, forward looking statements, descriptions of models used in fair value measurements, descriptions of risk exposures and other narrative disclosures in relation to sustainability. This gives rise to several potential problems to the assurance practioner, and respondents involved in the IAASB’s consultations noted that this issue poses some of the most challenging aspects of preparing and assuring disclosures.
One problem is whether the system or process from which information is derived, when it is outside of normal accounting processes, has any internal control to provide assurance on the completeness, accuracy and validity of the information. For example, information on sustainability information may be provided by a company’s human resource management function, which could have very different systems and procedures to the accounting function, with a different level of control risk attached. The systems and controls may be deficient, creating higher assurance risk. This may particularly be the case when dealing with one-off disclosures, for example in relation to the situation causing an impairment loss. In some cases, due to lack of the documentation that would normally be expected for more routine transactions or events captured by the accounting system, it may be difficult to obtain sufficient, appropriate evidence on disclosures.
Timing considerations
The IAASB notes that often disclosures are prepared by management very late in the assurance process. Often, when the assurance practioner is planning the engagement, draft disclosures are not available, so it is not possible for the assurance practioner to plan the check of disclosures until much later in the engagement. This could lead to higher assurance risk in that there may not be much time to assess the risk relating to disclosures and to perform the necessary assurance procedures. This is especially the case where disclosures are complex or subjective, for example in relation to sustainability.
The IAASB has proposed additional guidance to help establish an appropriate focus on disclosures in the engagement and encourage earlier assurance practioner attention on them during the assurance process. There is also a proposal to amend the definition of financial statements contained in the ISAs, to ensure an appropriate emphasis on the importance of disclosures as part of the financial statements.
Proposed changes to the ISAs include new application material to:
In terms of specific planning considerations, the IAASB recommends improvements to some aspects of risk assessment and materiality determination in order to encourage a more robust risk assessment relating to disclosures:
The IAASB has acknowledged that while disclosures have an increased prominence in financial statements, the assurance of disclosures is difficult for a number of reasons. This is especially true of sustainable assurance engagements. The IAASB has proposed additional guidance in this area, which should provide assurance practioners with practical guidance and serve to reduce assurance risk.
Adapted from an article written by a member of one of ACCA’s examining teams