see also...
ISA 530, Audit Sampling
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 530 (Redrafted) Audit Sampling (proposed ISA 530), 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 530 and to the significant matters discussed in the Explanatory Memorandum accompanying proposed ISA 530.
We support the objective of the auditor in proposed ISA 530.
Although we believe that much opportunity has been taken to enhance the standard, we are particularly concerned with the removal of all references to CAATs. We certainly believe that the use of CAATs should be encouraged in an environment where electronic data processing is pervasive.
We are also of the opinion that some of the material from the extant ISA 530 which has been included in ISA 500 (Redrafted) Considering the Relevance and Reliability of Audit Evidence should be reintroduced to proposed ISA 530 to emphasise the difference between the selection of items for testing and audit sampling and hence clarify the scope of ISA 530. This could be done most conveniently by extending the Introduction.
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 .
Significant matters
The IAASB has identified three areas of notable interest within the Explanatory Memorandum accompanying proposed ISA 530. Our comments on these three aspects are presented directly below, and are also referred to in our commentary on the specific requirements of proposed ISA 530 in the section entitled Changes Made to Enhance the Clarity of Proposed ISA 530.
Selecting items for testing to obtain audit evidence
We believe that reference to selecting items for testing is relevant to ISA 530 and consequently consider there to be a need for the scope of the proposed ISA to provide more explanation about the interaction between it and ISA 500.
Should this further explanation about the scope of proposed ISA 530 not result in any change, we suggest, as an alternative, that the material on selection of items for testing be retained in proposed ISA 530. This would allow the selection of items for testing to be covered before dealing with the outcomes of such testing, only one category of which (sampling) yields information that is relevant to the whole population. Such an approach would also allow (with adjustment) integration with the requirement in paragraph 15, as the auditor would assess the evidence in relation to individual items tested and other findings as part of considering the need for additional audit evidence.
Anomalies
We believe that the auditor's consideration of anomalous misstatements is implicitly dealt with in ISA 450 Evaluation of Misstatements Identified during the Audit and it is therefore unnecessary to include some of the present tense statements from extant ISA 530 as requirements within proposed ISA 530.
Whilst we certainly agree with the point made in paragraph 13, that anomalous misstatements are considered to be rare, and that it would be beneficial and meaningful to refer to such misstatements within the context of proposed ISA 530, we believe these discussions should be kept within the Application and Other Explanatory Material (A&OEM) guidance.
Projecting and evaluating sample results
Our views on this matter are set out in the detailed comments on paragraphs 14 and 15 within the Requirements section of this response.
Objective
We consider that the objectives of the auditor is appropriate.
Changes Made to Enhance the Clarity of Proposed ISA 530
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. We note that such elevation has affected proposed ISA 530. As set out in our detailed comments below, the result often reduces the clarity.
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 Statements 1, provides further information on the deficiencies that we identify in the requirements of this and other proposed ISAs issued in the Clarity project.
Paragraph 7
The wording used in this paragraph does not facilitate the understanding of this requirement, which we believe was adequately drafted in paragraph 40 of the extant ISA. The sub-points (i) and (ii) are however useful additions to the proposed ISA and help to clarify the obligations on the auditor.
Paragraphs 9, 10 and 11
Paragraph 9 states the primary requirement relating to performing audit procedures on audit sampling. The 'requirement' in the other paragraphs are clearly extensions of the requirements of paragraph 9 and should be treated as such.
Paragraph 10 simply offers further guidance should the audit procedures not be appropriate for selected items and should be incorporated in paragraph A13.
Similarly the first part of paragraph 11 offers guidance on the treatment of selected items that the audit procedures could not be applied to. This should be added to the paragraph A14.
The second part of paragraph 11 which provides an explicit reference for the auditor to consider the impact of inability to apply the designed audit procedures on selected items on the risk assessment, we would consider a matter of course, and does not offer any benefit to the proposed ISA. This should either be incorporated in the guidance in A14 or excluded.
Paragraph 13
This ‘requirement' again simply offers greater detail to the requirements of paragraph 12, stating the steps that would be necessary if the deviation were considered an anomaly. This duplication should be eliminated by taking this paragraph to the A&OEM section and appropriately referred to in paragraph in 12.
Paragraph 14
We believe that that the further detail in the requirement, which now includes more appropriate requirements for tests of controls (previously paragraph 53 of extant ISA 530 noted that no explicit projection of errors was necessary), ensures that the requirement is proportionate to the subject matter.
Paragraph 15
The requirement in paragraph 15 essentially concludes the logical flow in circumstances where the conclusion required in paragraph 14 is that no appropriate basis exists. We note that there is no equivalent requirement, however, to take appropriate action if the conclusion is positive, i.e. that an appropriate basis exists. This could be regarded as an omission, but we strongly suggest that neither outcome should in fact be the subject of a requirement in proposed ISA 530.
We have commented earlier in this response on the scope of ISA 530 and the need for there to be more explanation about the interaction between it and ISA 500. Any requirements to use non-sampling methods is wrongly positioned in proposed ISA 530. To the extent that this is felt a necessary prescription, it should be within ISA 500 .
CAATs
Specifically, we also have concerns that the exclusion of references to Computer Aided Audit Techniques (CAATs) detracts from proposed ISA 530. We believe that in the current environment electronic data processing is all-pervasive and the use of CAATs should be encouraged if the audit and the auditor are to be viewed as relevant.
Reference can and should made where relevant in the guidance and the appendices even if the exclusion of selection of items for testing is retained. The guidance should also make reference to the interface with use of an auditor's expert, where one is employed for CAATs.
Costs of elevated requirements
As mentioned above the additional requirements often detract from the clarity from the document. 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 warranty 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 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.