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In April 2022, the International Ethics Standards Board for Accountants (IESBA) had released the revised definition of a ‘Public Interest Entity’ (PIE) together with other revised provisions in the International Code of Ethics for Professional Accountants (including International Independence Standards) (the IESBA Code). The changes to the IESBA Code inter alia require firms to publicly disclose when the independence requirements for PIEs have been applied in an audit of financial statements.

In order to operationalise the changes stipulated in the IESBA Code, on 6 July 2022, the International Auditing and Assurance Standards Board (IAASB) issued an Exposure Draft (ED) on certain narrow scope amendments to International Standards on Auditing (ISA) 700 (Revised), Forming an Opinion and Reporting on Financial Statements, and ISA 260 (Revised), Communication with Those Charged with Governance.

Proposed revisions to ISA 700 (Revised)
ISA 700 (Revised)27 requires auditors to identify the jurisdiction of origin of the relevant ethical requirements or refer to the IESBA Code. However, currently, it does not require auditors to further specify whether differential independence requirements in the relevant ethical requirements that are applicable only to audits of financial statements of certain entities were applied, such as the independence requirements for PIEs in the IESBA Code.
In order to align the guidance specified in ISA 700 with the independence requirements prescribed by IESBA, IAASB has identified two approaches that would require public disclosure that differential independence requirements for audits of financial statements of certain entities were applied. These are:

  1. A conditional requirement that applies only when the relevant ethical requirements require public disclosure that differential independence requirements for audits of financial statements of certain entities were applied. If the condition is met, the auditor is required to indicate in the auditor’s report that the relevant ethical requirements for independence for those entities were applied, or
  2. A non-conditional requirement that would apply in all circumstances when differential independence requirements for audits of financial statements of certain entities were applied, even if the relevant ethical requirements do not require the auditor to publicly disclose that such differential independence requirements were applied.

The IAASB has proposed amendments to ISA 700 (Revised) based on the conditional approach and has also proposed relevant application material.

Proposed revisions to ISA 260 (Revised)
ISA 260 (Revised) specifies the guidance regarding the communication of matters related to independence28. Accordingly, in line with the abovementioned amendments, IAASB opined that revisions to ISA 260 (Revised) would be necessary, in order to increase transparency with those charged with governance that differential independence requirements for certain entities have been applied. Accordingly, new application material has been proposed to ISA 260 (Revised) to correspond with the revisions to ISA 700 (Revised).
Comments on the ED have been requested by 4 October 2022.

  1. Paragraph 28(c) of ISA 700 (Revised)
  2. In case of listed entities, paragraph 17(a) of ISA 260 (Revised) requires auditors to communicate with those charged with governance a statement that the engagement team and others in the firm as appropriate, the firm and, when applicable, network firms have complied with relevant ethical requirements regarding independence.

To access the text of IAASB ED, please click here

To access the text of IESBA pronouncement on PIE provisions, please click here

Action points for auditors

  • The auditor’s report is a key mechanism for communication to users of financial information about the audit that was carried out. Accordingly, the proposed revisions to ISA 700 (Revised) would enable consistency and comparability in auditor reporting globally. The IAASB is pursuing a project to consider a number of matters relevant to its standards arising from the finalisation of the IESBA’s PIE provisions, including whether and how to address the transparency requirement noted above in the IAASB’s standards. Since the standards on auditing applicable to audits in India are reasonably aligned with the ISAs, amendments in the ISAs may be adopted by the Indian regulators to be a part of the standards on auditing. Accordingly, auditors should watch this space for further developments.
  • The proposed amendments are expected to impact the auditor’s report, accordingly members of the profession are encouraged to utilise the comment period for providing their feedback and suggestions, while the regulations are in the initial stages of preparation.

In December 2019, ISA 315, Identifying and Assessing the Risks of Material Misstatement was revised, with the aim to include a more robust and consistent risk identification and assessment framework. The revised standard set out enhanced requirements, in order to support the auditor’s risk assessment process, intended to support more focused responses to the auditor’s risk assessment in accordance with ISA 330, The Auditor’s Responses to Assessed Risks. ISA 315 (Revised 2019) is effective for audits of financial statements for periods beginning on or after 15 December 2021.

In this regard, on 27 July 2022, IAASB released its First-Time Implementation Guide (IG) on ISA 315 (Revised 2019). The guide focuses on the more substantial changes that were made to ISA 315 (Revised 2019) and would help stakeholders understand and apply the revised standard as intended

To access the text of the IG, please click here

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