GAAP Deficiency Report to the Annual Audit Practice—November 2019

Prepared by: AAPT

Background

As stated in our annual audit methodology, “to ensure that the overall presentation of the financial statements, including the related disclosures, is in accordance with the applicable financial reporting framework, the relevant Financial Statement Disclosure Checklist or equivalent tailored to the entity’s circumstances and addressing the relevant auditing, accounting and other issues, shall be completed and reviewed by the engagement leader.” [AAM 9032]

The Financial Statement Review Team (known as AAPT) conducts financial statement reviews to provide assurance to the report signatory that, in all material respects, the financial statements are prepared in accordance with the applicable financial reporting framework and that the auditor’s report is appropriately worded.

Best practices suggest that “good disclosure” should describe a situation in enough detail for a reader to understand the following:

  • What is the issue? (Include relevant context / background information)

  • How was the issue accounted for? (Discuss any accounting policy choices made and alternatives considered)

  • What are the reasons supporting the accounting?

  • Which financial statement accounts are affected?

  • Why is it relevant to the entity? (Discuss magnitude of exposure)

Use of a “boilerplate disclosure” is the result of the entity failing to clearly explain one or more of the elements of good disclosure. The most common deficiencies relate to a lack of disclosing sufficient context or background information, the key reasons for supporting the conclusion, and the magnitude of exposure.

Deficiencies commonly identified in financial statements reviews completed from 1 October 2018 to 30 September 2019

The purpose of this report is to provide a summary of the presentation and disclosure deficiencies commonly identified by AAPT in the financial statements reviews completed over the past year. This is not an exhaustive list of all deficiencies identified. Information found in the list below should help audit teams assess the sufficiency and appropriateness of financial statement presentation and disclosure during their own review of the financial statements.

Between 1 October 2018 and 30 September 2019, AAPT completed 58 financial statement reviews (either full or targeted), relating to the following different financial reporting frameworks:

  • 29 International Financial Reporting Standard (IFRS)
  • 16 Public Sector Accounting Standard (PSAS)
  • 6 International Public Sector Accounting Standard (IPSAS)
  • 7 other frameworks

From those financial statement reviews, AAPT observed the following presentation and disclosure deficiencies:

Adoption of new accounting standards

  • In the case of a retrospective or retroactive application, comparative information within impacted note disclosures were not consistently labelled as “restated” where applicable (IAS 8.28‑29, PS 2120.18‑23, IPSAS 3.33‑34).

  • The general disclosure requirements for changes in accounting policies were not adequately met within the detailed change in accounting policy note (IAS 8.28‑29, PS 2120.18‑23, IPSAS 3.33‑34), such as:

    • Inadequate identification of impacted note disclosures, or of impacted major subtotals on main statements.

    • Unclear or internally inconsistent disclosure about the impact of the adoption.

  • Various disclosure requirements within newly adopted accounting standards were not adequately met (IFRS 7.42I‑42S, IFRS 15.110‑129, IPSAS 39.137‑154).

Correction of prior period errors (IAS 8, PS 2120, IPSAS 3)

  • In a case of a restatement, comparative information within impacted note disclosures not consistently labelled as “restated” where applicable (IAS 8.29, PS 2120.18, IPSAS 3.34).

  • The disclosure requirements for error corrections were not adequately met (IAS 8.49, PS 2120.34, IPSAS 3.54).

Reclassification of comparative information (IAS 1, PS 2120, IPSAS 1)

  • The disclosure requirements for reclassifications of comparative information were not adequately met (IAS 1.41, PS 2120.05, IPSAS 1.55).

Financial instruments—definitions (IAS 32, PS 3450, IPSAS 28), and disclosures (IFRS 7, PS 3450, IPSAS 30)

  • Items missing from the financial instruments disclosures that should be included, or items incorrectly disclosed as financial instruments that don’t meet the definition of a financial instrument (IAS 32.11, IFRS 7.3, PS 3450.001‑.008, IPSAS 28.9).

  • Incomplete or non‑GAAP disclosure of the significant accounting policies relating to financial instruments (IFRS 7.21, PS 3450.078, IPSAS 30.25).

  • Incorrect or incomplete disclosure about financial instrument risks (IFRS 7.31‑42, PS 3450.085‑096, IPSAS 30.38‑49), such as:

    • Missing sensitivity analyses;

    • Internally inconsistent information between different notes or main statements about the extent of certain risks.

  • Continued use of terminology or classifications from the previous financial instrument standard that no longer exist within the new financial instrument standard (such as IFRS 9 vs IAS 39 classifications)

Various other disclosure observations (IAS 1, IFRS Conceptual Framework, PS 1201, PS 1000, IPSAS 1, IPSAS Conceptual Framework)

  • The inclusion of information on the nature and key terms of material transactions or balances was an area where disclosure was sometimes insufficient or missing (IAS 1.112(c), PS 1201.046, PS 1201.051, IPSAS 1.127(c)).

  • General understandability of the financial statements (IFRS Conceptual Framework, PS 1000, IPSAS Conceptual Framework) was also sometimes hindered in a variety of ways relating to disclosure deficiencies, such as:

    • Material financial statement line items for which there was no related significant accounting policy note disclosed, or no related and referenced detailed note disclosure.

    • Unclear or incomplete significant accounting policy notes or detailed note disclosures (particularly in respect of disclosures relating to the new IFRS 15 standard, such as information about performance obligations or contract assets and liabilities).

    • Internal inconsistencies in terminology or information throughout the financial statements.

    • Insufficient disclosure about the specific significant judgments made by management in applying the significant accounting policies (IAS 1.122).

Various presentation observations (IAS 1, IAS 7, PS 1000, PS 1201, IPSAS 1, IPSAS 2)

  • Incorrect current versus non-current classification of liabilities (IAS 1.69, IPSAS 1.80), or assets (IAS 1.66, IPSAS 1.76), on the statement of financial position.

  • Inappropriate offsetting or net presentation of assets and liabilities (including pension plans) on the statement of financial position (IAS 1.32, PS 1201.044, PS 1201.049, IPSAS 1.48), of revenues and expenses on the statement of operations (IAS 1.32, PS 1201.083, PS 1201.085, IPSAS 1.48), or of certain amounts on the statement of cash flows (IAS 7.22, PS 1201.119-123, IPSAS 2.32).

  • Inclusion of non-cash items on the statement of cash flows outside of operating activities (IAS 7.43-44, PS 1201.124, IPSAS 2.54-55).