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A Proposed Revised International Standard on Auditing issued for comment by the International Federation of Accountants

Comments from ACCA
November 2003

Executive Summary

The Association of Chartered Certified Accountants (ACCA) welcomes the opportunity to comment on the revised International Standard on Auditing 300 Planning the Audit proposed by the International Auditing and Assurance Standards Board (IAASB).

We have several major concerns about the proposed revised ISA 300:

• The document does not provide sufficient guidance on planning matters relevant to the audit risk pronouncements or to quality control.

• The fact that planning is a continual and iterative process has not been fully reflected in the drafting.

• The separation of documentation requirements has not been fully implemented.

• The distinction made between overall audit strategy and an audit plan is artificial and may hinder proper linkage between planning at the level of the financial statements and planning at the assertion level.

• Requirements relating to professional scepticism and to perform certain preliminary procedures before planning are unnecessary.

These concerns, taken together with the fact that the document will require significant changes to conform to the audit risk pronouncements issued at the end of October 2003, lead us to recommend that the document be re-exposed before finalisation.

We also comment on the boxed text that precedes the proposed ISA as we do not believe that changes from similar text before extant ISAs have been properly exposed for comment. We are concerned that identical text has already been released as final in connection with the audit risk pronouncements.

General Comments

Timing of Exposure

1. The explanatory memorandum to the audit risk exposure drafts issued by IAASB in October 2002 explained that 'when these proposed ISAs are approved, other ISAs will require revision for conformity and consistency.' IAASB then believed that significant conforming changes would be required to ISA 300 Planning, to ISA 240 The Auditor�s Responsibility to Consider Fraud and Error in an Audit of Financial Statements and three other ISAs.
   
   
2. We have commented separately on an exposure draft of a proposed revised ISA 240. In that response, we stated that 'It is unfortunate that this exposure draft has been issued during the period in which the audit risk pronouncements are being finalised, as it is difficult for those commenting on this document to give proper consideration to whether material misstatement arising from fraud has been dealt with in a manner that is consistent with the treatment of material misstatement arising from error.'
   
   
3. A similar comment is relevant in respect of this exposure draft. Indeed, given the potential extensive articulation between planning and the subject matter of the audit risk pronouncements, the difficulties are considerably enhanced. The final pronouncements arising from the audit risk exposure drafts were issued on 31 October 2003. It is almost impossible, therefore, for those commenting by 15 November to have had sufficient time to assimilate such material and for organisations to formulate and approve their response in accordance with their own due processes.
   
   
4. We note that the explanatory memorandum issued with the proposed revised ISA 300 states that 'the final ISA will be conformed to new ISAs issued when the Audit Risk Exposure Draft is finalized.' In view of our comments below on the exposure draft, several of which recommend considerable redrafting, we do not believe that it would be appropriate for IAASB to carry out the conforming process without a further exposure draft. It is important for the authority of ISAs that IAASB observes due process.

    

   Planning is Continuous

5. Paragraph 6 states that �Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after the completion of the previous audit and continues until the completion of the current engagement.� Given that the proposed ISA is framed in the context of recurring audits, we suggest that planning begins during the previous audit, or earlier. This may be through simple clerical procedures, such as recording actual time spent against each budgeted audit procedure as these act to inform the budget and planning for the next year. It may be through having cyclical procedures that span several years. It may arise as planning documents are updated to reflect occurrences during an audit which are expected to recur, or file notes are made as to how to improve effectiveness or efficiency in future audits.
   
   
6. Despite the reference to a 'continual and iterative process' the proposed ISA is written as if planning was a linear process. Reference is made to the �timing and sequence of certain planning activities�. The normal reference elsewhere in ISA is to the �nature, timing and extent of procedures�. Sequence is in reality just one aspect of timing and need not be mentioned separately. We recommend a review of the whole of the proposed ISA to eliminate inappropriate references to timing of procedures and wording which deals with continuous activities as if they occur only once.
   
   
7. Paragraph 8 introduces further linearity because it requires certain activities to be performed prior to performing significant audit planning activities. We regard these as matters that properly receive attention during the whole of an audit. In reality, many procedures at many times will contribute evidence on which an understanding can be built and maintained. We recommend removing this artificial distinction and this requirement.

    

   Separate documentation requirement

8. The proposed ISA has a separate section dealing with documentation. This is a significant change from extant ISA 300, which contains black letting that deals with 'developing and documenting'. We do not believe that sufficient attention has been given to the effect of this separation in the drafting. For example, paragraph 16 refers to the audit plan as setting forth in detail the planned audit procedures and serving as a record of the execution of the work. The material transferred in from IAPS 1005 The Special Considerations in the Audit of Small Entities has not been properly integrated to eliminate specific documentation references (such as in paragraph 14 which refers to 'a brief file note' ). We recommend an extensive and detailed review of the prose to ensure that concepts and judgements are not unintentionally confused with documentation.

    

   Professional Scepticism

9. Paragraph 4 contains a bold type requirement that 'The auditor should plan the audit with an attitude of professional skepticism.' We do not believe this statement is necessary since ISA 200 Objectives and General Principles Governing an Audit of Financial Statements already addresses the need for an attitude of professional skepticism during the whole of the audit.

    

   Boxed text preceding the standard

10. The audit risk pronouncements issued on 31 October 2003 incorporate new boxed text preceding each ISA. This text is different from the text at the exposure draft stage (which at that time was the same as preceded other extant ISAs). The exposure draft of proposed revised ISA 300 Planning the Audit includes the new boxed text. This sequence of events could be interpreted as IAASB finalising material before the end of the exposure period.
    
    
11. The substantive differences between the old and new are:
    
    The statement that 'ISAs are also to be applied, adapted as necessary, to the audit of other information and to related services.' has been removed
    
    and
    
    The statement that 'ISAs need only be applied to material matters.' has been replace by two statements. The first is part of a paragraph that deals with justifying departures: 'The nature of ISAs requires auditors to exercise professional judgment in applying them.' The second statement follows that paragraph: 'Any limitation of the applicability of a specific ISA is made clear in the ISA.'
    
    
12. These changes have presumably been made as a consequence of the exposure for comment in November 2002 of proposed Terms of Reference; Preface to the International Standards on Quality Control, Auditing, Assurance and Related Services; and Operations Policy No 1 � Bold Type Lettering. The first change acknowledges that, as set out in a diagram in the November 2002 exposure draft, assurance and related services are now intended to be separate from ISAs. However, as a framework document for related services is neither in place nor in preparation, the omission does not assist users. Assuming that the assurance framework, when finalised, will refer to the usefulness of ISAs (for example on evidence) where no equivalent is available for assurance engagements � it would be helpful to state that �ISAs may provide useful guidance for other assurance engagements and for related services engagements where there is no more-specific standard.�
    
    
13. Our comments on the November 2002 exposure draft of the Preface are relevant to the second change:

    'The section dealing with 'Authority Attaching to Standards' refers to the exercise of professional judgement in their application. There is, however, no discussion of relevance or materiality in this context. Operations Policy No. 1 - Bold Type Lettering refers to such matters in a discussion of 'should statements' (paragraphs 8 to 10) but implies (though using the words 'of course') that relevance and materiality are well understood. Currently, each International Standard on Auditing (ISA) is preceded by a statement (displayed with other text in a box - but not otherwise given specific authority) that 'ISAs need only be applied to material matters.' We believe that the Preface should make explicit reference both to materiality and to relevance.'

14. The Auditing and Assurance section of the 2003 edition of the IFAC Handbook of International Auditing, Assurance, and Ethics Pronouncements contains the proposed Terms of Reference and Preface. Any revision of the Preface will first be in the public domain as at 1 January 2004. It is presumably not considered to be important by IAASB that the conforming changes to the text preceding the audit risk pronouncements have been made before changing the Preface itself as it is only the Preface which has authoritative status. Nevertheless, the boxed text preceding ISAs has arguably greater visibility. We doubt whether those commenting on the exposure draft of the audit risk pronouncements paid attention to the boxed material, as it was identical to that then in use. We also doubt whether the implications of an omission of a reference to materiality in the exposure draft of the Preface will have drawn widespread comment.
    
    
15. We believe that the change in the boxed text is, however, fundamental to auditing standards and that it deserves better exposure with proper explanation so that the arguments for change can be assessed. As we commented in our earlier response, relevance and materiality are both potentially significant to ISAs.
    
    
16. The change appears to have been made in order to make it clear that ISAs are always applicable. This was, however, always the case. The text that has been eliminated ( 'ISAs need only be applied to material matters.' ) prompted auditors to applying judgement in respect of materiality. As the new text concerning judgement is part of a paragraph that deals with justifying departures, we believe that it will be understood only in that context. In addition, as IAASB is removing a statement that 'ISAs need only be applied to material matters' auditors could interpret that a signal that IAASB intends that ISAs should be applied to matters irrespective of materiality.
    
    
17. We are concerned that when ISAs are become lengthier and more procedural this change will prompt auditors to carry out unnecessary procedures. Instead, IAASB should be encouraging auditors to apply professional judgement in relation to materiality and to relevance.
    
    
18. In today's litigious environment for auditors, the new statement that: 'Any limitation of the applicability of a specific ISA is made clear in the ISA.' is a significant problem when ISAs are not updated holistically. Many ISAs that should not apply except in specific circumstances do not currently contain a clear statement of the limitation of their applicability. As such, they apply and auditors should be prepared to justify a departure from their basic principles and essential procedures. The current text of such ISAs may include an introduction setting out the purpose of the ISA, but that text is not a clear statement of limitation of applicability. For example, the introduction to ISA 720 Other Information in Documents Containing Audited Financial Statements states that '[this ISA] may also apply to other documents, such as those used in securities offerings.'
    
    
19. While again recommending holistic updating, we believe that the publication of the 2004 Handbook represents an opportunity to standardise the boxed wording preceding all ISAs. If that were to be done, consideration should be given to inserting (in the body of affected ISAs) a statement of any limitation of applicability. Alternatively, as an interim measure, the boxed statement could be extended to make it clear that, for older ISAs, limitations may be inferred from their introductory text. The Preface itself may need consideration for the same reasons.
    
    
    

    Specific Questions

    Scope of Proposed ISA 300

    The scope of Proposed ISA 300 includes the auditor�s considerations relating to managing the audit engagement, planning considerations relating to overall strategic audit decisions, and planning considerations relating to the design and performance of detailed audit procedures. Is the scope of Proposed ISA 300 appropriate? If not, do commentators believe the scope should be limited to engagement management considerations?

20. The ISA serves as a general introduction the ISAs in the 300 series. In that role, we believe that it would be inappropriate to limit it to engagement management considerations. Such considerations are included in proposed International Standard on Quality Control 1 Quality Control for Audit, Assurance and Related Services Practices and the proposed revised ISA 220 Quality Control for Audit Engagements and are relevant to aspects of the audit other than planning. However, there would be benefit in expanding the proposed ISA 300 to include fuller consideration of planning quality control as well as planning the audit.
    
    
21. Of the 300 series, the introduction to proposed ISA 300 refers only to ISA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. We recommend including references also to ISA 320 Audit Materiality and to ISA 330 The Auditor's Procedures in Response to Assessed Risks and expanding the material in proposed ISA 300 to provide fuller guidance on how the auditor considers their subject matter in planning the audit.
    
    
22. Proposed ISA 300 includes a new section on initial audit engagements. While the material in the section is relevant, there are several other ISAs which deal with matters for which the auditor may need to expand the planning activities. These too could have been made the subject of a separate section. We suggest instead, that this section be subsumed into a general one providing guidance on those circumstances in which planning activities may need to expand. The new section should provide guidance allowing the auditor to better determine the adequacy of planning, which is mentioned in paragraph 3 of the proposed ISA.
    
    
    
    

    Overall Audit Strategy and Audit Plan

    The requirement in Existing ISA 300 to develop an overall audit plan has been changed in Proposed ISA 300 to a requirement to develop an overall audit strategy. Proposed ISA 300 also changes the requirement in Existing ISA 300 from developing an audit program to a requirement to develop an audit plan. These changes were made in order to better align the guidance with the requirements in the Audit Risk ED and to better reflect recent trends in audit practice. Do commentators agree with these changes?

23. We are wary of justifying change on the basis of 'recent trends in audit practice'. Such trends may or may not improve auditing quality. Moreover, we are not aware of any comprehensive research done on a global basis of methodologies used outside the major international firms that would indicate that the trends referred to are widespread. We have contributed views to the response to the proposed ISA that is being made by the European Federation of Accountants. That response suggests that, from a European perspective, the changes in the proposed ISA may not reflect current practice.
    
    
24. It is appropriate to make a theoretical distinction between planning at the level of the financial statements and planing at the assertion level. The linkage between these can be hindered, however, by dividing the processes into two separate parts. In some circumstances, development of a combined strategy and plan may be carried out effectively. In more complex circumstances, such as the audit of consolidated financial statements, audit planning many involve many layers of decision making analysed by geographical region or industry or legal entity and by office, network firm or other auditor.
    
    
25. We recommend that the proposed ISA be rewritten so as to remove from the black lettering any requirement to maintain the artificial distinction between overall audit strategy and an audit plan.

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