Auditing and Compliance: Requirements for Auditors Under IFRS 18

The transition to IFRS 18 has significant implications for the annual financial statement audit. External auditors must understand the new standards, review their implementation, and ensure compliance. This article examines the requirements for auditors and highlights how companies can optimize their collaboration with auditors.

The Role of Auditors in IFRS 18

Auditors play a critical role in ensuring compliance with IFRS 18. Their responsibilities include:

Audit of implementation: Verifying that the implementation complies with the requirements of IFRS 18.

Reviewing classification: Verifying that items are correctly classified into the new categories.

Reviewing MPMs: Verifying that Management-Defined Performance Measures are correctly calculated and disclosed.

Reviewing consistency: Verifying that classification is consistent across multiple periods.

Reviewing disclosures: Verifying that all required disclosures are present.

Audit Approaches for the New Income Statement Categories

Auditors will develop new audit approaches to audit the new income statement categories:

Audit Approach 1: Understanding the New Categories

The first step is for auditors to develop a deep understanding of the new categories (Operating, Investing, Financing). This includes:

• Understanding the definition of each category

• Understanding the boundaries between categories

• Understanding special cases and exceptions

Audit Approach 2: Review of the classification process

Auditors will review the classification process:

• Verifying that classification guidelines are documented

• Verifying that the classification process is applied consistently

• Verifying that classification decisions are traceable

Audit Approach 3: Sampling

Auditors will perform sampling to verify that items are classified correctly:

• Selecting samples from each category

• Verifying that the classification is correct

• Identifying patterns or systematic errors

Audit Approach 4: Review of Borderline Cases

Auditors will pay particular attention to borderline cases:

• Items that are difficult to classify between categories

• Items that were classified differently in prior periods

• Items that are industry-specificPrüfung von Management-Defined Performance Measures (MPMs)

Auditing MPMs is a new focus for auditors:

Audit Approach for MPMs

Identification of MPMs: Auditors will first identify all MPMs that the company is required to disclose.

Review of Definitions: Auditors will verify that the definition of each MPM is clear and applied consistently.

Review of Calculations: Auditors will verify that each MPM is calculated correctly.

Reconciliation review: Auditors will verify that the reconciliation to IFRS subtotals is correct.

Disclosure review: Auditors will verify that the disclosure is complete and understandable.

Challenges in Auditing MPMs

One challenge in auditing MPMs is that there are no uniform standards for their calculation. Different companies may calculate the same metric differently. Auditors must therefore:

• Develop an understanding of the calculation

• Verify consistency with prior periods

• Verify plausibility

Common Errors and How to Avoid Them

Based on early implementations of IFRS 18, several common errors have emerged:

Error 1: Inconsistent Classification

Problem: Items are classified differently across periods.

Prevention: Develop clear classification guidelines and apply them consistently.

Error 2: Incomplete Disclosure of MPMs

Problem: Not all MPMs that the company communicates externally are disclosed.

Prevention: Conduct a thorough review of all external communication channels to identify all MPMs.

Error 3: Incorrect Reconciliation Statements

Problem: Reconciliation statements for MPMs are incorrect or incomplete.

Prevention: Thoroughly review reconciliation statements and work closely with auditors.

Error 4: Insufficient documentation

Problem: Classification decisions and calculations are not sufficiently documented.

Prevention: Implement processes that ensure thorough documentation.

Error 5: Insufficient system support

Problem: Systems do not sufficiently support the new requirements.

Prevention: Adapt systems early on and test thoroughly.

Collaboration with Auditors

Close collaboration with auditors is essential:

Best Practice 1: Early Coordination

Coordinate with your auditors early on to ensure that you fully understand the requirements.

Best Practice 2: Regular Updates

Keep your auditors regularly updated on the progress of the implementation.

Best Practice 3: Provide Documentation

Provide your auditors with all necessary documentation to support the audit.

Best Practice 4: Open Communication

Communicate openly about challenges and issues. This helps find solutions more quickly.

Best Practice 5: Clarification of Special Cases

Clarify special cases and borderline cases with your auditors to ensure you handle them correctly.

Compliance Requirements

In addition to the annual financial statement audit, there are other compliance requirements:

Regulatory Requirements

Various regulators may have specific requirements regarding the implementation of IFRS 18. These may include:

• Disclosure requirements

• Reporting requirements

• Documentation requirements

Internal Compliance

Companies should establish internal compliance processes to ensure that the IFRS 18 requirements are met:

• Regular review of compliance

• Documentation of compliance reviews

• Resolution of compliance issues

Conclusion: The audit is a collaborative process

The audit of the implementation of IFRS 18 is a collaborative process between the company and its auditors. Companies that work closely with their auditors and provide thorough documentation will successfully complete the audit and ensure compliance.

Investing in a thorough implementation and documentation pays off when it comes to the annual financial statement audit.