As part of its mandate to promote and ensure that financial statements prepared in the country conform to international standards, The Financial Reporting Council of Nigeria (FRC) has released Rule 9 to guide Independent auditors on the application of International Standard on Auditing (ISA) 701 in preparation of audit report.
The scope of this Rule 9 which hinges on the application of ISA 701 deals with the auditor’s responsibility to communicate key audit matters in the auditor’s report is intended to address both the auditor’s judgement as to what to communicate in the auditor’s report and the form and content of such communication.
According to the Executive Secretary, FRC, Mr. Jim Obazee, the released of the “Rule 9” was in accordance with sections 8(2) and 53(2) of the Financial Reporting Council of Nigeria, Act No. 6 2011, (FRC Act, 2011).
According to him, the purpose of communicating key audit matters is to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed.
He added that, communicating key audit matters provides additional information to “intended users” of financial statements to assist them in understanding those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial statements of the current period, stressing that communicating KAM can also assist “intended users” in understanding the entity and areas of significant management judgement in the audited financial statements.
Obazee noted however that, communicating KAM in the auditor’s report was not substitute for existing disclosure requirements by the Council among others:
Disclosures in the financial statement that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation;
Auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with ISA 705 (Modifications to the opinion in the Independent Auditor’s Report- Revised);
Reporting in accordance with ISA 570 (Going Concern- Revised) when a material uncertainty exists relating to events or conditions that may cast significant doubt on any entity’s ability to continue as a going concern; or
A separate opinion on individual matters.
He maintained that Independent Auditors shall comply with provisions of ISA 701 for audits of financial statements and which shall take effect on Decembers 15, 2016.
He also stated that auditors of Listed companies are expected to apply this Rule for audit of financial statements for periods ending on or after December 15, 2016, while auditors of all other entities shall apply this Rule for audit of financial statements for periods ending on or after June 30, 2017.
He noted that KAM is not required to be communicated as stipulated by this Rule where law or regulation precludes public disclosure about the matter or in extremely rare instances where the auditor determines that the adverse consequences of the disclosure would reasonably be expected to outweigh public interest benefit of the communication.