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An Auditing Practices Board Exposure Draft

Comments from ACCA
February 2003

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to comment on the Auditing Practices Board (APB) exposure draft Scope and Authority of Pronouncements (the draft Statement).

Late in the exposure period, the Government announced its conclusions on the report from the Co-ordinating Group on Audit and Accounting Issues and on the regulatory regime for the accountancy profession. The transfer of some of the responsibilities of the Ethics Standards Board to APB may have a significant effect on the draft Statement. We recommend that APB takes this into acount and re-exposes the draft Statement with appropriate amendment.

While generally supporting the material in the draft Statement, we believe that the public interest would be better served if APB were to expand disclosure of its working procedures, as that would both increase transparency and promote the authority of its pronouncements.

We do not agree with the inclusion of 'The Auditor's Code'. 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.

As part of the transition process towards the planned adoption of International Standards on Auditing by 2005, our response argues that APB should increase the prominence given to assurance engagements and promote a better understanding of the public sector perspective.

Responses to Specific Questions

1. The 'invitation to comment' accompanying the draft Statement asks for responses to specific questions. We are pleased to give our answers as set out below. While we have taken some account of the implications of the Government review of the regulatory regime for the accountancy profession, the publication of the relevant reports occurred at a late stage of the exposure period. Accordingly, it is not possible for ACCA's comments to be formulated with the full due process which is normally undertaken in relation to APB exposure drafts. We anticipate that similar considerations will affect other responses and we recommend, therefore, that APB considers the implications of the Government review, in particular the transfer to it of some of the responsibilities of the Ethics Standards Board, and re-exposes a revised draft Statement in due course.
   
   Does the draft Statement meet its objectives, which are to:
   • provide an overview of the types of document issued by APB
   • explain the level of authority associated with each type of document
   • set out the regulatory regime supporting APB pronouncements derived from legislation and the rules of the accountancy bodies
     and
   • set out the fundamental principles which APB expects to guide the conduct of auditors?

   Is there additional information that should be included?

    

2. We do not agree with this list of objectives. As we explain further below, we propose removing from the draft Statement material relevant to the last objective and, instead, providing a fuller description of APB's working procedures.
   
   
3. In general, the document meets the stated objectives. We suggest that paragraph 18 should be expanded to promote a better understanding of the authority of Bulletins. As these documents may have no public exposure, it is important to draw attention to the normal development process through a working party involving external industry and assurance experts.
   
   
4. APB will be aware of an exposure draft issued for comment by the International Auditing and Assurance Standards Board of the International Federation of Accountants: 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 IAASB document). That document deals with some matters which we believe would provide useful information if reinterpreted in the context of APB. We draw attention to the inclusion of material in relation to working procedures (paragraphs 21 to 25 of the IAASB document).
   
   
5. Such material enhances the authority of pronouncements through promoting an understanding of how they are developed. The public interest is also served by an increase in transparency. For example, the draft Statement does not mention that APB provides an annual report or that it publishes minutes and agenda papers on its website. There is no mention of important arrangements, such as the Technical Advisory Group, the presence of Government and other observers at APB meetings, or the increasingly important close working relationship with IAASB. While APB now makes use of its website to provide information (such as 'What is the Auditing Practices Board?'), it is still necessary to incorporate appropriate material in APB's formal publications.

   Do you support the inclusion of the Fundamental Principles of Auditing in the Statement of APB�s Scope and Authority of Pronouncements? What more do you suggest can be done to emphasise their importance?
   

6. We do not support the inclusion of the material which was originally published as 'The Auditors' Code' in 1996. There are three principal reasons for this:
   • the purpose of the draft Statement is much narrower than that of the Auditors' Code
   • the material cannot truly be described and used as 'fundamental principles'
     and
   • its inclusion is not in the interests of international harmonisation.
     
     
7. The Introduction to the relevant section of the draft Statement states that 'The APB expects that auditors, in complying with SASs, will also adhere to the following fundamental principles:' This is much less extensive than the Introduction to The Auditors' Code, which also explains its role to inform users of audited financial statements and promotes the importance of the independent audit function. These aspects of its function can be fulfilled instead by documents describing the value of audit (and assurance) issued by accountancy bodies having auditor members or by auditing firms. For ease of reference, the Introduction is reproduced below.
   

   'Introduction to The Auditor's Code
   

   The Auditors� Code is published for the information of all those who have an interest in financial reports on which an opinion has been expressed by independent auditors. The Code sets out the fundamental principles which the Auditing Practice Board (APB) expects to guide the conduct of auditors and which underlie its Auditing Standards and the ethical standards of professional bodies whose members undertake the role of independent auditor. The APB expects that auditors, in complying with its standards, will follow the spirit of the Code.

   The independent audit function is an important aspect of good corporate governance necessary for the maintenance of confidence in the operation of business, capital markets and the public sector. It provides reasonable assurance that published audited financial reports are free from material misstatement are in accordance with legislation and relevant accounting standards. Auditors� reports thus add credibility to financial information prepared and published by directors or officers. A by-product arises from constructive observations made by auditors to directors or officers based on matters which have come to the auditors� attention in the course of the audit.'

8. In paragraph 10 of the draft Statement, the section of the fundamental principles dealing with 'Providing value' is primarily aligned to the second paragraph of the Introduction shown above and is not relevant, therefore, to the narrower objective in the draft Statement. Although it deals with making constructive observations, that aspect is now dealt with in SAS 610 Communication of audit matters to those charged with governance.
   
   
9. The same argument could be extended to the section on 'Accountability'. If, however, that section is intended to be more than simple description, it would require considerable expansion to clarify its meaning.
   
   
10. We explain below that there are further instances of duplication in SASs of parts of The Auditors' Code. Such duplications argue against including the material in the draft Statement. This is one of the reasons why we suggest that the material in the draft Statement cannot truly be described and used as 'fundamental principles'. The second reason is its duplication of the fundamental principles of professional ethics.
    
    
11. It is also relevant that SAS 100 Objective and general principles governing an audit of financial statements effectively gives ethical principles the same mandatory status for auditors as auditing standards. It states that 'In the conduct of any audit of financial statements auditors should comply with the ethical guidance issued by their relevant professional bodies' (SAS 100.2).
    
    
12. The ethical principles which govern auditors' professional responsibilities are illustrated in SAS 100 by a list as follows:
    • 'Integrity
    • Objectivity
    • Independence
    • Professional competence and due care,
    • Professional behaviour, and
    • Confidentiality
      
      
13. An anomaly arising from the way in which the pronouncements of the APB are adopted by the accountancy bodies is that, once the draft Statement is adopted, certain of the fundamental principles within it will arguably come within the scope of the term 'the ethical guidance issued by their relevant professional bodies'. SAS 100.2 would give these, therefore, the force of auditing standards; making it logically difficult for such statements to both underlie, and be, standards.
    
    
14. We do not believe that the fundamental principles of ethics (which apply to all services provided by professional accountants) should be undermined in this way. APB will necessarily have to consider the impact of the Government review on the draft Statement, in particular the transfer to it of some of the responsibilities of the Ethics Standards Board. ACCA believes that UK auditing standards and related ethical pronouncements should be developed in a manner which is consistent with the pronouncements of the IAASB and the IFAC Code of Ethics for Professional Accountants.
    
    
15. The following sections of the Code duplicate existing ethical pronouncements:
    • Integrity
    • Objectivity and independence
    • Competence
    • Rigour
      
      
16. The table on the following page shows the duplication between individual sections of the Code and auditing standards.
    
    

    Fundamental principle	Duplication of auditing standards
    Judgment Auditors apply professional judgment taking account of materiality in the context of the matter on which they are reporting.	SAS 220 Materiality and the audit deals with this at length.
    Clear communication Auditors� reports contain clear expressions of opinion and set out information necessary for a proper understanding of the opinion.	SAS 600 Auditors' reports on financial statements sets out equivalent material.
    Association Auditors allow their reports to be included in documents containing other information only if they consider that the additional information is not in conflict with the matters covered by their report and they have no cause to believe it to be misleading.	SAS 160 Other information in documents containing audited financial statements (revised) deals with this although the wording of the Code could encompass circumstances where no financial statements are present. Interim financial statements are covered in Bulletin 1994/4 Review of interim financial information.

     

    Are there any changes that should be made to the draft Statement including the Fundamental Principles?

17. In addition to necessary revisions arising from the Government review, we suggest the following two matters need to be taken into account.
    1. Assurance given insufficient prominence

       The draft Statement includes only one paragraph dealing with other assurance engagements (number 5). Although, the primary focus of APB is on auditing, it must be remembered that auditing is an assurance engagement. IAASB acknowledges the importance of assurance engagements through its very name and we suggest that APB ought to give assurance at least an initial prominence in the draft Statement equal to that of auditing. Had we not earlier recommended the exclusion of The Auditor's Code, we would at this stage have recommended changing it to be relevant to all assurers.

    2. Public sector perspective

       We suggest that APB ought to consider the public sector perspective during the transition to the adoption of International Standards on Auditing (ISAs) in EU member states by 2005. Individual ISAs contain a 'Public Sector Perspective' statement, setting out circumstances where specific Standards or guidance are not applicable in a public sector environment, or where additional guidance is appropriate. As an aid to transition, the existence of Practice Note 10 (Revised) The audit of public sector entities in the United Kingdom (and its Irish equivalent) and its role could be described in the draft Statement, as could the public sector background of certain APB members and observers.

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