There will be mandatory enhancements to AIM company audit reports for periods commencing on or after 17 June 2016. Early adoption is permitted and may be advantageous in certain circumstances.
Last year premium listed companies saw an increase in the amount of auditor commentary in their enhanced audit reports. Following the adoption of the EU Audit Directive, the requirement for enhanced audit reports has now been extended to all listed entities, including AIM companies. This may involve your auditor making commentary on the directors’ key judgements and will include a description of the audit scope.
What are the key changes?
In essence, auditors will be required to determine, from the matters communicated with those charged with governance, those key audit matters that required significant auditor attention in performing the audit.
Key audit matters will include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditor, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team.
The description of each key audit matter in the auditor’s report should include a reference to the related disclosure(s), if any, in the financial statements and address why the matter was considered to be a key audit matter and how the matter was addressed in the audit.
In addition, the auditor’s report on AIM companies will now also include:
- an explanation of how the auditor applied the concept of materiality in planning and performing the audit. Such explanation shall specify the threshold used by the auditor as being materiality for the financial statements as a whole;
- an overview of the scope of the audit, including an explanation of how such scope addressed each key audit matter relating to one of the most significant risks of material misstatement; and was influenced by the auditor’s application of materiality.
You will need to factor extra time for drafting your disclosures about the risks affecting the business and the critical accounting estimates and judgements impacting the financial statements.
You should allow a longer lead time to discuss with your auditors what they intend to communicate as key audit matters in their auditor’s report because they may identify key audit matters which differ from the key judgements or risks disclosed by you. It is important you understand why something is being communicated as a key audit matter and are happy with the way that this is described in the auditor’s report.
Why early adoption may be good news
It may seem odd to want to adopt new requirements early. However, following the adoption of the EU Audit Directive, AIM or small listed companies with a market cap of less than 200m Euros will now be permitted to seek financial reporting advice from their audit firm as long as they comply with all aspects of the EU Audit Directive. Although the mandatory enhancements to AIM company audit reports apply to periods commencing on or after 17 June 2016, early adoption is permitted and may be advantageous in certain circumstances where you want to take advantage of the new provisions allowing you to seek financial reporting advice from your audit firm.
For further information please get in touch with your usual RSM contact.