Reporting on reports on reporting

Matters addressed
In October 2002 IFAC’s International Auditing and Assurance Standards Board (IAASB) issued a proposed International Auditing Practice Statement (IAPS) ‘Reporting on Compliance with International Financial Reporting Standards’. The new guidance is designed to clarify when financial statements are in full compliance with IFRSs, thereby contributing to greater consistency in their application.

The ED IAPS proposes additional guidance when the auditor expresses an opinion on financial statements prepared in accordance with:

• International Financial Reporting Standards (IFRSs)
• both IFRSs and relevant national standards or practices

or

• relevant national standards or practices, but which disclose in the notes to the financial statements the extent of compliance with IFRSs.

Financial statements prepared in accordance with IFRSs
IAS 1 ‘Presentation of Financial Statements’
Under International Accounting Standards, ‘fair presentation’ requires that financial statements should not be described as complying with IFRSs unless they comply with all the requirements of:

• each applicable standard
  and
• each applicable interpretation of IFRIC.

Indicators of non-compliance
Indications that financial statements have not been prepared in accordance with IFRSs include the following:

• A note to the financial statements indicates that they have been prepared in accordance with IFRSs but then go on to specify certain departures (e.g. non-disclosure of sales for geographical segments).
• A note identifies specific IFRS requirements used to prepare the financial statements, but these do not include all the requirements necessary for full compliance.
• A note discloses partial compliance with IFRSs without reference to specific departures. For example, the financial statements are:
  - ‘based on IFRSs’
  or
  - ‘comply with the significant requirements of IFRSs’.

Unqualified opinion
It is a principle of auditor’s reports that an unqualified opinion may be expressed only when the auditor concludes that the financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with the identified financial reporting framework (ISA 700 ‘The Auditor’s Report on Financial Statements’ and SAS 600 ‘Auditors reports on financial statements’).

An unqualified opinion cannot indicate compliance with IFRSs if the financial statements contain any material departure. Such a departure results in disagreement with management regarding:

• the accounting policies selected
  or
• the adequacy of financial statement disclosures.

A qualified opinion or an adverse opinion is then necessary. An opinion paragraph indicating that ‘the financial statements give a true and fair view and are in substantial compliance with IFRSs’ does not meet the requirements of ISA 700 / SAS 600.

More than one financial reporting framework
Issue
A note may indicate that the financial statements comply with both:

• IFRSs
  and
• national financial reporting requirements.

Such financial statements must comply, simultaneously, with each of the indicated frameworks individually – without the need for reconciliation.

Financial statements prepared in accordance with one framework (e.g. IFRS) that contain a note or supplementary statement reconciling the results to those that would be shown under another framework (e.g. US GAAP) are not prepared in accordance with that other framework. This is because the financial statements themselves do not show all the information required in the manner required by that framework.

Simultaneous compliance with IFRSs and a national financial reporting framework is unlikely, unless the country has adopted IFRSs as its national financial reporting framework. In practice, the ability to comply fully with more than one financial reporting framework is rare.

Action by the auditor
To help decide which of the frameworks is predominant, the auditor should discuss financial statements that purport to have been prepared in accordance with more than one financial reporting framework with:

• management
  and
• those charged with governance.

Management should then be encouraged to prepare the financial statements in accordance with the predominant financial reporting framework only, thereby eliminating the problem. The auditor’s report can then be worded in terms of preparation in accordance with that financial reporting framework.

If management insists on indicating compliance with more than one framework, each framework requires separate audit consideration.

Audit opinion
If the financial statements are in accordance with only one of the frameworks then:

• an unqualified opinion on compliance with that framework is expressed
  and
• a qualified opinion (or an adverse opinion) on compliance with the other framework(s) is also given.

Another acceptable financial reporting framework
Issue
Financial statements prepared in accordance with an acceptable financial reporting framework other than IFRSs (e.g. UK or US GAAP) may disclose, in the notes to those statements, the extent to which they comply with IFRSs.

Audit considerations
A note containing disclosure about compliance with IFRSs is treated no differently from any other note and the auditor must obtain sufficient appropriate audit evidence to support management’s assertions. The auditor considers, in particular:

• whether assertions made in the notes with respect to the extent of such compliance are factually correct and not misleading
  and
• the effect of that disclosure on the auditor’s report.

Example 1
The effect of applying a certain IFRS would be material and pervasive. An assertion of proper preparation in accordance with IFRS except for the application of that particular standard may be misleading without fully disclosing the effect of not applying that standard.

Recommendation
It may be more appropriate for the notes:

• not to comment about the extent of compliance with IFRS
  or
• to state that the financial statements have not been prepared in accordance with IFRS.

Example 2
A note indicates only partial compliance with IFRSs (e.g. ‘based on’) without reference to specific departures.

Analysis
This misleads readers because it implies compliance while failing to provide sufficient information for readers to determine the extent to which the financial statements do not comply with IFRSs.

Audit opinion
If disclosures are misleading, the auditor’s report expresses a qualified or an adverse opinion as illustrated. See Figure 1.

Figure 1
Note 1 to the financial statements indicates that the financial statements have been prepared in accordance with [relevant national financial reporting framework] and are substantially in accordance with International Financial Reporting Standards (IFRSs) except that they do not comply with IAS 12 ‘Income Taxes’. Given the significant effect in this case on the company’s financial statements of non-compliance with IAS 12 and given that the company has not disclosed the effect of this departure from IFRSs, the reference to compliance with IFRSs is considered to be misleading and accordingly is unacceptable within financial statements prepared in accordance with [relevant national framework].

In our opinion, except for the inclusion of the reference to compliance with IFRSs, the financial statements present fairly in all material respects the financial position of the Company as of December 31, 20X1, and of the results of its operations and its cash flows for the year then ended in accordance with [financial reporting framework1] (and comply with [relevant statutes or law]).

The ED IPAS Reporting on Compliance with International Financial Reporting Standards may be downloaded free of charge from IFAC’s website www.ifac.org.

1. With reference to the country of origin

Kim Smith is Examiner for Paper 3.1