IAASB approves narrow scope amendments to ISA 700and ISA 260

Background:

International Auditing and Assurance Standard Board (IAASB) approves narrow scope amendments to International Standard on Auditing (ISA) 700 (Forming an Opinion and Reporting on Financial Statements) and ISA 260 (Communication with Those Charged with Governance) will help operationalize recently approved changes to the International Ethics Standards Board for Accountants (IESBA), International Code of Ethics for Professional Accountants (including International Independence Standards) related to listed and public interest entities. The changes to the IESBA Code require firms to publicly disclose when the independence requirements for public interest entities have been applied in an audit of financial statements.

Proposed Revisions to ISA 700:

Paragraph 28(c) of ISA 700 (Revised) requires the auditor to identify the jurisdiction of origin of the relevant ethical requirements or refer to the IESBA Code. However, it does not require the auditor 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.
The IAASB identified two possible approaches to amending the requirement in paragraph 28(c) of
ISA 700 (Revised) that would require public disclosure that differential independence requirements
for audits of financial statements of certain entities were applied:

• A conditional requirement that applies only when the relevant ethical requirements require public disclosure, during the audit of financial statements of listed entities and PIEs, that 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.
• A non-conditional requirement that would apply in all circumstances when 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 supports a conditional requirement because:

• It does not impose an obligation on the auditor to disclose in the auditor’s report that the relevant
  ethical requirements for independence for those entities were applied if the underlying relevant
  ethical requirements do not require the auditor to do so. It enables to determine whether it is
  appropriate to have a transparency requirement in their ethical requirements, and whether the
  transparency requirement should specify circumstances when it is not appropriate to provide
  such disclosure (e.g., when the disclosure would result in revealing confidential future plans of
  the entity).
• Mandating disclosure in all circumstances could expand the disclosure to circumstances when
  relevant ethical requirements, including jurisdictional law or regulation, impose independence
  requirements on certain entities that are not Public Interest Entities (PIEs)
• Describing the independence requirements applied when there are multiple ethical codes,
  law or regulation applicable in the circumstances, could become complex if the auditor is also
  required to explain whether specific independence requirements for certain entities contained
  in the ethical codes, law or regulation were applied.

Proposed Revisions to ISA 260:

The IAASB agreed that revisions to ISA 260 may be necessary to increase transparency with Those
Charged with Governance that differential independence requirements for certain entities have
been applied. Communication of matters related to independence is already captured in ISA 260.
Accordingly, new application material has been proposed to ISA 260 to correspond with the
revisions to ISA 700.

Effective Dates:

IAASB is proposing that the amendments to ISA 700 and ISA 260 become effective for audits of
financial statements for periods beginning on or after December 15, 2024. The IAASB is of the view
that this timeframe is adequate to allow jurisdictions sufficient time for translation of the final text of
the amendments to the respective ISAs, for national adoption processes to occur, and for
practitioners to update templates and associated internal materials. The IAASB considers that a
longer effective date is unnecessary due to the limited nature of the amendments proposed and
because it would not be in the public interest to have a prolonged misalignment with the IESBA
Code in this regard.

Hemant Joshi, Audit Associate, SW India