Proposed International Standards on Auditing (UK and Ireland)
Proposed Standards on Auditing and associated pronouncements issued for comment by the Auditing Practices Board
Comments from ACCA
September 2004
Executive Summary
ACCA is pleased to comment on the proposed International Standards on Auditing ( UK and Ireland ) issued for comment by the Auditing Practices Board (APB).
We welcome APB's decision to adopt International Standards of Auditing (ISA) and so strengthen existing auditing standards in the UK and Ireland . The early and clear statement of intentions and timing by APB and the decision to avoid a piecemeal transition have paved the way for successful implementation.
APB has included extra material, drawing on existing UK and Ireland Statements of Auditing Standards. We welcome the announcement that APB hopes to be able to withdraw such material as relevant ISA are revised. The inclusion of such �plusses' for any length of time would destroy the benefits of international harmonisation of auditing standards, the value of which has been widely recognised by securities regulators and governments.
We also take issue with some of the other structural matters:
- We do not agree with the inclusion of ethical material in the UK and Ireland �plusses'. APB now issues separate Ethical Standards for auditors and the duplication of material is unnecessary.
- We call on APB to address actively the need to update supporting guidance if, as proposed, International Auditing Practice Statements are not adopted.
- We see no need to disapply Public Sector Perspectives in ISA, which could operate in parallel with national guidance.
General Comments
The Association of Chartered Certified Accountants (ACCA) welcomes the opportunity to comment on the proposed International Standards on Auditing ( UK and Ireland ) (ISA ( UK &I)) issued for comment by the Auditing Practices Board (APB). We are also pleased to comment on the proposed revised Statement of Scope and Authority of APB Pronouncements (the Statement) and an International Standard on Quality Control (UK and Ireland) (ISQC (UK&I)) issued for comment in the same exposure draft.
APB's decision to adopt International Standards of Auditing (ISA) issued by the International Auditing and Assurance Board (IAASB) is most welcome, as it will strengthen existing auditing standards in the UK and Ireland and provide for higher quality audits. Most importantly, the decision anticipates the European Union's move to ISA and provides auditors throughout the UK and Ireland with certainty as to what changes will be required of them.
We would like to record our appreciation of the decisions by APB to provide certainty as to the date of the adoption of ISA and to engage actively with stakeholders. We are pleased to be able to contribute to the work of an ISA implementation group which includes representatives of auditing firms and major UK and Irish accountancy bodies. As well as assisting the technical staff of APB, the group also facilitates communication with publishers, technical consortia and trainers to prepare for the use of ISA ( UK &I).
In preparing the exposure draft, APB reviewed existing Statements of Auditing Standards (SAS) to identify instances where they were thought to contain higher standards than those in equivalent ISA and relevant and helpful guidance developed after the equivalent ISA was issued. Such material was included in the proposed ISA ( UK &I). ACCA welcomes the announcement by APB that it hopes to be able to withdraw such supplementary material as relevant ISA are revised by IAASB. However well intentioned, the inclusion of such �plusses' for any length of time would destroy the benefits of international harmonisation of auditing standards, the value of which has been widely recognised by securities regulators and governments.
At a time when significant new international standards strengthen auditing in the UK and Ireland , we do not believe that the introduction of many minor �plusses' has any significant effect on overall audit quality. Given the limited anticipated life of such �plusses', and the fact that auditors do not easily forget the training they have received in them, the continuing need for �plusses' to feature in examinations and audit manuals or systems for perhaps only two years is not cost effective. We urge APB to reconsider, therefore, on an item by item basis, whether prior inclusion in SAS is sufficient justification for the continued inclusion of such material.
We support, nevertheless, the way in which the extra material has been incorporated, through shading and appropriate numbering of text. This is more usable than a separate national supplement but still clearly identifies the additions.
We do not agree with the inclusion of ethical material in the UK and Ireland �plusses'. The APB now issues separate Ethical Standards for auditors and the duplication of material is unnecessary. Any attempt to précis or paraphrase is, moreover, likely to cause confusion. There is a wider issue for APB to resolve as, if properly adopted, ISA refer to compliance with the IFAC Code of Ethics for Professional Accountants. A similar issue arises with ISQC 1. APB needs to ensure that ISA ( UK &I) fits together with these pronouncements as adopted by APB and that transitional measures are both consistent and appropriate.
We are concerned that the decision not to adopt International Auditing Practice Statements (IAPS) leaves ISA ( UK &I) deprived of relevant supporting guidance. While Practice Notes and Bulletins are to remain in effect, they make extensive reference to SAS and hence require extensive updating. APB has to address this as a matter of priority, as it is possible that EU law will require IAPS to be implemented for audits of 2007 financial statements.
Public Sector Perspectives (PSP) in ISA have been disapplied, while reference is made instead to relevant APB Practice Notes. There is little duplication between PSP and Practice Notes, and we see no reason to delete material at the end of ISA ( UK &I) as it remains relevant.
Responses to Specific Questions
Q1 Paragraph 17 explains that, as there is no ISA equivalent, SAS 620 has been included in its entirety as a separate section in the proposed ISA ( UK and Ireland ) 250. Do commentators agree with this approach?
We are aware of discussions as to whether SAS 620 The Auditors' Right and Duty to Report to Regulators in the Financial Sector (Revised) would be best retained as the only non-international standard or whether (as eventually proposed in the exposure draft) it should be included as part of ISA (UK&I).
If the material is to be retained as a standard we agree that it should be within ISA ( UK &I). However, the material would need revision so as to be better integrated, as it is currently forms a separate part B of ISA ( UK &I) 250 Consideration of Laws and Regulations in an Audit of Financial Statements .
Although, historically, the material in SAS 620 has had the authority of a standard, we do not believe that it is necessary for it to retain that status. The auditor's statutory duty to report to regulators is a matter of law and an equivalent standard is no longer necessary. A similar duplication exists with regard to the right to report.
As a preferred alternative, we propose, therefore, that SAS 620 be revised and published with the authority of a Practice Note (or pronouncement of equivalent status). This would immediately remove it as a �plus' from ISA ( UK &I) and promote international harmonisation. It would also achieve consistency in the UK and Ireland as APB has adopted that treatment in relation to guidance on money laundering.
If APB adopts this approach then many of the �plusses' to part A of ISA 250 could also be removed. If APB is not content with the rigour of ISA 250 then it will, no doubt, wish to influence its further development by IAASB.
Q2 Paragraph 22 explains an issue related to the clarity of the use of the terms �those charged with governance� and �management�. Do commentators believe that the APB's proposed solution (to explain the terms in each ISA ( UK and Ireland ) and add footnotes where necessary to confirm responsibilities) achieves the necessary clarity?
If such guidance is to be included, we do not believe that it merits inclusion in each ISA ( UK &I); presentation in a glossary or other introductory text would be sufficient.
The terms are already well known to auditors in the UK and Ireland , in particular through using SAS 610 Communication of Audit Matters to Those Charged with Governance. We see no need to provide this extra guidance when SAS 610 has been applied successfully for several years without it.
Q3 Paragraph 23 describes proposed revisions to the standards and guidance in the extant SAS 610 �Communications of Audit Matters to Those Charged With Governance� to be incorporated in the proposed ISA ( UK and Ireland ) 260 to take account of the Smith Guidance and a study into the effectiveness of SAS 610. Do commentators agree with these proposed revisions?
The proposed revisions are intended to address a perceived deficiency in large company auditing and are not appropriate for an auditing standard of general application. Some paragraphs (for example 7-3) could be written much more simply and some matters are so obvious that they need not be stated (for example the last sentence of 4-3).
The inclusion of extensive quotations from (or paraphrases of) APB Ethical Standards is unnecessary and dangerous, as reference should be made to the original pronouncement.
The notes at the end of the ISA state that public sector guidance is contained in a Practice Note. However, paragraph 20-2 contains some public sector guidance.
We have the following comments on specific paragraphs of proposed ISA ( UK &I) 260:
- The inclusion of material on groups (paragraphs 10-1 to 10-3) will be made redundant by the issue of an ISA or it will be included in an IAPS � in which case it is not to be adopted in the UK . There seems little reason for its current inclusion.
- Paragraph 11-12(b) requires specific reference to matters where management is reluctant to make representations. This is unnecessarily narrow in application.
- In paragraph 11-5(a)(i) the word �reasonable' should be �reasonably'.
- We do not agree that auditors should always issue a written report to those charged with governance (paragraph 15-1). Communication should only take place where necessary or appropriate � not just to comply with a standard.
- Compliance with paragraph 17-2 implicitly requires the auditor to determine the effectiveness of a process and the likelihood of success of a further process. Such matters are not trivial and the methodology and documentation necessary to carry out such determinations with rigour are disproportionate to the benefit that could be derived from this requirement. It would be possible to replace this paragraph by a requirement based on principles. This paragraph also duplicates guidance at 4-2.
Q4 Will implementation of the proposed ISAs ( UK and Ireland ) for the audit of financial statements for periods commencing on or after 15 December 2004 cause practical difficulties? If so, how do you suggest these be addressed?
We consider that auditors will be able to implement the changes according to the proposed timetable despite the very short period between the issue of ISA ( UK &I) and their implementation. There is a particular problem, however, in respect of the systems of quality control (required by ISQC ( UK &I)) which will have to be in place in the UK six months earlier than internationally. APB may wish to consider this as well as Ethical Standards when determining the need for transitional measures.
Q5 Do you agree with the proposed revision of the Statement on the scope and authority of the APBs pronouncements and, in particular, the appending of The Auditors' Code to that document?
Some, but not all, engagement standards include the words �( UK and Ireland )'. There should be consistency in approach where possible.
The document should make clear whether compliance with ISA ( UK &I) allows the auditor to state that the audit complies with ISA.
APB has decided to adopt ISQC 1 but that document includes provisions that can apply to firms only carrying our �related procedures' � such as accounts preparation (compilations) that involve no assurance. APB should ensure that it is not acting ultra vires by attempting to impose standards outside its remit.
The Auditors' Code is described in the document as �a framework of fundamental principles which the APB expects to guide the conduct of auditors' . It is, however, a mix of ethical and associated statements that has not been updated since its issue. In a February 2003 response to the then proposed APB Scope and Authority of Pronouncements we disagreed with its inclusion. The response stated that: �Although we recognise the merit of formulating fundamental principles to guide the conduct of auditors and appreciate the role which the Code has played, we believe that it has now been overtaken by events. We suggest instead that APB:
• considers the impact of the Government's regulatory changes on the way in which ethical matters are dealt with in its pronouncements,
and
• works with the International Auditing and Assurance Standards Board (IAASB) to promote the acceptance of the thinking behind the Code.'
APB will be aware of the fact that the IAASB is close to issuing a discussion paper on improving the clarity of IAASB standards. A draft of that paper, which has drawn on The Auditors' Code, contains a section dealing with the fundamental principles of auditing. As APB has now contributed to that project and is issuing Ethical Standards, there is no longer any need for The Auditors' Code to be appended to the Statement.