Audit of financial statements of public sector entities in the United Kingdom
An Auditing Practices Board Consultation Draft of a Practice Note
Comments from The Association of Chartered Certified Accountants
29 Lincoln's Inn Fields London WC2A 3EE United Kingdom
September 2000
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to have the opportunity to comment on the proposed Practice Note Audit of financial statements of public sector entities in the United Kingdom (the proposed PN). The document has been considered by members of ACCA's Auditing Committee and Public Sector Technical Issues Committee.We consider the proposed PN to be authoritative and comprehensive in the areas covered and welcome its issue. However, we have some concerns regarding its scope and coverage and certain of its contents. These concerns and our comments on its drafting are set out below.
1. General Comments
1.1. Public sector audit has a key part to play in safeguarding public money, ensuring proper accountability, upholding proper standards of conduct in public services and helping public services achieve value for money. The public has a legitimate interest in public sector audit and the standards and guidance applied by auditors. We note that other APB PNs are published only in paper form and are not, therefore, readily available for public scrutiny on the Internet. We recommend that the proposed PN be made available on the Internet, ideally as an APB publication or through parallel publication, perhaps by the Public Audit Forum, the national audit agencies, or the accountancy bodies designated under the Audit Commission Act 1998.1.2. The proposed PN does not deal specifically with the audit of local councils (i.e. parish, town and community councils) which pose particular problems for auditors. The special problems which face auditors of small companies are addressed by APB PN 13 The audit of small business. We are aware of the fact that auditors of entities within the scope of the proposed PN are the national audit agencies or drawn from a small panel of firms. We are responding separately to a consultation paper from the Audit Commission on the local council audit regime. In those comments we draw attention to the anti-competitive practice of appointing auditors from a small panel of firms. We believe that it would be in the public interest for all registered auditors who can demonstrate appropriate expertise to be eligible for such appointments. It will be important for such auditors to be able to refer to relevant authoritative guidance from the APB.
1.3. We do not believe that the overall construction of the document will properly assist public sector auditors in applying auditing standards or the public in understanding the public sector audit. The extent of general introductory material and guidance has been reduced compared to the PNs which the document is to supersede. The foreword is very brief and provides little in the way of an overview of public sector accounting and auditing. Ideally it should be expanded but, as a minimum, it ought to refer to sources of further information, such as that produced by the Public Audit Forum.
1.4. We consider that much of the general material in the sections dealing with individual SASs should be consolidated into an extended foreword. We are concerned that:
- some matters in later sections are not properly
introduced, for example the regularity assertion (in the SAS 300
section)
- some useful material of general application is 'hidden' by being confined to a section dealing with a particular SAS
and
- users wanting to develop an understanding of the audit of a particular type of entity are forced to skip between sections in order to discover whether they are relevant.
1.6. The first paragraphs of each section are headed 'Summary of SAS'. There is a danger that those who are not entirely familiar with Auditing Standards will be misled. In many cases the paragraphs do not mention all the individual auditing standards in a SAS. A particularly clear example of this is on page 15, where a summary of four paragraphs includes only some of the 16 standards in SAS 120 Consideration of law and regulations. We prefer the approach adopted in other PNs, where such material is more properly described as a 'Background Note'. APB would better serve the public interest by making at least a summary of SASs available on the Internet.
1.7. We note that, where examples are provided of auditors' reports, no account has been taken of the proposed issue of Bulletins: The electronic publication of auditors' reports and Revisions to the auditors' report on financial statements. We recommend that the opportunity is taken to conform the proposed PN to these Bulletins to ensure that it is not out of date immediately on publication. 2. Specific Comments
Foreword
2.1. The section dealing with responsibilities of public sector auditors (pages 4 and 5) should also include reference to 'best value' and ought to refer to propriety, which otherwise is not properly considered until page 124.2.2. In paragraph 11 it would be helpful to refer also to the NHS Executive Guidelines.
SAS 100
2.3. Although material is provided in relation to SAS 100, we do not feel that it assists public sector auditors in applying it. Accordingly we recommend that the section is deleted. The wording relating to auditors' other responsibilities and to regularity would more properly fall to be dealt with in the foreword.SAS 110
2.4. Paragraph 13 concludes with the sentence that: 'In Northern Ireland, section 47 of the Local Government (Northern Ireland) Act 1972 applies.' The paragraph should state explicitly whether or not that legislation is equivalent to section 117(2) of the Local Government Act 1972.2.5. The use of the word 'proven' in the last part of paragraph 14 might be taken as referring only to the outcome of legal proceedings, whereas the intention of the sentence is to highlight an important aspect of the legislation. We recommend that the sentence is redrafted to eliminate the words 'it is proven that'.
2.6. We consider that paragraph 15 should be expanded to give further guidance on the circumstances in which auditors should conclude that instances of suspected corruption are outside the terms of reference of SAS 110.
SAS 130
2.7. Paragraphs 6 to 9 make assertions about what auditors are expected to do in relation to going concern. The paragraphs also note cases where such expectations are not set out in authoritative documents, such as the Accounts Commission's Code of Audit Practice. As a minimum, the proposed PN should indicate whether the expectations arise from custom and practice or unpublished authoritative material. Ideally, the publication of the proposed PN ought to prompt those responsible for determining the scope of public sector audits to issue explicit guidance.2.8. Paragraph 11 states that SAS 130 does not apply where central government agencies prepare financial statements on a cash basis as the going concern basis is not used in the preparation of the statements. The implications for auditors' reports ought to be at least referred to in the section dealing with SAS 600. Understanding of this matter relies on familiarity with government accounting. We recommend an improvement to the proposed PN in this regard in connection with the comment immediately below.
2.9. Paragraphs 13 to 16 explain how auditors consider the circumstances in which a public sector entity may cease to continue in operational existence. The case where assets are transferred at fair value but nil consideration features as the third situation in Example 2 on page 23. We believe that the auditors' view on the valuation of assets would be inappropriate for a non-public sector entity. In essence government accounting practice is analogous to 'push down' of 'group' asset values into the accounts of the entity. Accordingly, we would prefer to see a fuller explanation of the basis of preparation of financial statements, as the wording 'appropriate adjustments have been made to the values of fixed assets' is insufficient. Alternatively, the proposed PN ought to provide further information and refer to appropriate sources to allow readers to gain an understanding of government accounting and its effect on the audit.
2.10. At paragraph 4 on page 22, paragraph 3 on page 23, and paragraph 2 on page 24 the words, 'having completed their audit' are used. What is meant, presumably, is that the auditors have completed other aspects of their work, as the audit is not complete until all work is finished, including that on going concern.
2.11. Paragraph 5 at the foot of page 24 uses the words 'extreme circumstances'. We consider that the text would be improved if it provided more explicit guidance as to what circumstances might be so described, perhaps by providing examples.
2.12. The note on the basis of preparing financial statements in paragraph 6 on page 26 refers to 'early retirement'. This should be altered to agree with the description of the facts in paragraph 3 on the preceding page.
SAS 140
2.13. In the section headed 'Agreeing the terms of engagement where the addressees include a Parliament', a summary of paragraph 3 of SAS 140 says that its intention is to indicate that the term 'client' means the addressee of the auditors' report. We do not believe this to be true; it is merely one of the alternatives presented in SAS 140. The full text of paragraph 3 of SAS 140 is: 'For the purpose of this SAS "client" means the addressees of the auditor's report, or, when as will often be the case it is not practical to agree such terms with this body, the entity itself through the board of directors or the audit committee'. This section of the proposed PN is complicating a subject already dealt with adequately by the SAS and we recommend that it is deleted.2.14. On page 31, paragraph 4.1 is based on paragraph 2.1 in the Appendix to SAS 140. Changes have been introduced to the wording but we see no good reason to deviate from established guidance.
2.15. In relation to the Accounting Officer's Statement on the System of Internal Financial Control (page 32), reference could be made to the need for this statement to include the additional paragraph set out in DAO (GEN) 7/00. This refers to the Accounting Officer taking reasonable steps to meet the Treasury's requirement for a statement on internal control to be prepared for the year ended 31 March 2002.
SAS 150
2.16. Paragraph 7 describes the circumstances of some central government agencies for which the accounts are deposited in the libraries of the House of Commons and House of Lords by the sponsor department. While it might be administratively convenient to allow auditors not to apply SAS 150.4 to such entities, we question whether there is sufficient justification for this. Given that auditors are under no obligation to perform procedure or make enquiries at that stage, there seems to be no cost justification for the stance taken by the proposed PN.SAS 220
2.17. In paragraph 3, the proposed PN attempts to introduce wording on the consideration of 'fairness'. In doing so it goes much further than the explanatory material in SAS 220 or in 600 Auditors' reports on financial statements. We do not believe that this is an appropriate pronouncement in which to include material that would be controversial if exposed in another pronouncement of greater general interest. We recommend, therefore, that the second sentence of paragraph 3 is deleted.SAS 240
2.18. The text refers to an exposure draft of a revised SAS 240. An exposure draft has no authoritative status. It is only appropriate to refer to an extant SAS. As a revised SAS 240 will be issued before the finalisation of the proposed PN, the text should be altered if necessary to agree to the revised SAS.SAS 300 and SAS 400
2.19. In the material relating to SAS 300 and SAS 400, the regularity assertion is mentioned but the concept is not properly introduced. As this is an important concept we recommend that it be dealt with in an expanded foreword.SAS 440
2.20. The second and third paragraphs introducing the illustrative example on page 61 would be useful in a wider context. We recommend that they are transferred to the main text of the proposed PN.SAS 470
2.21. The financial reporting requirements for each type of public sector entity are of interest in areas not related to SAS 470. We recommend that this material is expanded and dealt with in the foreword. The 'summary' of the requirements is, in fact, just a cross-reference to their sources.SAS 500
2.22. In paragraph 7, the guidance states that auditors formally advise internal auditors of any specific intention to use their work. This requirement goes beyond that of SAS 500 and, unless further specific authority is provided for this matter, we question whether this paragraph should be included.2.23. It would be useful to provide full references to the internal auditing standards and practices referred to in the Annex to this section. This is especially true for the Government Internal Audit Manual and the NHS Internal Audit Manual. In addition, CIPFA is currently updating its guidance on internal audit in local government and will shortly issue a code of internal audit practice. This should be reflected in the Annex to the SAS 500 section.
SAS 600
2.24. The reduction in the number of example reports from that in PN 10 and the increased complexity of the examples (e.g. Example 3 has 19 footnotes and Example 4 has 13) does not help auditors develop a clear understanding of reporting requirements.Regularity
2.25. In several instances, what were different layers of subheadings in PN 17 have been collapsed into one. We recommend that a thorough review of the headings in this section is done to restore the logical structure of the material.2.26. The proposed PN imposes onerous obligations on auditors in relation to compliance with EU authorities (paragraphs 46 to 48). These have no parallel in the private sector and it would be usefull to have a more specific authority for this requirement, which in effect amounts to auditors having to 'second guess' the actions of departments.
Appendix 2
2.27. The references to Scottish devolution should be replaced with wording applicable to the period after 1 April 2000.3. Drafting Points
3.1. The text includes phrases which could be intended to have equivalent meanings but which are worded differently. While this is an acceptable device to introduce variety into normal writing, it is questionable in a document which should be providing unambiguous guidance. An alternative interpretation is that the phrases used in the document are intended to impart very fine shades of meaning. If the latter is the intention, we do not believe that auditors will necessarily interpret the guidance in the way intended. For example, on page 13 the following phrases are used: 'In the public sector, auditors are expected to be aware of' (paragraph 12), 'public sector auditors make themselves aware of' (paragraph 13), and 'auditors are aware of' (paragraph 14). Further similar variations are found elsewhere. We recommend that simple constructions be used consistently to ensure that the guidance is both easy to assimilate and unambiguous.3.2. In the body of the text some initial attempt seems to have been made to identify words which appear in the Glossary. If, however, that is the intention, it ought to be mentioned in the document. The terms so identified appear in different ways and we suggest that a consistent approach should be adopted.
3.3. We note that the numbering of paragraphs restarts for each section. This is consistent with the way PN 10 was numbered but not with PN 17, where a numbering system was used which included the section number at the start of the paragraph number. We believe that the latter scheme of numbering is better as it allows a paragraph to be identified uniquely by number. There are other schemes of numbering which also allow this to be done which could also be used.
3.4. The sections within the PN sometimes have an 'Annex'. This is in contrast to other PNs, where such matters are normally dealt with in Appendices. Because of the numbering scheme adopted, cross-references to Annexes are not unique. We recommend the introduction of a referencing system using unique references for Annexes.
3.5. Those parts of sections which are new to the document (i.e. were not present in earlier PNs which this PN will supersede) have suffered from inconsistency in formatting and punctuation. This is particularly apparent in the tables and public sector content paragraphs. We have noted some of these inconsistencies in a separate letter, but our review was not primarily designed to identify such matters and we expect that the text contains more. In the preparation of the text of the final published version, we recommend that further attention be paid to copy editing.