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ISA 510, Initial Audit Engagements - Opening Balances
Proposed redrafted International Standard on Auditing issued for comment by the International Auditing and Assurance Standards Board of the International Federation of Accountants
Comments from ACCA
October 2007
Executive Summary
ACCA welcomes the opportunity to comment on the proposed International Standard on Auditing ISA 510 (Redrafted) Initial Audit Engagements – Opening Balances (proposed ISA 510), issued for comment by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants.
Our comments are restricted to the changes proposed as a result of applying the Clarity project drafting conventions to extant ISA 510.
We support the objectives of the auditor stated in proposed ISA 510, but as previously stated in our responses to recent redrafted ISAs, we urge that consideration is given to the consistency of wording used throughout the Clarity project.
Although we believe that the structure of the requirements and the application material appropriately support the presentation of the objectives, we are concerned that proposed ISA 510 has increased the number of requirement paragraphs in an area where the risk of material misstatement is relatively low.
We welcome the fact that the IAASB has invited comments on any undue costs arising from the inclusion of requirements that would otherwise have been guidance under the existing drafting conventions. Although much of our response deals with such matters, we have provided a summary of our relevant conclusions in the section headed Costs of Elevated Requirements .
Objectives
We consider that the objectives of the auditor are acceptable.
We agree that there are in effect only two distinguishable objectives, and that the third objective (sub-paragraph 2(b)) of the extant ISA 510 regarding the prior period's closing balances being brought forward correctly does not form a separate consideration to that of paragraph 3 (a) in the proposed ISA 510. Clearly opening balances will necessarily be misstated if the closing balances are not brought forward correctly, which is already covered by paragraph 3(a) in the proposed objective.
We also believe that is reasonable that the consideration of closing balances being appropriately carried forward is addressed in the requirements of proposed ISA 510 (paragraph 5) rather than being separately identified in the objectives.
Changes Made to Enhance the Clarity of Proposed ISA 510
Requirements
As we have stated in our responses to previous redrafted ISAs issued in the Clarity project, we do not agree with the wholesale elevation of guidance material to requirements. This we believe is a fact that has been effected in proposed ISA 510. As set out in our detailed comments below, the result often reduces the clarity of the document.
We also believe that this elevation of requirements predictably has a cost burden to all audits. We discuss this more specifically in the Costs of Elevated Requirements section of this response.
The appendix to our response to the proposed International Standard on Auditing ISA 250 (Redrafted) The Auditor's Responsibilities Relating to Law and Regulations in and Audit of Financial Statements1, provides further information on the deficiencies that we identify in the requirements of this and other proposed ISAs issued in the Clarity project.
Paragraph 5
Part (c) of this paragraph is an example of ‘requirements' that are essentially further guidance on parts (a) and (b) of that paragraph. The use of a construction including the phrase ‘as is necessary in the circumstances' gives a clear signal that there is no definite requirement. The instructions in part (c) simply provide details of what can be done to meet the requirements of either determining whether the prior period's closing balances have been correctly brought forward (a) or that the opening balances reflect the application of appropriate accounting policies (b).
These guidelines would be more appropriately included in the Application and Other Explanatory Material (A&OEM) section of the ISA. We also believe that the preferred procedure would be to obtain and review the predecessor auditor's working papers, and that the other procedures are in effect caveats should that not be possible. Thus if this part were to be retained as a requirement, the preference for (i) should be made more explicit.
The relevant guidance in A1-A5 for these requirements appears reasonable, although further application guidance should be included for instances where predecessor auditor working papers are available by law, but review is restricted due to the working papers being subject to litigation or other regulatory actions.
We agree with the omission of the other parts of paragraph 6 from extant ISA 510 with relation to the consideration of professional competence of previous auditors and the prior period auditor's report, which build on the requirement of other ISAs.
Paragraph 6
Although we believe that the opening sentence, as extracted from current ISA 710, is appropriately considered in the proposed ISA 510 we again consider that this in itself is not a useful new requirement and should be included the explanatory material relating to Opening Balances . Again the phraseology employed in this paragraph such as ‘as are appropriate in the circumstances', implies that the requirement is not definite and is something that the auditor would do irrespective of this particular wording being in the standard.
Similarly 6.2 which refers to the communication of material misstatements in accordance with ISA 450 (Redrafted) Evaluation of Misstatements Identified During the Audit should be maintained as guidance (in the A&OEM section) as was the case in the extant ISA 510. There is no new requirement here, simply an extension of the fundamental requirements of paragraph 5.
Paragraph 8
This paragraph which elevates paragraph 14 of extant ISA 510 to a requirement seems reasonable. The explicit reference that the auditor should consider the impact on the risk assessment in the current period of any prior period qualification is a routine and fundamental matter that any audit would be expected to consider, and does not add much to the requirement.
Paragraph 11
Whilst we agree that this requirement, primarily addressing consistency of accounting policies, is appropriate, we would consider that further guidance in addressing the evaluation of the appropriateness of the accounting policies reflected in the opening balances would be beneficial. This could be added to the A&OEM section of the proposed ISA.
Costs of Elevated Requirements
As mentioned above the additional requirements often detract from the clarity of proposed ISA 510. In addition we believe that the elevation of guidance material to requirements potentially adds costs to all audits. Not only are these costs likely to fall disproportionately on smaller entities, but we also believe that the level of risk associated with this area of auditing does not warrant the increased requirements and resultant costs.
The cost of including a single requirement should not be underestimated. Even if that requirement is conditional and is not relevant in the circumstances, it requires consideration by every auditor on every audit and that gives rise to a considerable aggregate cost, which includes the related training and changes to audit manuals, programmes or software.
Clearly a requirement will ensure that the auditor, when facing the specific condition, will act in appropriate manner. However, we believe a balance has to be struck between the additional burden placed on every audit as a result of these additional requirements and the cost that the requirement will have in terms of considerations required on every audit. This potentially considerable cost burden is again likely to fall disproportionately on smaller entities.
We recommend, therefore, that any proposed elevation be supported by an assessment of the frequency with which the condition for its use is met and the additional benefit (if any) to the quality of the audit that arises through inclusion as a requirement. We would not ordinarily expect such assessments to show that the benefit of elevation outweighed its cost.
1 "See also" section for ease of reference.