For financial years commencing on or after 1 January 2016 auditors have additional reporting responsibilities in relation to the strategic report and the directors’ report and, where applicable, the corporate governance statement. This will also apply if you have decided to early adopt FRS 102 for small entities (section 1A) or FRS 101.
Although the new opinions are based on the work undertaken by the auditor during the course of the audit these new requirements go much further than the auditor’s previous responsibility to report on consistency of the strategic report and directors’ report with the financial statements and focus much more on compliance with the law.
The companies, partnerships and groups (accounts and reports) regulations 2015 (SI 2015/980) requires auditors to:
- state whether, in their opinion, the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
- state whether, in the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, the auditor has identified material misstatements in the strategic report and the directors’ report; and
- if applicable, give an indication of the nature of each of the misstatements referred to.
Auditors work in this area could include:
- challenging directors to meet detailed legal requirements;
- increased reporting of non-compliance with legal requirements;
- analysing the business review against key performance indicators; and
- stating if either the strategic report or the directors’ report contain material misstatements (based upon the auditor’s knowledge and understanding obtained during the course of the audit).
Under the new reporting regime, unless deficiencies in the strategic report, or, where identified, the directors’ report, are corrected, the audit report may need to be qualified. This part of the new regime is not expressed in terms of materiality so it is not yet clear whether any non-compliance with applicable legal requirements in the strategic report or directors’ report will require the audit report to be qualified or whether there is still room for judgement to be exercised. We are waiting for the Financial Reporting Council to issue guidance.
For entities which prepare a separate corporate governance statement (whether required to or not) auditors have similar responsibilities as regards material misstatements. In addition auditors have a responsibility to report if certain aspects of the disclosure and transparency rules are not complied with.
For more information please contact Jonathan Ericson, or your usual RSM contact.