The Enhanced Auditor's Report - Post implementation review in South Africa

SAICA analysed the auditor’s reports of the Top 40 South African companies (based on market capitalisation). The companies included in the research population analysed were those listed on the JSE at 31 January 2019 and had been listed for the first two years where KAMs were required to be reported (referred to in this article as the “Top 40 Companies”).

Transparent and high-quality financial reporting are critical in creating and sustaining investor confidence in the South African economic markets. The auditor reporting standards were revised with the aim of enhancing the communicative value of the auditor’s report by increasing transparency about audits performed. The new and revised requirements were also aimed at driving more robust discussions between the auditor, management and audit committees. Furthermore, it was pre-empted that the reporting of Key Audit Matters (KAMs) would provide investors with a basis for discussion when engaging with the companies. All of these activities were ultimately aimed at enhancing the confidence of users of financial statements in the external audit process.

Key audit matters

In terms of the International Standards on Auditing (ISAs), Registered Auditors are required to communicate KAMs in auditors’ reports issued on listed entities as well as when the auditor is required by law or regulation to communicate KAM in the auditor’s report. The description of KAMs in the revised auditor’s report is intended to be specific to the entity and to provide useful and relevant information about the audit of an entity to the user of the auditor’s report.

In South Africa, the five most commonly reported KAMs include:

• Impairment assessment of goodwill and/or intangible assets;
  
• Current and/or deferred tax (including disputes with tax authorities);
  
• Valuation of financial instruments and/or hedge accounting;
  
• Impairment assessment of financial instruments; and
  
• Valuation of assets and/or liabilities in a business combination.

A comparison of the KAMs reported was done with other jurisdictions, including the United Kingdom, New Zealand and Malaysia. The nature of the KAMs being identified in the territories above relate largely to revenue recognition, impairment of assets and valuations. There are similarities to the KAMs reported in South Africa with the exception of revenue which does not feature highly on the South African KAMs for the period analysed.

Joint audits

From the analysis, it was noted that more KAMs were reported when joint audits were performed. The majority of the joint audits included in the analysis related to the audit of a large bank. The number of KAMs to be included in the auditor’s report may be affected by the size and complexity of the entity, the nature of its business and environment, and the facts and circumstances of the audit engagement.

Voluntary reporting

In Year 2, 65% (Year 1: 62.5%) of the auditors’ reports that were analysed provided voluntary disclosure of the outcome of some of the audit procedures performed for the identified KAMs. Some of the firms provided information about the outcome of the audit procedures performed in the auditor’s report. Although providing an indication of the outcome of the auditor’s procedures is not required by the ISAs, it enhances the communicative value of the auditor’s report by answering the “so what?” question that users may have in mind. This may contribute to closing the audit expectation gap as this will give users of financial statements a better understanding of the audit process.

The ISAs neither require the auditor to disclosure the materiality figure that has been applied during the audit in the auditor’s report, nor prohibit the auditor from doing so. While some jurisdictions such as the United Kingdom have made it a mandatory requirement for auditors to disclose information about materiality figure applied during the audit for certain entities, this is only voluntary in South Africa.

In both Year 1 and Year 2, PwC is the only firm that disclosed the materiality figure in all of the auditors’ reports included in our research population, except in those instances where they were party to a joint audit. The PwC auditors’ reports included details of the overall group materiality figure, the benchmark that was used in calculating the materiality and the rationale for selecting the benchmark.

The extent of communication by the auditor has improved in the revised auditor’s report, in that the reporting is more transparent and tailored to the unique circumstances of the various engagements. While KAMs improve transparency and play an important role in educating the users of financial statements about the audit process, they are not necessarily an indication of the maturity and quality of a company’s financial reporting process and should not be construed as such by the users of financial statements. They do, however, provide a basis to drive more robust conversations between all affected parties.

SAICA will continue to monitor developments in this area, to update members and educate all stakeholders in order to promote a better understanding of the audit process.

The detailed results can be accessed here.

About SAICA

The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 46 000 members and associates who are chartered accountants [CAs(SA)], as well as associate general accountants (AGAs(SA)) and accounting technicians (ATs(SA)), who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.

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Kulani Chauke
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