An Auditor’s Guide to XBRL Tagging

As financial reports are going digital, thanks to the ESMA-ESEF mandate, the process of auditing is also changing. There are additional requirements for an auditor that include verifying and approving the iXBRL aspect of the financial report. As an auditor, it then becomes important for you to know what an iXBRL document is, how to approach the audit process for this format, and account for additional resources (like time and ESEF audit-specific tools) that you will require going forward.

This guide will help you navigate the changes now that your client’s financial reports will be filed in xHTML/iXBRL.

What to keep in mind during the audit process

Before you continue, please bear in mind that National regulators may develop their own implementation approach with time. As of now, CEAOB (Committee of European Auditing Oversight Bodies) and Accountancy Europe are the only entities that have provided instructions for auditors and how they need to proceed. Major changes in the auditing process include the following:

The auditor will review the face of the report (the human-readable layer) to ensure that it has been prepared in the ESEF format. Even if the report is audited before it is tagged, the auditor must be aware of ESEF RTS and make sure that his feedback is for an iXBRL document.

The auditor needs to ensure that the information embedded through XBRL tags (machine-readable layer) in the electronic report follows the ESEF requirements.

The conclusions derived by the auditor need to be part of the audit report, in the form of a specific assurance conclusion that is specifically ESEF-related. The assurance should assert the reliability of the report, use concise wording and logical structure for understandability, and prove that the auditor has used an effective and efficient approach to arrive at his/her assurance.

How to proceed with assurance reports

The assurance report will be incorporated in the issuer’s annual financial report and will be presented in a human-readable format (since the process for electronic verification is yet to be introduced for ESEF) to the respective OAM (Officially Appointed Mechanism) as required by the Transparency Directive.

The auditor’s assurance must be treated like an ISAE 3000 (International Standard on Auditing for Europe) engagementISAE 3000 came into play because no national standard or guidance regarding the auditing of iXBRL tagging exists in Europe and as of now no initiative has been taken towards it. If you’re an auditor for a public listed company, you may be familiar with ISAE 3000 as the standard that has been specifically designed to provide requirements and guidance to a practitioner when no subject-matter standard exists. The standard has been recommended by Accountancy Europe because the topics it addresses are relevant in connection to the ESEF.

When you use this standard for auditing, you will:

Obtain reasonable assurance about whether the issuer’s consolidated financial statements have been tagged in all material respects in compliance with the ESEF RTS.

Express a conclusion regarding the outcome of the evaluation of the electronic tagging of consolidated financial statements through a written report that conveys a reasonable assurance conclusion and describes the basis of the conclusions.

The auditor’s professional judgment

ISAE 3000 will set the base for your auditing process and provide direction when it comes to aspects like materiality assessment. However, your professional judgment is what really drives the entire process. Certain aspects of what you used to do before won’t change, but the way you will do it most certainly will (like addressing the use of standard tags, extension tags, anchors, etc).

Here’s a look at how iXBRL will change the way you audit:

Risk Assessment

You will need to identify and assess the risk of material misstatements in the tagging of the consolidated financial statements in compliance with the ESEF RTS. If you don’t address these issues, it could lead to incomplete or inaccurate tagging. Accountancy Europe has listed certain risks like:

1) Risks related to completeness:

  • Not all figures disclosed in the primary statements of the IFRS consolidated financial statements are tagged. For example:

1 XBRL tagging

  • Not all the disclosures in the IFRS consolidated financial statements are marked up as specified in Annex II of the RTS on ESEF.OR
  • Omission of required tags relating to the identification of the entity.

For example, as per phase 1 requirement, the issuers are required to mandatorily tag the 10 elements given below:

2 XBRL tagging

2)Risks related to accuracy:

Inaccurate tagging

  • The tagged data does not correspond with the audited consolidated financial statements OR
  • A figure disclosed in the primary statement of the IFRS consolidated financial statement has been tagged with an inaccurate context. For example:

3 XBRL tagging

Wrong tagging

  • Failure to select an appropriate element from the core taxonomy OR
  • Misrepresentation of the accounting meaning of the fact being marked up arising from selecting an inappropriate element from the core taxonomy. For example:

4 XBRL tagging

Random Extensions

  • Creating unnecessary extensions when there is an appropriate tag available in the core taxonomy. For example, the ESMA-ESEF element for Plant and Machinery is appropriate and extension is not actually required.

5 XBRL tagging

These are just a few of the situations which will require your professional expertise.

iXBRL tools and expert guidance

As we mentioned earlier, with a change in reporting standards, your auditing process will also have to evolve. You will need to consider an iXBRL-friendly software that will identify the tags applied as well as check whether XBRL specification and filing rules have been met among other things. Additionally, you may require an iXBRL expert to guide you through your first iXBRL report audit and help you refine and create your own process.

These changes can seem intimidating but remember that there are validating software like IRIS Bushchat® that perform validations for iXBRL documents and you can avail it for yourself or recommend it to your clients. As the audit process changes, stay informed and be ahead of the curve. The auditor’s role will play a major role in the creation of a powerful European Capital market and there is absolutely no room for error. For any questions or clarification, you can always reach the IRIS Carbon® experts here.

Get in Touch with us for Your XBRL-based Compliance Reporting Needs.

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