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Proposed International Auditing Practice Statement

Comments from ACCA
January 2003

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to have the opportunity to comment on the proposed International Auditing Practice Statement Reporting on Compliance with International Financial Reporting Standards (the proposed IAPS) issued by the International Federation of Accountants (IFAC).

ACCA does not support the issue of an IAPS dealing with the subject matter contained in the proposed IAPS for a number of reasons.

• The guidance on reporting in the proposed IAPS is of little real value to auditors.
• A planned revision of ISA 700 The Auditor's Report on Financial Statements (ISA 700) already takes such matters into account.
• Auditors would place more value on guidance dealing with risk assessment and the design of audit procedures.
• The proposed IAPS may deter informative reporting at a time when IFAC should be encouraging transition to IFRSs.

If it is decided to continue to progress this proposal to an IAPS, we recommend that major changes are made throughout the document to address:

• the broader challenges faced by auditors when companies make a transition to IFRSs
• the failure to acknowledge and provide guidance relating to the provisions of the standard which will result from the proposed IFRS First-Time Application of International Financial Reporting Standards
  and
• the inappropriate inclusion of material which could be interpreted as asking auditors to take on a management decision-making role.

General Comments

NEED FOR THE DOCUMENT IN ITS CURRENT FORM

1. As guidance only on reporting, we question whether the proposed IAPS is sufficiently useful to merit publication. The proposed IAPS provides additional guidance where financial statements are:

   '(a) in accordance with International Financial Reporting Standards (IFRSs);

   (b) in accordance with both IFRSs and relevant national standards or practices; or

   (c) in accordance with relevant national standards or practices, but which disclose in the notes to the financial statements the extent of compliance with IFRSs.'

2. Case (a) causes auditors less difficulty than where national standards or practices themselves introduce uncertainty to financial reporting. It is clearly one already addressed by ISA 700.

3. Case (b) is referred to in paragraph 5 of the proposed IAPS in the following terms (emphasis added): 'the ability to comply fully with more than one financial reporting framework is rare.' And: 'In practice, simultaneous compliance with both IFRSs and a national financial reporting framework is unlikely unless the country has adopted IFRSs as its national financial reporting framework.' The need for provision of guidance for such rare or unlikely circumstances is questionable.

4. Case (c) is not one where additional guidance is required as (to quote the proposed IAPS): 'A note to the financial statements containing disclosure about compliance with IFRSs is treated no differently from any other note to the financial statements.'

5. If additional guidance on reporting is to be provided, it should be incorporated in a revision of ISA 700. A project for a revision of ISA 700 was approved in June 2002, before the proposed IAPS was approved for issue. That project is planned to include (amongst other matters) consideration of:

   'Explanatory paragraphs when the financial reporting framework used differs significantly from international standards.

   Whether guidance is needed in ISA 700 in addition to the proposed new IAPS, Reporting on Compliance with International Financial Reporting Standards, for circumstances when the financial statements have been prepared or make reference to IFRSs.

   Clarifying the definition of a 'financial reporting framework' in the ISAs.'

6. The proposed IAPS deals only with the application of ISA 700 and provides no assistance to auditors in relation to risk assessment or the design of appropriate audit procedures in instances of dual or transitional reporting. If an IAPS is to be issued, it should address these issues as well as reporting by auditors.

7. At a time when IFAC should be encouraging reporting under IFRSs, the proposed IAPS may act as a deterrent to transition. The risk of adverse comment in the auditor's report could inhibit companies from providing useful disclosures on the extent of their compliance with IFRSs in a period before their full adoption.

   GUIDANCE WHICH SHOULD BE PROVIDED

8. The transition between acceptable accounting frameworks is an unusual financial reporting event and one which an increasing number of companies are faced with as IFRS are adopted in more jurisdictions. It is our view that guidance on risk assessment and the design of audit procedures will be more valuable to auditors than the reporting guidance in the proposed IAPS. Such guidance should include:
   • audit implications of the proposed IFRS First-Time Application of International Financial Reporting Standards
     and
   • providing assurance on a reconciliation between frameworks in addition to (or as part of) financial statements.

   Detailed Comments

   APPARENT EXCLUSION OF ACCEPTABLE NON-COMPLIANCE WITH IFRSs

9. Paragraph 3 of the proposed IAPS indicates that an unqualified opinion is not appropriate: 'if the financial statements contain any departure from IFRSs and the departure has a material effect on the financial statements'. The wording of paragraph 3 may have been intended to restrict this statement only to that part of the opinion which relates to IFRSs and so exclude consideration of the 'true and fair override'. However, for clarity of exposition, we recommend that such justifiable departures be referred to explicitly and that suitable guidance be given.

   DANGER OF PUTTING AUDITORS INTO A MANAGEMENT ROLE

10. Paragraph 6 of the proposed IAPS suggests that auditors should encourage management to adopt one financial reporting framework as predominant. We do not believe that an IAPS should make such a proposal. The issue of 'predominance' is one which should be addressed by financial reporting standard setters and management. Auditors offering such encouragement may open themselves to business risk and a self-review threat to their independence (as set out in Section 8 'Independence for Assurance Engagements' of the IFAC Code of Ethics for Professional Accountants).

    DOCUMENT TITLE

11. The proposed IAPS is called: 'Reporting on Compliance with International Financial Reporting Standards'. This word 'reporting' would normally be interpreted as a reference to management reporting on compliance not, as presumably intended, to the auditor's expression of opinion.

12. Although the proposed document is to be an IAPS, that context is not always clear and, for the avoidance of doubt, the title should be made more appropriate to the content of any final pronouncement.

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