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Proposed International Standards on Auditing issued for comment
by the International Auditing and Assurance Standards Board of the International Federation of Accountants

Comments from ACCA
October 2005

General Comments

ACCA welcomes the opportunity to comment on proposed International Standards on Auditing 701 The Independent Auditor’s Report on Other Historical Financial Information and 800 The Independent Auditor’s Report on Summary Audited Financial Statements issued for comment by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants.

ACCA supports the updating of these ISAs to conform the approach therein to that of ISA 700 (Revised) The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements.

It is proposed to issue ISA 800 The Independent Auditor’s Report on Summary Audited Financial Statements as a separate ISA. We comment on this in the next section of our response when we answer the first question posed by the IAASB in the explanatory memorandum forming part of the exposure draft.

Our answer to question 1 concludes that there is a clear public interest argument in favour of public reports by auditors, in their capacity as such, being subject to International Standards on Auditing as that term is widely understood. We recommend, therefore, that changes be made to proposed ISA 800 so that it clearly mandates a reasonable assurance engagement in relation to the summary audited financial statements. We recognise that there is some scope for confusion between such an engagement and a direct audit of summary financial statements. However, we do not consider that this should unduly hamper the design of an appropriate form of reporting.

Comments on Significant Proposals

The explanatory memorandum forming part of the exposure draft draws attention to significant proposals and directs commentators to consider certain questions. Questions 1 and 7 relate to proposed ISA 800. Questions 2 to 6 relate to proposed ISA 701. We comment below on these matters.

RETENTION AS AN INTERNATIONAL STANDARD ON AUDITING

Question 1: Do you agree with the IAASB’s conclusion that the standards and guidance for auditors’ reports on summary audited financial statements should be retained within ISAs?

If yes, do you agree that the standards and guidance should be placed in a separate ISA?

Under the International Framework for Assurance Engagements, the engagement standards issued by the IAASB are divided into two sets: ‘Audits and Reviews of Historical Financial Information’ and ‘Assurance Engagements Other Than Audits and Reviews of Historical Financial Information’. The former is divided into two series; ‘International Standards on Auditing’ and ‘International Standards on Review Engagements’.

The underlying logic appears to be that the set and / or series of a pronouncement is determined by whether it does or does not deal with ‘historical financial information’ and whether (in the case of Audits and Reviews of Historical Financial Information) the engagement provides reasonable or limited assurance.

In the case of auditors’ reports on summary audited financial statements, the proposed engagement is not itself an audit of summary financial statements (paragraph 3(b) of proposed ISA 800), nor do the mandatory procedures or form of reporting indicate that it is an engagement that is intended to provide reasonable assurance. Without such an objective, as an engagement within the scope of the International Framework for Assurance Engagements, it must be dealt with as an International Standard on Review Engagements or an International Standard on Assurance Engagements. Pragmatically, describing it as a ‘review engagement’ does not appeal. Users may also be unimpressed by any logic used to justify treating the subject matter as ‘non-financial’.

There is a clear public interest argument in favour of public reports by auditors in their capacity as such being subject to International Standards on Auditing as that term is widely understood. We are drawn to the conclusion, therefore, that proposed ISA 800 must be changed so that it mandates a reasonable assurance engagement.

THE APPLICABLE FINANCIAL REPORTING FRAMEWORK

Question 2: Do you agree with the description in paragraph 10, acknowledging that, depending on the circumstances of the engagement, the applicable financial reporting framework may encompass more than just accounting standards and legal requirements?

While we agree that the applicable financial reporting framework can theoretically encompass more than just accounting standards and legal requirements, we caution against extending its boundaries too far.

Many of the matters cited in paragraph 10 as possibly being within the financial reporting framework could also be referred to as ‘influencing how the financial reporting framework is applied’. If a financial reporting framework is to be capable of concise definition it cannot include material (such as ‘accounting literature’) that is itself ill-defined. For example, a financial reporting framework may include authoritative industry statements of recommended practice but not the way in which one entity accounts for an emerging issue.

We are not convinced that there is a need to refer to the financial reporting framework in this way at all. The purpose of the guidance is to lead the auditor towards consideration of the suitability of criteria for an assurance engagement. This is dealt with in the International Framework for Assurance Engagements and it would be better to align the proposed ISA 701 directly with that.

Conforming amendments to ISA 200

We are concerned that the proposed conforming amendment to ISA 200 Objective and General Principles Governing an Audit of Financial Statements includes in the definition of a ‘financial reporting framework designed to achieve fair presentation’ a statement that it ‘provides a context for the auditor’s evaluation of the fair presentation of the financial statements’. If this is intended to be a condition that a financial reporting framework must satisfy before it can be considered to be ‘designed to achieve fair presentation’, it is inappropriate. If the wording it is merely descriptive, it has no place in a definition.

We do not support the definition 1(a):

‘"Financial reporting framework” means a set of criteria applied in preparing and presenting other historical financial information. The term includes any legal and regulatory requirements that supplement but do not conflict with the financial reporting framework.’

A definition should not use within it the defined term, with a different meaning.

DISTINCTION BETWEEN FINANCIAL REPORTING FRAMEWORKS

Question 3: Do you agree with the proposed distinction in paragraphs 15 and 16 [between financial reporting frameworks designed to achieve fair presentation and other financial reporting frameworks], and the effect that it has on the form of opinion? If not, clearly explain your preferred distinction and the effect that it has on the form of opinion?

We acknowledge that in certain jurisdictions the term ‘true and fair view’ (and its equivalent) would not be appropriate except in relation to a full set of financial statements intended to give such a view. Accordingly, we support the use of different wording for an opinion in such circumstances to signal that reasonable assurance has been obtained.

ASPECTS OF FORMING AN OPINION

Question 4: Do you agree with the proposals for forming an opinion in paragraphs 23 [evaluating the fair presentation] and 24 [considering if misleading]? If not, clearly explain the reasons for the disagreement?

We agree with these proposals, which are consistent with requirements in other ISAs.

AUDIT OF PARTS OF FINANCIAL STATEMENTS

Question 5: Do you agree that the ISAs should contain standards and guidance for an auditor’s report issued as a result of an audit of one or more specific elements, accounts or items of a financial statement?

We agree, because, where such reporting is in the public domain, it is appropriate for it to be subject to the IAASB engagement standards.

Question 6: If your response to question 5 is yes, do you agree with the proposed standards and guidance for these types of auditor’s report? If not, how should they be amended?

We agree with the proposed standards and guidance for these types of auditor’s report.

We specifically support the approach set out in the second part of paragraph 38, under which the auditor may be able to express an unmodified opinion on one or more specific elements, accounts or items in a financial statement with respect to which the auditor has expressed an adverse opinion or a disclaimer of opinion, provided that certain conditions are met. We recommend, however, that a different test be found to that of whether ‘a major portion of the financial statement’ is involved, as such wording can be interpreted very widely.

FORM OF OPINION ON SUMMARY FINANCIAL STATEMENTS

Question 7: Do you agree with the proposed form of opinion on summary financial statements? If not, provide your preferred form of opinion and reasons for such preference.

We do not support the exclusive use of the words ‘an appropriate summary’ in the opinion paragraph. Several jurisdictions require an opinion on whether the summary financial statements are ‘consistent with’ the financial statements and we suggest that that alternative be allowed.

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