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IAASA publishes survey of Directors’ Critical Accounting Judgments and Auditors’ Assessed Risks of Material Misstatement

30/11/2015

IAASA, Ireland’s accounting enforcer, has today published the results of a desk top survey it has undertaken into the critical accounting judgments made by company directors, together with a comparison of the assessed risks of material misstatement identified by those companies’ independent auditors. The survey covered the 2014/2015 financial statements of 20 companies listed on the Stock Exchange.

The published document is available here.

Background

Financial reporting standards require the disclosure of judgments that have the most significant effect on the amounts recognised in the financial statements. Auditing standards require auditors to provide a description of those assessed risks of material misstatement that the auditor identified and which had the greatest effect on the overall audit strategy, the allocation of resources in the audit and directing the efforts of the audit engagement team.

The primary purpose of the desk top survey was to:

  1. determine the critical accounting judgements which the companies’ directors considered to be the most significant when preparing their 2014/15 financial statements;

  1. determine the assessed risks of material misstatement identified by those companies’ auditors; and

  1. provide preparers, auditors and users of financial statements with factual information which may encourage discussion and debate on the nature and extent of assessed risks and judgements made in the 2014/15 financial statements.

Key survey results

The most common critical accounting judgements made by directors in the 2014/15 financial statements were:

  1. taxation – identified in 75% of the financial statements;

  2. retirement benefit obligations – identified in 60% of the financial statements;

  3. goodwill impairment – identified in 55% of the financial statements; and

  4. provisions – identified in 40% of the financial statements.

In relation to auditors, the most common assessed risks of material misstatement identified in the 2014/15 audit reports were:

  1. assessment of goodwill – identified in 55% of audit reports;

  1. deferred tax – identified in 40% of audit reports;

  1. revenue recognition – identified in 40% of audit reports; and

  1. retirement benefit obligations – identified in 30% of audit reports.

It is interesting that a number of the topics identified by the directors as critical accounting judgements and the assessed risks of material misstatement identified by the auditors are those raised by IAASA through its accounting enforcement activities. In some instances undertakings have been received from companies with regard to these matters.

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