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Proposed Statement of Standards for Reporting Accountants issued for comment by the Auditing Practices Board

Comments from ACCA
April 2007

Executive Summary

ACCA welcomes the opportunity to comment on the proposed Statement of Standards for Reporting Accountants ISRE ( UK and Ireland ) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity (the proposed ISRE) issued for comment by the Auditing Practices Board (APB).

While we welcome the decision to adopt the international standard, we are concerned that:

• The issue of a UK and Ireland version prevents auditors and users from deriving the full benefits of an international standard.
• Some of the supplementary guidance proposed for the UK and Ireland has the substance, if not the form, of additional requirements.
• The proposed implementation date does not allow sufficient time for auditors to put in place the necessary resources.

Our concerns and related recommendations are set out below in the form of answers to the APB's ‘questions to commentators'.

Responses to Questions for Commentators

Question 1 Do you agree that there is benefit in the APB replacing Bulletin 1999/4 by this proposed ISRE ( UK and Ireland ) 2410? If not, why not?

We agree that there is a need for a new pronouncement to accommodate the changed circumstances since the issue of Bulletin 1999/4.

The preface to Bulletin 1999/4 explained that the APB had considered whether it was appropriate to issue standards and would do so again as the regulatory framework continued to develop. We support the issue of the proposed ISRE, as opposed to updated guidance. This is a significant step that recognises the increasing interest in appropriate international standards to drive auditor behaviour in capital markets.

We do not support, however, the creation of a UK and Ireland version of the international standard.

Unlike International Standards on Auditing (ISAs), where the APB has justified UK and Ireland versions on the basis that it was ‘early adopting' ISAs before being required to do so by EU law, there is no barrier to immediate adoption, as adoption of ISREs is not planned to be subject to EU law. Moreover, the 2004 decision to incorporate some material from existing Statements of Auditing Standards into ISAs to avoid a reduction in the quality of UK and Irish standards has no parallel, because there is no existing standard in the UK and Ireland for the review of interim financial information.

The adoption of the international standard would greatly facilitate the work of transnational audit firms and minimise the costs to their clients.

We recognise that some UK and Ireland guidance would facilitate the use of the international standard and suggest, therefore, that Bulletin 1999/4 be updated and repositioned as supplementary guidance on the application of ISRE 2410. Such guidance might usefully include material relevant to the Alternative Investment Market, for which the review of interim financial information is growing more popular.

In our answer to question 2 below, we examine the nature of the proposed supplementary guidance and conclude that some has the substance, if not the form, of additional requirements. If the APB is willing to adopt the international standard only in a UK and Ireland version, we believe that, for the avoidance of doubt, it should consider making a more-definite separation from the international standard. This has been done in Australia where there is a different approach to the issue of convergence with ISAs. In Australia , the equivalent is Auditing Standard ASRE 2410 Review of an Interim Financial Report Performed by the Independent Auditor of the Entity. It includes a section explaining the main differences between it and ISRE 2410. Those differences include mandatory requirements that are not in ISRE 2410.

Question 2 Do you support the addition of the proposed APB supplementary guidance? If not, why not?

Consistent with the views expressed in our answer to question 1 above, we do not agree that ‘supplementary guidance' should be added to the proposed ISRE. Instead, we recommend the issue of a separate guidance document.

Much of the proposed guidance and illustration is valuable, but there is a significant difference between merely adding guidance and changing the nature of an international standard through the addition of further requirements. Although not identified as such, we believe that several paragraphs are, nevertheless, worded in a manner consistent with the intention that they are requirements:

• Paragraph 29-1: comparative interim financial information
• Paragraph 37-1: association with other information
• Paragraph 44-1: date of the review report
• Paragraph 60-2: requests to discontinue an engagement

While this may be a consequence of transferring wording from Bulletin 1999/4, the result is the addition of requirements (‘plusses'), in substance if not form.

As further explaining in our answer to question 1, we recommend reconsideration of the need for the inclusion of such material given the change in status of the pronouncement and the advantages of having a standard that is international rather than one containing additional national requirements.

Question 3 Do you support the APB‘s interpretation and clarification of the requirement in paragraph 25, as set out in paragraph 25-1 and described above, concerning the agreement of consolidated group interim financial information to underlying accounting records? If not, do you believe the auditor should be required to trace the interim financial information back to the accounting records of all the individual group components and, if so, what do you estimate would be the impact of this on the costs of performing interim reviews?

We believe that the material presented in paragraph 25-1 is realistic and sensible.

Question 4 Do you consider that the implementation of this ISRE (UK and Ireland) is likely to result in a change in entities' decisions whether to ask auditors to review and report on interim financial information — either to decrease or increase the number of review engagements? If yes, why?

On the assumption that the APB's view on the costs of review engagements is correct, we do not believe that the implementation of the proposed ISRE will result in a significant change in the number of review engagements. We do not have any research evidence, however, that is relevant to this question.

Question 5 Do you agree with the APB's view that the introduction of ISRE ( UK and Ireland ) 2410 will not result in a significant increase in the amount of work performed by the auditor and, therefore, the costs to review interim financial information? If not, why?

Although cost increases may be expected as a result of reporters complying with IAS 34 Interim Financial Reporting , we do not believe that implementation of the proposed ISRE will add significant costs.

A caveat here is in relation to the implementation date. If the APB insists on a short implementation period there will be higher costs, and possibly reduced quality, suffered mainly by those who report in the early stages.

Question 6 Do you support the proposed implementation date?

Although the proposed commencement date coincides with that relevant for the revised rules for half-yearly financial reports, we do not agree with it.

The transition from guidance to a standard makes it imperative that auditors be allowed sufficient time to put in place the necessary resourc es. These relate not only to the proposed ISRE itself, but also to any consequent changes to quality control systems.

The APB may wish to take this opportunity to consider an alternative structure for its pronouncements, as a similar need will arise in the future to provide UK and Ireland guidance for the implementation of ISAs, if and when adopted for use in the EU.

The proposed ISRE is to be read in the context of the statement T he Auditing Practices Board – Scope and Authority of Pronouncements (Revised). That statement, which was last revised in December 2004, makes no mention of the proposed ISRE other than generically (in paragraph 17) in relation to the APB's future intentions.

We regret that the proposed ISRE did not indicate what conforming amendments, if any, are proposed to the above statement.

We assume that, for the proposed ISRE, the APB intends to adopt the text convention that requirements are identified by bold type.

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