The new auditor's report

Study of first year of application

in Italy by listed companies
July 2018
The new auditor's report | Study of first year of application in Italy by listed companies

Contents

Introduction 3
What's new?
What are Key Audit Matters?
What have we analysed?
Preliminary considerations

Results of the analysis 9

Number of Key Audit Matters
Key Audit Matters categories
Main matters

Other results arising from the analysis 19

Modifications to the opinion in the
independent auditor’s report
Going concern
Emphases of matter

Forthcoming challenges 21

Contacts 23

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 The new auditor's report | Study of first year of application in Italy by listed companies

Introduction

What's new?
With the aim of promoting greater transparency of thereof, gave a concise opinion on the financial
financial statements for third party users, the European statements as a whole. To meet the increasingly
legislator and the IAASB have respectively issued growing needs of the market, the Legislator and
regulations and auditing standards that have changed the Standard Setter have deemed it appropriate to
the structure and content of the auditor’s report. enhance the communicative value of the auditor’s
Prior to these changes, the auditor’s report was the report, in the users' interest.
conclusion of a process that, based on the outcome

New auditor’s report

Directive 2014/56/EU Art. 28 Opinion

(transposed by Leg. Dec. 135/16)

Amendments made to Directive 2006/43/EC (transposed Basis for opinion

into Italian law by Leg. Dec. 39/2010) relating to statutory
audits of annual accounts and consolidated accounts
Key Audit Matters (PIEs)

Revised ISAs Responsibilities of the Directors and Board of

Statutory Auditors for the Financial Statements

Regulation (EU) 537/2014 Art. 10 Auditor’s Responsibilities for the Audit of

the Financial Statements
Regulation (EU) 537/2014 sets out specific requirements
regarding statutory audits of the accounts of Public Other information communicated pursuant to
Interest Entities (PIEs) art. 10 of the EU Regulation 537/2014 (PIEs)

Report on Other Legal and

Regulatory Requirements

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The new auditor's report | Study of first year of application in Italy by listed companies

As a result of the enactment of Legislative Decree 135 According to Regulation (UE) 537/14, Key Audit Matters
/16, which updated and amended Legislative Decree should be communicated in the auditor’s report for the
39/10, and Regulation (UE) 537/14 concerning Public financial statements of Public Interest Entities, which
Interest Entities, the auditor’s report has undergone include:
substantial amendments, not only to its structure, a) Italian companies with transferable securities listed
but also to its content. Under these circumstances, on Italian and EU regulated markets
the auditing standards below have been updated or
b) banks
prepared1.
c) insurance and reinsurance undertakings3.

ISA Italia 710 (revised) (new) ISA Italia 701

Comparative information Communicating key What are Key Audit Matters?
corresponding figures audit matters in the
independent
Determining Key Audit Matters
and comparative
financial statements
ISA Italia 700 auditor’s report
(revised) The auditor shall determine from the matters
Forming an opinion communicated with those charged with
and reporting on
ISA Italia 706 financial statements
ISA Italia 705 governance, those matters that required significant
Emphasis of matter Modifications to the auditor attention in performing the audit, including:
paragraphs and other opinion in the
matter paragraphs in independent • areas of higher assessed risk of material
the independent auditor’s report
auditor’s report (revised) (revised) misstatement, or for which significant risks have
been identified
The new regulations for the preparation of the auditor’s • significant auditor judgements relating to
report are intended to increase transparency. areas of significant management judgement
In fact, the inclusion of information on so-called in the financial statements, including accounting
“Key Audit Matters”2 as required by the standard on estimates subject to a significant degree of
auditing, ISA Italia 701, constitutes a significant change, uncertainty
the benefits of which had been expected by various • the effect on the audit of significant events or
corporate stakeholders, supervisory bodies, those transactions that occurred in the period.
charged with governance and the audit firms.

1. The amendments to the auditing standards became effective for audits of financial statements for periods beginning on or after 6 August 2016
and, for Public Interest Entities, for periods beginning on or after 17 June 2016. The following have been revised: ISA Italia 570 (Revised) (Going
concern); ISA Italia 260 (Revised) (Communication with those charged with governance); ISA 720B (Revised) (The auditor’s statutory reporting
responsibility in relation to directors’ reports and certain specific information contained in the report on corporate governance and ownership
structure) (effective for audits of financial statements for periods beginning on or after 1 July 2016). In order to implement the conforming
amendments to the standards relating to the auditor’s report as well as the amendments to Legislative Decree 39/10 introduced by Legislative
Decree 135/16 and by Regulation (EU) 537/14 effective for audits of financial statements for periods beginning on or after 31 December 2017,
amendments have also been made to other auditing standards. .
2. Key Audit Matters or KAM.
3. In accordance with ISA Italia 701, to facilitate the comparability and consistency of the content of the auditor's report on financial statements
of companies other than PIEs, it is not permitted to communicate Key Audit Matters in the auditor's report on the financial statements of such
companies.
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 The new auditor's report | Study of first year of application in Italy by listed companies

Of those identified in accordance with the above • why the matter was considered to be a Key Audit
criteria, the auditor should select those matters that Matter (WHY)
are of most significance in the audit of the financial • the manner in which the matter was addressed
statements and that are, therefore, the Key Audit during the course of the audit, being a summary of
Matters. the auditor's response in terms of audit procedures
performed (HOW)
Matters communicated with those charged with governance
• where pertinent, the main observations made in
relation to the key matter described.
Matters that require significant
auditor attention
Paragraph 4 of ISA Italia 701 clarifies that:
Matters of most “Communicating Key Audit Matters in the auditor’s
significance report is in the context of the auditor having formed
an opinion on the financial statements as a whole.
Communicating Key Audit Matters in the auditor's report
is not
Key
a) a substitute for disclosures in the financial
audit
matters statements that the applicable financial reporting
framework requires management to make, or that are
Auditor’s judgment otherwise necessary to achieve fair presentation;
b) a substitute for the auditor expressing a modified
opinion when required by the circumstances of
a specific audit engagement in accordance with
Communicating Key Audit Matters International Standard on Auditing (ISA Italia) 705;
The description of each Key Audit Matter must include: c) a substitute for reporting in accordance with
• a concise and specific explanation of the matter, International Standard on Auditing (ISA Italia)
which, having been determined to be of most 570 when a material uncertainty exists related to
significance in the audit of the financial statements, events or conditions that may cast significant doubt
was deemed to be a Key Audit Matter on the entity’s ability to continue as a going concern,
• a reference to the related disclosure(s), if any, in the or
financial statements d) a separate opinion on individual matters”.

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The new auditor's report | Study of first year of application in Italy by listed companies

What have we analysed? The companies analysed had the following market
The analysis was conducted on auditor's reports issued capitalisation at the end of 2017 (in Euro million) 4:
since the implementation of Regulation (EU) 537/14 and
of the new standard on auditing, ISA Italia 701, relating
to the financial statements of Italian companies with 1 Shares suspended
shares listed on the Electronic Equities Market 9
13 0-500
(MTA) organised and managed by Borsa Italiana, as
resulting from the list available on Borsa Italiana's
501-1,000
website “Listed companies capitalisation on 29 57
December 2017”. 121 1,001-5,000
The analysis was performed on auditor's opinions
5,001-10,000
on consolidated financial statements and, solely for 20
companies that do not prepare the latter, on auditor's 10,001-55,000
opinions on financial statements published on or
before 15 June 2018.
The analysis thus covered 221 companies, of which For each auditor’s report subjected to analysis:
over 95% had a 31 December 2017 financial year end. • we have categorised the Key Audit Matters based on
In dettaglio: the topic addressed

• 6 companies with a 30 June 2017 financial year end • we have considered, with reference to the audit
procedures, if the foregoing had required the
• 1 company with a 31 October 2017 financial year end
performance of tests of the operating effectiveness
• 212 companies with a 31 December 2017 financial of the issuer's controls or recourse to specialists or
year end experts
• 1 company with a 31 January 2018 financial year end • we also collected and summarised further
• 1 company with a 28 February 2018 financial year information, such as the type of opinion, the
end. existence of sections addressing material
uncertainties related to going concern and emphases
of matter.

4. Source: Borsa Italiana's Listed Companies Capitalisation on 29 December 2017.

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 The new auditor's report | Study of first year of application in Italy by listed companies

When categorising the KAMs, we adopted the following but are dealt with by the auditor in a specific and
conventions and assumptions: separate section of the auditor’s report. Situations
• Key Audit Matters concerning impairment testing characterized by material uncertainty are examined
involving goodwill and other asset components have in the section “Other results arising from the
been allocated to a category entitled “Goodwill and analysis”
intangible assets” • a category entitled “Provisions and Contingencies”
• for Key Audit Matters concerning more than one has been used for issues pertaining to allocations to
item/category, we have allocated the KAM to the provisions and KAMs concerning risk disclosures that
most significant category in quantitative terms did not give rise to the recognition of a provision.

• the “going concern” category considers matters Moreover, to enable further analysis of the results,
relating to the going concern basis other than those we have classified the entities analysed into sectors
where a material uncertainty exists in relation to in order to examine the correlation between KAM
events or circumstances that may cast significant categories and different activity sectors.
doubt over the entity’s ability to continue as a The breakdown by sector is based on an internal
going concern. Under the new ISA Italia 570, these classification by Deloitte. The companies analysed may
last circumstances in constitute Key Audit Matters be broken down by sector as follows:

INDUSTRIAL PRODUCTS & SERVICES

BANKING
TRANSPORTATION, HOSPITALITY & SERVICES
MEDIA
FASHION & LUXURY
REAL ESTATE & CONSTRUCTION
POWER
CONSUMER PRODUCTS
CHEMICALS & SPECIALTY MAT.
INVESTMENT MANAGEMENT
TECHNOLOGY
AUTOMOTIVE
RETAIL
OIL & GAS
LIFE SCIENCES
INSURANCE
TELECOMMUNICATIONS
CIVIL GOVERNMENT
WATER
PUBLIC TRANSPORTATION

0 5 10 15 20 25 30

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The new auditor's report | Study of first year of application in Italy by listed companies

Preliminary considerations attention to the disclosure of issues identified, such

International studies show that in countries where the as KAMs, thus contributing in this manner to an
adoption of the new auditor’s report took place prior improvement in the financial reporting process.
to Italy (such as the United Kingdom, the Netherlands, Interaction with governance bodies and company
South Africa and Australia) the reaction of various management, with a constant dialogue throughout the
stakeholders was generally positive. audit process, from planning to completion, has also
Also in Italy, at the end of the first year of adoption, increased the transparency of the work performed by
an improvement was seen in the two-way dialogue the auditor, thus laying the foundations for continuous
between audit firms and governance bodies, audit quality improvement.
especially with audit committees on risk areas and It would thus appear that the changes introduced
audit procedures identified to address them, thus for 2017 audits onwards have marked the
encouraging the monitoring by such committees5 of beginning of a new path that could provide value
the financial statement audit process. added to issuers, increase investors' confidence
We also believe that the adoption of the new auditor’s in the financial reporting process and meet
report has driven issuers' management to give specific supervisory expectations.

5. Depending on the governance system adopted by a public interest entity, the audit committee would be: a) the Board of Statutory Auditors for
entities that have adopted the traditional system, b) the supervisory board or a subcommittee thereof for entities that have adopted the two-tier
system; c) the internal control committee for entities that have adopted the one-tier system.
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 The new auditor's report | Study of first year of application in Italy by listed companies

Results of the analysis

Number of Key Audit Matters In 2015, the IDW8 had developed a specific analysis of
The number of Key Audit Matters was the starting point auditor's reports issued in the United Kingdom and the
of the analysis. Some indication had been provided by Netherlands with the following findings:
authoritative sources, such as documents published in “The range in number of KAMs varied quite
2015 and 2016 by the IAASB that broached the subject considerably, possibly according to the complexity
as follows: of particular industries and, of course, the individual
• “The number of KAM that will be communicated entity’s circumstances. There was some evidence
in the auditor’s report may be affected by the that delineation of individual KAM may not be
complexity of the entity, the nature of the entity’s straightforward, which will also impact the number
business and environment, and the facts and of matters reported. KAM reporting in the first two
circumstances of the audit engagement. It is years was generally not static, and matters reported
envisaged that there will be at least one KAM for an changed, as did the level of detail, which in many cases
audit of a listed entity." 6 increased in the second reporting year. We noted a
marked difference between auditors’ reports issued in
• “The auditing standards therefore do not prescribe
the UK in 2013 and early 2014 compared to the latter
or limit the number of matters to be reported as
half of 2014 and subsequently. Noticeable differences
KAM – practice to date has shown that the average
over time were less significant in reports issued in the
number of KAM communicated falls somewhere
Netherlands”.
between two and six.” 7

6. “Auditor Reporting – Illustrative Key Audit Matters”,IAASB April 2015

7. “More informative auditor’s reports – what audit committees and finance executives need to know - auditor reporting”, IAASB, March 2016
8. “Analysis of Auditor Reporting on Key Audit Matters (KAM) in the UK and the Netherlands”, Institut der Wirtschaftsprüfer in Deutschland e.V., June 2015

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The new auditor's report | Study of first year of application in Italy by listed companies

With reference to the sample of companies examined, The analysis has revealed a higher number of KAMs for
we have analysed the number of Key Audit Matters this subset, as shown in the following table:
included in each auditor’s report and have noted
the figure related to auditor’s reports issued on the 20 Average No. 3.2
consolidated financial statements or, where this does Median 3
not exist, the figure related to auditor’s reports issued 15 13 Maximum No. 6

on the separate financial statements. 11

10
The table below shows that, of the 221 entities, more 6
than 35% of the companies had at least 2 KAMs, 26% 5
2 2
had 1 KAM and 24% had 3 KAMs. The numbers for 0 0
the lower and upper limits were limited (0 KAM and 6 0
0 kam 1 kam 2 kam 3 kam 4 kam 5 kam 6 kam
KAMs).

100 In order to evaluate the results emerging, in a broader

Average No. 2.2
Median 2 context, we have checked whether the results were
79
80 Maximum No. 6 in line with figures pertaining to other countries that
58 had already adopted the new auditor’s report in
60 53
accordance with ISA 701.
40 Specifically, we have examined a study by Deloitte10
21 based on a sample of 50 listed companies in
20 Switzerland with reference to reports on financial
4 3 3
statements for the year ended 31 December 2016, the
0
0 kam 1 kam 2 kam 3 kam 4 kam 5 kam 6 kam first year of adoption of the new auditor’s report in
that country, the results of which were the following:
“All auditor’s reports on the consolidated financial
To examine the level of correlation between the statements disclose at least one Key Audit Matter
number of KAMs and the size of the entities, we have (KAM) in specific situations but not more than seven
performed the same analysis for a subset of highly KAMs. On average, the auditors disclosed 2.8 KAMs per
capitalised issuers included in the FTSE MIB index. 9 group audit”.

9. This analysis was conducted with reference to 34 Italian companies included in the index, excluding 6 companies included in the index that have
their head office in other countries.
10. “Benchmarking the new auditor’s report: Key audit matters and other additional information”.
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 The new auditor's report | Study of first year of application in Italy by listed companies

Key Audit Matters categories

Goodwill and intangible assets:
155
We then examined the number of Key Audit Matters valuation or impairment

by previously identified category. The chart provides Revenue recognition 60

details of the TOP 5, which represent approximately Accounts receivable and loans 42

65% of the key matters, clearly showing the significance Provisions and contingencies 3
34
of certain issues compared to others.
Taxation 0
30
Further matters reported as KAMs pertain to the
categories: 0 20 40 60 80 100 120 140 160

• “acquisitions / business combinations” (29 KAM)

• “property and tangible assets: valuation or Consumer & Financial Services13 Energy & Resources14
impairment” (25 KAM) Industrial Products12

• “unlisted/ listed investments” (24 KAM) 10% 11% 11%

• “inventory” (23 KAM)
• “going concern” (in circumstances whereby no 22% 26%
11% 64% 50% 58%
material uncertainties were identified related to
going concern) (14 KAM)
43% 17% 21%
• “insurance reserving” (9 KAM) with respect to
insurance companies
• “derivatives and other financial instruments” (8 KAM) Technology, Media & Other sectors16
Telecommunications15
that account for approximately 27% of total KAMs.
The remaining KAMs, which account for approximately 9%
15%
8% of the total, are very fragmented, with less than 5 21%
KAMs for each further category. 11 62% 53%
17% 36%
An analysis of the results by industry sector shows a
different weighting of the various KAM categories. In 17%
fact, the “Goodwill and intangible assets” category
is the most frequent for the industrial sector, whereas
the “Accounts receivable and loans” category is Accounts receivable and loans Provisions and contingencies

ranked first for the financial sector. Goodwill and intangible assets Revenue recognition

Inventory Taxation

Property and tangible assets Unlisted / listed investments

11. Issues addressed in the remaining categories relate to “Pensions”, “Related party transactions”, “Disposals / Held for sale assets”, “Presentation of exceptional /
non-recurring items” and “IT change, security or controls”.
12. Includes the following sectors: Automotive, Chemicals & Speciality Mat., Consumer Products, Fashion & Luxury, Industrial Products & Services, Retail,
Transportation, Hospitality and Services.
13. Includes the following sectors: Banking, Insurance and Investment Management.
14. Includes the following sectors: Oil & Gas, Power and Water.
15. Includes the following sectors: Media, Telecommunications and Technology.
16. Includes the following sectors: Life Sciences, Civil Government, Public Transportation, Real Estate & Construction.
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The new auditor's report | Study of first year of application in Italy by listed companies

Main matters As regards the audit procedures performed to address the KAM
Goodwill and intangible assets (HOW), taking account of the complexity of the measurement
issues associated therewith, there was widespread recourse
In approximately 64% of the auditor's reports there is at least one
to experts/specialists to support the performance of the audit
KAM pertaining to the “Goodwill and intangible assets” category.
procedures. In particular, experts were used by audit teams,
Why is this?
who, under the management and the supervision of the latter,
The reasons are surely diverse and range from the number of were engaged to perform specific audit procedures that required
transactions completed in recent years, which, as a consequence specific skills with respect to valuation models, benchmarking
thereof, have led to the recognition of often significant amounts analysis, etc.
of goodwill or other intangible assets, to difficulties in measuring
On the other hand, there were very limited cases of the adoption
such items. In accordance with the relevant accounting standards,
of an audit approach based on the testing of the operating
the recoverability of goodwill is verified together with that of other
effectiveness of a company's internal controls, as shown by the
tangible and intangible assets, with reference to the same cash
tables below.
generating unit to which the goodwill has been allocated and, thus,
the KAMs included in this category also encompass other items
subjected to impairment testing.
17%
Do the procedures envisage
Key Audit Matters reported in connection with other intangible
experts/specialists being involved?
assets include KAMs relating to:
• recoverability of intangible assets primarily with indefinite useful YES

lives NO
• measurement of brands 83%

• recoverability of development costs

• measurement of long-term rights, concessions, etc..
6%
Terms frequently used to describe the reason (WHY) for the matter Were tests performed of the operating
having merited specific attention include the following: effectiveness of controls?

Future expectations, subjectivity of YES

estimates, high level of judgement involved NO

in the main assumptions, models sensitive 94%
to changes in data inputs, materiality/
significance of the amount.

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 The new auditor's report | Study of first year of application in Italy by listed companies

Revenue recognition “The auditor shall design and perform tests of controls to
There was also a significant, but expected, number of Key Audit obtain sufficient appropriate audit evidence as to the operating
Matters relating to the revenue recognition category, on account effectiveness of relevant controls, if:
of the fact that revenue trend is frequently considerably important a) the auditor’s assessment of risks of material misstatement at
for the measurement of a listed company's performance and, the assertion level includes an expectation that the controls are
accordingly, it constitutes a significant matter for users of financial operating effectively (that is, the auditor intends to rely on the
statements and for the audit process. In fact, over 26% of the operating effectiveness of controls in determining the nature,
auditor's reports included at least a key matter relating to revenue timing and extent of substantive procedures)
recognition. b) substantive procedures alone cannot provide sufficient
The most recurring issues for which a Key Audit Matter had been appropriate audit evidence at the assertion level." 17
identified (WHY) were related to specific circumstances, such as: As already stated, the use of specialists was less frequent than
• the complexity of revenue recognition in relation to a company's that for the category examined previously (Goodwill and intangible
industry sector (estimates of electricity and gas revenue not yet assets) and the field of specialisation differed, as it primarily
billed; estimates of expected returns of unsold books; advertising concerned Information Technology.
revenue, etc.) The analysis performed also showed that the use of specialists
• contractual or regulatory peculiarities (revenue recognition was often combined with tests of the operating effectiveness of
net of adjustments for allowances, discounts and returns, the controls.
existence of multiple performance obligations, complexity of
relevant legislation, etc.)
• complexity of measurement (recognition of revenue from 28% Do the procedures envisage
experts/specialists being involved?
and losses on long-term contracts; recognition of revenue and
margins relating to contract work in progress, etc.). YES

In terms of procedures performed to address Key Audit Matters NO

(HOW), for this category, the recourse to specialists was less 72%
frequent than that for the foregoing issue, whereas, what was
widespread was testing of the operating effectiveness of
controls as an audit procedure performed together with others.
The widespread recourse to testing of the operating effectiveness Were tests performed of the operating
of controls for revenue recognition issues identified as Key Audit 35% effectiveness of controls?
Matters was reasonably attributable to circumstances having
YES
arisen, which, in accordance with the relevant auditing standards,
required the performance of such tests: 65% NO

17. ISA Italia 330 – The auditor’s responses to assessed risks, paragraph 8.
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The new auditor's report | Study of first year of application in Italy by listed companies

Accounts receivable and loans of the operating effectiveness of controls (67% of the KAMs
Another significant issue was receivables and the recognition of examined) that, particularly in the banking sector, was subsequent
impairment losses that was mentioned in approximately 16% of the to having gained an understanding of the internal control system
auditor’s reports examined. implemented by the banks in relation to the classification and
monitoring of the quality of the receivables and loans due from
Analysis by industry sector was important for customers. There was also significant involvement of experts/
this category, as it showed that the banking specialists (approximately 43% of the KAMs). They are used in
sector had an expected significant weighting the banking sector given the pervasiveness and importance of
information systems that are a feature of banking operations and
(approximately 50%). 18 the complexity of valuation models used.

Why was this? In fact, as regards the banking sector, the “Accounts Banking

receivable and loans” category was the most frequent, with TH&S
particular reference to issues concerning the classification and
Media
measurement of receivables and loans due from customers, having
in certain cases differentiated between, and treated separately, Power

non-performing and performing loans due from customers (with Real Estate & Construction
a special focus on those deemed to be high risk or that had been
Industrial Products & Services
performing poorly). In other cases, the KAM was focused on
Retail
only one of the above or, the KAM made a general reference to
receivables and loans due from customers. Investment management

The reasons are evidently attributable to the nature of banking Fashion & Luxury
and the consequent significance and materiality of the amount
Consumer products
of receivables and loans due from customers in banks' financial
statements, plus, as is also the case for the Italian banking industry,
Do the procedures envisage
the attention given to non-performing loans and the recognition of experts/specialists being involved?
related impairment losses. 43%
YES
These aspects are confirmed by the reasons (WHY) underlying the
identification of KAMs related to this category that include: 57%
NO
• the significance of the amount of receivables and loans
recognised in the financial statements
• the complexity and subjectivity of the estimation processes
adopted
Were tests performed of the operating
• the use of valuation models characterised by many variables and 33% effectiveness of controls?
parameters.
YES
As regards the audit procedures (HOW) performed in response
to the key matter identified, as it would appear evident from the 67% NO
charts below, what was significant was the performance of testing

18. This sector, under categorization performed by Deloitte, includes, other than banks, other financial institutions.
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 The new auditor's report | Study of first year of application in Italy by listed companies

Provisions and contingencies

The “Provisions and contingencies” category is broad in that
it encompasses different cases, such as provisions for tax risks, Do the procedures envisage
experts/specialists being involved?
work related risks or legal disputes, allocations to provisions and
disclosures of risks. 47% YES
53%
As regards the reasons underlying the identification of KAMs
NO
related to the above issues (WHY), which are typically subject
to accounting estimates, in approximately 13% of the auditor’s
reports analysed, the reason given was recourse to estimation
processes deemed to be complex, detailed, subject to significant
uncertainties and changes in which may often have a material
impact on the financial statements. As far as the audit responses Were tests performed of the operating
effectiveness of controls?
are concerned (HOW), these included involvement to experts/
specialists (53% of the KAMs examined) and the performance of 44%
YES
testing of the operating effectiveness of controls (44%) and, in 56%
NO
certain cases, a combination of both.
An analysis of numbers by sector reveals a significant weighting in
the Banking and Investment Management sectors, which are
again in the financial sector. The reasons therefor may be explained
by the specific industry sector, which is strongly regulated and
which could thus lead to significant legal, compliance, reputational
and operating risks for the companies concerned.

TECHNOLOGY, MEDIA & TELECOMMUNICATIONS

BANKING

ENERGY & RESOURCES

CONSUMER & INDUSTRIAL PRODUCTS
REAL ESTATE & CONSTRUCTION

INVESTMENT MANAGEMENT
AUTOMOTIVE
LIFE SCIENCES

0 1 2 3 4 5 6 7 8

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Taxation
Last in the TOP 5 list is the “Taxation” category, which is present Do the procedures envisage
in over 13% of the reports examined and which almost entirely experts/specialists being involved?

encompasses issues related to the recoverability of deferred 43%

YES
tax assets, while, in an extremely limited number of cases, this 57%
was combined with the measurement of deferred tax liabilities. NO
Further tax related KAMs, which were reported in a small number
of reports, related to the US tax reform, given the impact on the
consolidated financial statements of the issuers in question.
The reasons (WHY) for the identification of KAMs related to
deferred tax assets included considerations concerning the 7%
Were tests performed of the operating
materiality of the item in question in the financial statements effectiveness of controls?
subject to audit, as well as the subjectivity of estimates concerning
the generation of sufficient taxable income in future years. YES

As regards the audit procedures adopted to address the issue NO

(HOW), the use of experts/specialists was reasonably widespread,
93%
whereas cases where testing was performed of the operating
effectiveness of controls were extremely limited.
Numbers by sector were not significant as they were quite
uniformly distributed.

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 The new auditor's report | Study of first year of application in Italy by listed companies

Other results arising

from the analysis
Modifications to the opinion in the independent The graph shows, for the sample
auditor’s report
analysed, the percentage of reports
ISA Italia 705 deals "with the auditor’s responsibility to
issue an appropriate report in circumstances when, in
with modifications to the opinion,
forming an opinion in accordance with International with reference to the various cases
Standard on Auditing (ISA Italia) 700 the auditor governed by the standard.
concludes that a modification to the auditor’s opinion
on the financial statements is necessary". 19

Auditor’s judgement about the

pervasiveness of the effects or
possible effects of the matter on
the financial statements 4%
Nature of matter
giving rise to the Material but not Material and Was the report modified?
modification pervasive pervasive

Financial statements SI
are materially Qualified opinion Adverse opinion
misstated NO

Inability to obtain 96%

Disclaimer of
sufficient appropriate Qualified opinion
opinion
audit evidence

19. ISA Italia 705 - Modifications to the opinion in the independent auditor’s report - Paragraph 1.
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The new auditor's report | Study of first year of application in Italy by listed companies

Going concern If disclosure about the material uncertainty is

In the event of a material uncertainty, the revised inadequate, depending on the circumstances, the
version of ISA Italia 570 requires a separate section to auditor shall express a qualified opinion or adverse
be included in the auditor’s report under the heading opinion and, in the basis for qualified (adverse) opinion
“Material uncertainty related to going concern”. In section of the auditor’s report, state that a material
these circumstances, if adequate disclosure about uncertainty related to going concern exists and that
the material uncertainty is made in the financial the financial statements do not adequately disclose
statements, the auditor shall express an unmodified this matter. 21
opinion, but: In situations involving multiple uncertainties that are
• shall draw attention to the disclosure provided in the significant to the financial statements as a whole,
financial statements the auditor may consider it appropriate in extremely
rare cases to express a disclaimer of opinion, stating
• shall state that these events or conditions indicate
that the going concern assumption is subject to the
that a material uncertainty exists that may cast
aforementioned multiple significant uncertainties with
significant doubt on the entity’s ability to continue
potential interactions and possible cumulative effects
as a going concern and that the auditor’s opinion is
on the financial statements. 22
not modified in respect of the matter. 20
With respect to the reports analysed, there
Did the report include a were 9 cases of material uncertainties related to
4% going concern, whereby, for 6 of these, a material
“material uncertainty
related to going concern” uncertainties related to going concern section was
section or was the
included in the auditor’s report and, for the other 3
opinion modified relation
to this matter?“ cases, the auditor expressed a disclaimer of opinion.

SI

96% NO

20. ISA Italia 570 – Going concern – paragraph 22.

21. ISA Italia 570 – Going concern – paragraph 23.
22. ISA Italia 570 – Going concern – paragraph A33.
18
 The new auditor's report | Study of first year of application in Italy by listed companies

Emphases of matter Despite the lack of perfectly comparable data, based

We have also analysed the number and weighting of on a comparison of the figure relating to the reports
the emphases of matter in the sample of auditor's analysed in this study (weighting of 8%) against that
reports reviewed by us. resulting from a study conducted by SDA Bocconi
on auditor's reports on listed companies in the two
By including an emphasis of matter in the auditor's
year period 2015-201624, for which the weighting of
report, the objective of the auditor is “to draw
“Clean opinions with emphases of matter (financial
users’ attention, when in the auditor’s judgement
statements for financial years 2015 and 2016)” was
it is necessary to do so, to a matter, although
13%, the expected decrease in emphases of matter
appropriately presented or disclosed in the financial
appears to have been confirmed.
statements, that is of such importance that it is
fundamental to users’ understanding of the financial
statements”. 23 Does the report include
With the introduction of KAM, the expectation was 8% emphases of matter?
that there would have been a decrease in the number
of emphases of matter, on account of the fact that the
new version of the standard on auditing, ISA Italia 706, SI
requires these to be included in the auditor’s report
provided that the matter being emphasised is not NO
deemed to be a Key Audit Matter (nor that the auditor
92%
judges it necessary to express a modified opinion due
to that matter in compliance with ISA Italia 705).

23. ISA Italia 706 – Emphasis of matter paragraphs and other matter paragraphs in the independent auditor’s report.
24. “Opinions issued by audit firms on listed companies in the two year period 2015-16: Italian market and main European stock exchanges” SDA
Bocconi - Audit Observatory, June 2017.
19
 The new auditor's report | Study of first year of application in Italy by listed companies

Forthcoming challenges

In relation to the implementation of the new

accounting standards, IFRS 15 and IFRS 9, as well as
the start of preparatory work in connection with the
IFRS 15
Revenue: a new
subsequent adoption of IFRS 16, it is expected that
recognition
these accounting standards will require significant model
attention to be given in the performance of audits of
2018 financial statements and that, consequently, in
the event that the related matters are deemed to be
material, they may be included in the KAMs. IFRS 16
Another focal point will be the treatment accorded in
Spotlight on
the second year of adoption of Key Audit Matters: leases
• Will the same matters be repeated?
• Will the experience gained lead to a different
determination of the matters addressed, especially
with respect to the level of detail and the specific
IFRS 9
form used for the description of the matter and the Financial
audit procedures performed? instruments

21
The new auditor's report | Study of first year of application in Italy by listed companies

Extending the analysis to an international context, The implementation of the new standard will be
there is much interest in the application in the US of gradual. It will apply first to large accelerated filers and
a new standard issued by PCAOB25 that requires a then to other companies falling within the scope of the
section dedicated to "Critical Audit Matters” (CAM) and adoption of the new standard. 26
the consequent market reactions thereto.

PCAOB adopts changes to the auditor's report

On June 1, 2017, the PCAOB adopted a new auditing standard on the auditor’s report (the “standard” or “release”).
While retaining the current “pass/fail” opinion of the existing auditor’s report, the standard includes several
significant modifications. These changes are intended to increase the informational value, usefulness, and
relevance of the auditor’s report.

A CAM is defined in the standard as “any matter arising from the audit of the financial statements that was
communicated or required to be communicated to the audit committee and that relates to accounts or disclosures
that are material to the financial statements and involved especially challenging, subjective, or complex auditor
judgment.”

The release also states that CAMs could include matters that were (1) required to be communicated to the audit
committee and (2) actually communicated, even if not required.

25. AS 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion
26. “Provisions related to critical audit matters will take effect for audits of fiscal years ending on or after June 30, 2019, for large accelerated filers;
and for fiscal years ending on or after December 15, 2020, for all other companies to which the requirements apply”.
22
Contacts

Stefano Dell’Orto Enrico Pietrarelli

Partner Partner
[email protected] [email protected]

Costante Beltracchi Cristina Leone Alessia Maggi

Director Director Senior Manager
[email protected] [email protected] [email protected]

Alessandro Repetto Elena Tenuta

Director Senior Manager
[email protected] [email protected]
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