IRBA EAR Rule

The IRBA Rule on Enhanced Auditor Reporting for the audit of financial statements of public interest entities (EAR Rule) was published in the Government Gazette on 15 September 2023. This rule will finally become effective from 15 December 2024, and auditors must ensure that they are fully prepared to implement its requirements.

The EAR Rule

For audits of annual financial statements of public interest entities (PIEs), the audit firm must disclose the following in the independent auditor’s report:

a) The final materiality amount determined by the auditor for the financial statements, as a whole, as well as an explanation of significant judgments made by the auditor in determining this materiality

b) The scope of the audit of group financial statements, and any significant judgments applied in this determination

c) A description of how the auditor evaluated management’s assessment of the entity’s ability to continue as a going concern, where the auditor has concluded that the going-concern assumption is appropriate, but a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, and adequate disclosures about the uncertainty are made in the financial statements

d) Key Audit Matters (KAMs), and the outcome of audit procedures or key observations, with respect to KAMs

e) Where the disclosure was not made in the annual financial statements or the annual report, the following fee-related matters should be disclosed in the independent auditor’s report:

i. Fees paid or payable to the firm and network firms for the audit of the financial statements on which the firm expresses an opinion

ii. Fees, other than those disclosed under (e)(i), charged to the client for the provision of services by the firm or a network firm during the period covered by the financial statements on which the firm expresses an opinion

iii. Any fees, other than those disclosed under (e)(i) and (ii), charged to any other related entities over which the audit client has direct or indirect control for the provision of services by the firm or a network firm, where the firm knows, or has reason to believe that such fees are relevant to the evaluation of the firm’s independence

iv. If applicable, the fact that the total fees received by the firm from the audit client represent, or are likely to represent, more than 15% of the total fees received by the firm for two consecutive years, and the year that this situation first arose.

Application guidance

The IRBA issued IRBA Staff Audit Practice Alert 9 in September 2023 to provide guidance on the application of the EAR Rule. While the EAR Rule is not applicable to audits of entities that are not PIEs, auditors of non-PIEs may make voluntary additional disclosures in the independent auditor’s report, as set out in the EAR Rule. In those circumstances, the guidance provided in the IRBA Staff Audit Practice Alert 9 may be applied without referring to the EAR Rule.

The guidance includes the following, and is supplemented by examples of additional disclosures in Appendix 2 of the alert:

Final materiality: An explanation of the final materiality disclosed and how the auditor may describe the significant judgments applied in determining materiality, using language that is understandable to all users
Group audit scope: Considerations in disclosing the scope of the audit in the context of group audits, and the significant judgments applied by auditors in determining the group audit scope
Going concern: Consideration of existing guidance in ISA 570 and ISA 701 when describing how the auditor evaluated management’s assessment
KAMs: A consideration of existing guidance on KAMs and guidance on avoiding discrete opinions on separate elements of the financial statements by giving examples of how outcomes and/or observations may be described in the KAMs, as well as wording that could be avoided
Fee-related disclosures: Application of IESBA guidance on fee-related matters, including considerations of what defines ‘fees’, as well as the application of the EAR Rule on fees for group audit and joint audit situations.

SAAPS 3 (Revised March 2024)

SAAPS 3 (Revised March 2024) was updated to incorporate the EAR Rule into the illustrative reports. Amendments were also made to the notes to Part A, including:

Addition of a new Note 16, IRBA Rule: Enhanced Auditor Reporting Requirements, which explains the EAR-related additions to the illustrative reports
Amendment to Note 7, Key Audit Matters, to incorporate the EAR Rule requirement to report key audit matters for all PIEs (which is an extension of the ISA 701 requirement through a legal requirement).

In summary

Audit firms should ensure that they are fully prepared for the implementation of the EAR Rule by ensuring that audit report templates for PIEs are updated, staff members are aware of the new requirements, and adequate audit work is performed to support additional disclosures made in the audit report.

References

1. IRBA Rule on Enhanced Auditor Reporting for the Audit of Financial Statements of Public Interest Entities, Government Gazette No. 49309 on 15 September 2023 (Board Notice 475 of 2023)
2. IRBA Staff Audit Practice Alert 9, September 2023, Guidance on the IRBA Rule on Enhanced Auditor Report for the Audit of Financial Statements of Public Interest Entities
3. SAAPS 3 (Revised March 2024), Illustrative Reports

How LEAF can assist

LEAF can assist firms with a full-spectrum service, producing manuals and risk registers, in line with firm circumstances and risks; continuous administration and monitoring of quality management systems; monitoring of audit engagement quality; thorough file reviews and EQR reviews; providing practical advice; reviewing methodology design; designing audit working paper templates; and providing staff training on the relevant requirements and procedures. Necessary safeguards are being applied to ensure the objectivity of our partners in each team.