ACCA welcomes the opportunity to respond to the Financial Reporting Council’s consultation on proposed revisions to International Standards on Auditing (UK and Ireland) to adopt changes to International Standards on Auditing addressing the use of internal audit. The consultation paper also sets out for comment a proposed process for consulting on the UK and Ireland adoption of new/revised ISAs.
We agree that the ISAs (UK and Ireland) should be updated in respect of these changes. The specific ISAs under consideration have gone through international due process; moreover, the extant ISAs (UK and Ireland), which are based on ISAs, already include many of the improvements that are now proposed for formal adoption.
ACCA agrees with the majority of positions taken by the FRC in relation to the proposed changes and the processes it intends to adopt for future changes, but we recognise that processes may have to change if European law mandates the form of adoption of ISAs.
We are particularly pleased that the FRC intends that changes in ISAs are implemented in the UK and Ireland at the same time as they are internationally and without significant additional requirements (‘plusses’) unless necessary in a UK and Ireland context.
We welcome the FRC’s call for those commenting on exposure drafts of ISAs to inform the FRC of their views. We suggest that the FRC should also seek views at earlier stages and cast its stakeholders’ net more widely. Finally, we suggest that the FRC should encourage similar bodies in other jurisdictions to follow its example to facilitate greater input to the development of global standards.
ACCA welcomes the opportunity to respond to the Financial Reporting Council’s consultation paper:
Proposed revisions to International Standards on Auditing (UK and Ireland) to adopt changes to International Standards on Auditing addressing the use of internal audit:
315 (Revised) Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment
610 (Revised) Using the Work of Internal Auditors
Conforming Amendments to Other ISAs (UK and Ireland)
This is the first consultation following the adoption of the Clarified International Standards on Auditing (ISAs) in the UK and Ireland and, in addition to the ISAs noted above, the consultation seeks input on the general process for adoption.
ACCA has commented in response to earlier consultations that the FRC should aim to adopt ISAs so that they become mandatory in the UK and Ireland at the same time as they do internationally. We also believe that there should be no significant additional requirements (‘plusses’) unless necessary in a UK and Ireland context. We are pleased to find that the current proposals are responsive to both these positions and note that the absence of ‘plusses’ reflects the FRC’s success in arguing for strengthening of the international standards relating to the use of internal audit.
In the next section of this response, we answer the specific questions posed in the consultation paper. We draw your attention in particular to our answer to question 11, in which we explore how the FRC can further enhance the IAASB’s standard setting processes.
Matters on which specific questions are asked
In this section of our response we answer the questions posed in the consultation paper.
Q1: Do you agree that the ISAs (UK and Ireland) should be updated to adopt the revised ISAs 315 and 610 and the related conforming changes to other ISAs? If not, please give your reasons and explain what action, if any, that you believe should be taken to update the ISAs (UK and Ireland) in relation to the use of internal audit.
We agree that the ISAs (UK and Ireland) should be updated in respect of these changes. This is necessary in order for the UK and Ireland economies to continue to benefit from the international acceptability of applicable auditing standards.
Ideally, ISAs (UK and Ireland) should be updated so as to ensure that changes to ISAs are capable of implementation as at the same date as internationally. We are pleased to note, therefore, that the planned implementation date for the UK and Ireland changes is for periods ending on or after 15 December 2013.
Q2: If you agree that the ISAs (UK and Ireland) should be updated to adopt the revised ISA 315 (Q1 above), do you agree that APB supplementary material can be limited to that shown in the exposure draft? If not, please give your reasons and explain what supplementary material, if any, you believe should be added.
We would go further than is proposed by eliminating the supplementary material. Such material comprises:
- a footnote to the definition of an assertion, which states that: ‘In the UK and Ireland, those charged with governance are responsible for preparing the financial statements.’
- a footnote referencing another ISA (UK and Ireland) as follows: ‘In the UK and Ireland, as explained in paragraph A2-1 of ISA (UK and Ireland) 580, Written Representations, it is appropriate for written representations that are critical to obtaining sufficient appropriate audit evidence to be provided by those charged with governance, rather than other levels of the entity's management.’
In our extensive comments of July 2009 on the consultation paper Proposed Clarified International Standards on Auditing (UK and Ireland) we criticised the inclusion of 1 above as follows: ‘The statement that those charged with governance are responsible for preparing the financial statements is not directly relevant to the wording of the definition of “assertions”. This material is not specific to the UK and Ireland. It is not necessary as guidance, because its inclusion has no significant effect on audit quality.’ Our response to the 2009 consultation paper also included a section dealing with the potential confusion that could arise from making statements such as in 2 above because ISAs deal separately with the concepts of management and those charged with governance as appropriate.
Q3: If you agree that the ISAs (UK and Ireland) should be updated to adopt the revised ISA 610 (Q1 above), do you agree that APB supplementary material can be limited to that shown in the exposure draft and described above? If not, please give your reasons and explain what supplementary material, if any, you believe should be added.
As explained in the consultation paper, the supplementary material is of two types. The first type is that shaded grey in the ISA itself, indicating that it will be issued when the proposed changes to the definition of engagement team are finalised by the International Ethics Standards Board for Accountants (IESBA). The second type is material that deals with UK and Ireland ethical requirements.
We agree that this proposed supplementary material is sufficient.
Q4: Do you agree that it is acceptable to use internal auditors to provide direct assistance in appropriate, limited, areas as set out in proposed revised ISA (UK and Ireland) 610? If not, please give your reasons.
We agree that direct assistance is acceptable in the circumstances set out in proposed revised ISA (UK and Ireland) 610.
Q5: If, following the eventual conclusion of the related IESBA consultation, the IAASB does not reissue ISA 610 with the material on direct assistance included, do you believe that the revised ISA (UK and Ireland) 610 should nonetheless be finalised to include that material? If not, please give reasons and explain how you believe direct assistance should be addressed in the revised ISA (UK and Ireland) 610.
The material on direct assistance is not yet issued because the IAASB does not wish to anticipate the outcome of IESBA deliberations on the definition of ‘engagement team’. Should the IESBA decide not to change the definition, the IAASB would have to revisit ISA 610, which may be delayed in implementation as a consequence.
Notwithstanding the current position with extant ISA (UK and Ireland) 610 and the definition of ‘audit team’ in the APB’s Ethical Standards for Auditors, we see no need to finalise revised ISA (UK and Ireland) 610 by including the material on direct assistance. It would be better to wait for a final international standard as otherwise UK and Ireland standards would change twice in a short time.
Q6: If you agree that the ISAs (UK and Ireland) should be updated to adopt the revised ISAs and related conforming changes to other ISAs (Q1 above), do you agree that it is not necessary to add APB supplementary material in relation to these conforming changes? If not, please give your reasons and explain what supplementary material you believe should be added.
We agree that it is not necessary to add supplementary material in relation to the conforming changes because there are no substantive changes to the requirements in those standards that are affected.
Q7: Is the proposed effective date, which is consistent with the effective date of the IAASB’s revised ISAs, appropriate? If not, please give reasons and indicate the effective date that you would consider appropriate.
We support the proposed effective date as this is consistent with the effective date of the IAASB’s revised ISAs. As noted in our answer to question 5 above, should the effective date of the IAASB’s revised ISAs change, we would also expect the UK and Ireland effective date to change.
Q8: Do you agree that the associated impact of these revised standards on work effort should not be disproportionate in relation to total audit work effort? If not, please give reasons and your estimate of the level of impact.
Q9: Do you agree that any related increase in work effort will be justified by the benefits of the proposed changes? If not, please give reasons.
We agree with the analysis and hence with the conclusions expressed in the consultation paper in relation to both these questions.
Q10: Do you agree that this overarching approach is the right one for the APB/FRC to adopt in dealing with any new/revised ISAs finalised by the IAASB? If not, please describe the approach you believe should be taken.
The approach described in the consultation paper involves several steps. We agree with the essential ones:
‘where the IAASB has finalised a new/revised standard we will look to implement it for the UK and Ireland’
‘we will then propose the standard as an ISA (UK and Ireland), including any additional requirements or guidance, for comment.’
It is likely that, if the relevant current proposals for European law are enacted, the discretion of Member States will be restricted such that statutory audits will be carried out on the basis of ISAs. Member States will be allowed to impose additional national audit procedures or requirements only if they stem from specific national legal requirements relating to the scope of the statutory audit of annual or consolidated financial statements. This will fundamentally affect the way the new/revised standard is considered (as set out in paragraph 38 of the consultation paper). We suggest, therefore, that any decisions taken based on the outcome of this consultation, but not anticipating such changes, will need to be reconsidered in due course.
Q11: Do you agree that we should seek the views of interested parties in the UK and Ireland on IAASB exposure drafts to inform our response to the IAASB consultation? If not, please explain why and whether you believe there are other, more appropriate, ways for us to seek the views of interested parties.
The consultation paper does not do justice to the many mechanisms already employed by the FRC to seek the views of interested parties. These include meetings, events and earlier uses of the mechanism that is the subject of the question (for example see APB press notice 82 APB invites comments on IAASB Exposure Drafts, January 2008).
We see merit in the FRC seeking the views of interested parties to inform its responses as proposed. There are practical difficulties in meeting a 60 day timetable when interested parties are working to meet a 120 day international timetable for responses. ACCA is the global body for accountants and we have to allow adequate time to develop our positions internationally, taking account of input from our Global Forum for Auditing and Assurance and the views of our members more widely. We will endeavour to provide a confidential preliminary indication of our likely positions.
IAASB exposure drafts arise from projects that have been in progress for one or more years and it is important to influence such projects earlier than the exposure draft. We acknowledge steps already taken by the FRC to effectively influence such developments and suggest that the views of interested parties should also be sought at an early stage to inform such work.
We believe that there is considerable merit in the FRC obtaining the views of experts and of stakeholders who would not be classified as ‘interested parties’ because they do not respond to IAASB exposure drafts. It is a moot point whether the focus of FRC stakeholder initiatives should be to inform its own positions, or to facilitate UK and Ireland stakeholder input to the IAASB global processes; in practice, any actions would likely further both aims.
We also encourage the FRC to promote such activities to its counterparts in other jurisdictions.