Benchmarking the new auditor’s report Key audit matters and other additional information Audit & Assurance Contents Introduction 01 Benchmarking results: key audit matters 03 Goodwill and intangible assets 05 Revenue recognition 08 Taxation 10 Provisions 12 Pension accounting 13 Audit procedures to address KAMs 14 Additional information in the auditor’s report 15 Determination of materiality 15 Group scoping 16 Contacts 19 Benchmarking the new auditor’s report | Key audit matters and other additional information Introduction Released six months after the end of the 2016 calendar year, this The benefits of the new structure and disclosing key audit publication is the first comprehensive analysis of the new auditor’s matters were discussed in detail in our earlier publication report with a main focus on the new key audit matters. Our first Clear, transparent reporting. impression is: a first step has been made, but the journey has not yet ended. What has changed? The annual reports of companies listed on a stock exchange in Switzerland include the auditor’s opinion on the consolidated financial statements and the standalone financial statements of the holding company. The audit report on consolidated financial statements prepared in accordance with IFRS, Swiss GAAP FER or US GAAP has now changed for listed companies. After a five‑year project led by the International Auditing and Assurance Standards Board (IAASB), followed by a transition period, auditors of listed entities needed to apply the revised International Standard on Auditing (ISA) 700 and the new ISA 701 for the first time in their audits of financial statements for periods endedDecember 2016 . This change comes from a demand by investors and users of What have we analysed? financial statements for more insights and transparency into the audit. The revision of ISA 700 has also led to a new structure of the This publication analyses the recently published audit opinion. With the new structure, the auditor’s report begins new auditor’s reports for companies in directly with the “opinion” and the identification of the document Switzerland listed at the SMI (“Swiss Market that has been audited. Investors and users of financial statements benefit from an increased understandability of the auditor’s report. Index”) or SPI (“Swiss Performance Index”). For listed companies, the new auditor’s report discloses the We selected a representative sample of 50 companies: 19 SMI matters that were of most significance in the audit. The new ISA companies and 31 SPI companies. These 50 companies cover 701 defines them as “key audit matters”. With this information a broad range of industries and sizes. As for their consolidated the auditor's report has been transformed from a standard pass/ financial statements, 70% prepare them in accordance with IFRS, fail report into a more meaningful and customised report and 20% with Swiss GAAP FER and 10% with US GAAP. represents a move towards more clarity and transparency. 01 Benchmarking the new auditor’s report | Key audit matters and other additional information Swiss GAAP FER is mainly applied by SPI companies and IFRS We understand from the results of our analysis that audit firms by SMI companies. The holding company information is subject support innovation and are willing to provide investors and to Swiss law and therefore prepared in accordance with the other stakeholders with greater transparency into the audit as requirements of the Swiss Code of Obligation (SCO). well as insights. We at Deloitte, are of the opinion that the more transparent we are in our daily business, the better the quality For the 50 companies, we have analysed both the auditor’s of our work will be. We, as a firm, are keen to go the extra mile to report on the consolidated financial statements as well as on respond to regulatory and investor expectations and introduce the standalone financial statements of the holding company. enhanced information in our new audit report. The analysed companies are all audited by one of the Big 4 audit firms (Deloitte, EY, KPMG and PwC). What will be the challenges? As stated at the beginning, a first step towards greater Our main focus was to see how the requirements of the revised transparency and understandability has been made. However, the ISA 700 and the new ISA 701 have been implemented in practice. journey has just started. Both auditors as well as board In particular, we were interested to see which audit areas have members, management, investors and other stakeholders been identified as key audit matters and how they have been need to balance the right level of information. addressed. We were also interested in additional information such as the materiality and group scoping. However, there is a risk that the new auditor’s report becomes a boilerplate report disclosing “standard” key audit matters without What are the key messages? tailoring to the companies’ circumstances or without revising them Our most important finding in the analysis of the new audit report in subsequent years. In light of this, we as audit firms need to be is that audit firms in Switzerland apply the new auditing proactive in reflecting these changes in the auditor’s report. standards in different ways. We noted two divergent trends: two Big 4 audit firms did not disclose voluntary additional information The company and industry specific circumstances should be such as reporting materiality and group scoping and limited considered prior to disclosing certain key audit matters or themselves to the minimum requirements. materiality and group scoping information. We do not consider that there is only one approach that fits all situations. Consequently, In contrast, the other two audit firms disclosed more information we are encouraging our audit teams to discuss such matters with than was required by the standards to increase transparency. audit committee members and management at an early stage Deloitte was one of these two firms and, as a firm, we have of the audit in order to agree on an approach which meets the concluded that information relating to materiality and group expectations of the investors and users of the financial statements scoping is also important information for the readers of the whilst not disclosing sensitive financial information. financial statements. Thierry Aubertin, Managing Partner, Audit & Assurance 02 Benchmarking the new auditor’s report | Key audit matters and other additional information Benchmarking results: key audit matters Our analysis shows that all auditor’s reports on the consolidated So let’s look a bit deeper into the KAMs relating to the consolidated financial statements disclose at least one key audit matter (KAM) in financial statements. All auditor’s reports analysed contain at least specific situations but not more than seven KAMs. one KAM. In fact, a quarter of analysed reports (26%) disclosed only one KAM. 10 out of 50 companies (20%) disclosed On average, the auditors disclosed 2.8 KAMs per two KAMs and 11 out of 50 companies (22%) disclosed either three or four KAMs in the attached audit opinion. In contrast, three group audit. In comparison, the auditor’s reports companies disclosed five KAMs, whereas two companies disclosed on the financial statements of the holding more than five KAMs (maximum seven KAMs). company describe 0.7 KAMs on average. Number of KAMs This number is interesting as there are already two presumed significant risks as per Swiss/International Standards on Auditing 8 (SAS/ISA): management override of controls and revenue 7 6 recognition. Depending on their nature, these risks may not 5 require significant auditor attention, and therefore would not be 4 considered in the auditor’s determination of KAMs. Nevertheless, 3 given this background, a low number of KAMs might be seen as 2 slightly surprising. 1 0 Min Max Average Median The range of KAMs reported in the auditor’s report on the financial Group FS Holding FS statements of the holding company is far lower. It ranges from no KAM up to two KAMs. In 30% of the analysed auditor’s reports on the holding company the auditor stated that there were no KAMs. When analysing the number of KAMs per audit firm, 3 out of 4 audit In contrast, 35 out of 50 auditor’s reports (70%) disclose one or two firms disclosed more KAMs than the average (2.8), Deloitte (3.5), EY KAMs. All of these reports disclosed valuation of investments and/ (3.1) and KPMG (3.9) all show more than 3 KAM per auditor’s report or loans as one of the KAMs. In two cases the auditor disclosed the on average. In comparison, PwC only disclosed 2 KAMs on average. topics of going concern and impairment of intangible assets as the second KAM. 03 Benchmarking the new auditor’s report | Key audit matters and other additional information 31 audit reports (62%) have reported goodwill and intangible assets being either one or two KAMs. Trailing a fair distance behind in second place is revenue recognition related audit matters (22 companies have reported in total 23 KAMs, being 44% of all companies) and third place goes to taxation related audit matters (19 companies have reported 26 KAMs, being 38% of the analysed companies). The fourth most reported KAM is related to provisions (12 out of 50 auditor’s reports (24%) discloses 13 provision related KAM. 7 auditor’s reports (14%) disclosed pension accounting and IAS 19 related topics as KAMs, being the fifth most disclosed KAM. Disclosure of KAMs 70 62% 60 50 44% 38% 40 30 24% 14% 20 12% 10% 10% 6% 6% 6% 6% 10 4% 4% 4% 4% 4% 4% 2% 2% t s s s s g g d n 0 ls Taxation Inventory Securities and loan Provisions Other risks Goodwill an Restructuring n concer Going Plant, property and equipmen intangible assets and combinations Pension accountin Capital expenditure Insurance reservin Business acquisition Accounts receivable Investment property Revenue Recognitio Financial instrument IT system and contro Discontinued operations Management estimation Percentage of companies Our analysis of 50 auditor’s reports on the consolidated financial statements identified 138 KAMs in total.