ISA 210 (Redrafted), Agreeing the Terms of Audit Engagements
Proposed redrafted International Standard on issued for comment by the International Auditing and Assurance Standards Board of the International Federation of Accountants
Comments from ACCA
April 2008
Executive Summary
ACCA welcomes the opportunity to comment on the proposed International Standard on Auditing ISA 210 (Redrafted) Agreeing the Terms of Audit Engagements (proposed ISA 210), issued for comment by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants. The Exposure Draft includes conforming amendments, including those arising from the finalisation of ISA 580 (Revised and Redrafted) Written Representations.
While we are generally supportive of proposed ISA 210 we suggest ways in which it may be further clarified, recognising that its requirements are extensive and diverse.
We do not believe that it is appropriate to introduce the term ' necessary preconditions for an audit' and we suggest how it should be eliminated from the Objectives and Requirements sections.
We also suggest that clarification is needed over how auditors determine whether wording in law or regulation dealing with management's responsibilities is equivalent in effect to that set out in proposed ISA 210.
Matters on which Specific Comments are Requested
In this section of our response we address the issues identified for specific comment in the Explanatory Memorandum forming part of the Exposure Draft. These include the conforming amendments to proposed ISA 200 (Revised and Redrafted) Overall Objective of the Independent Auditor, and the Conduct of an Audit In Accordance With International Standards on Auditing, proposed ISA 210 and proposed ISA 700 (Redrafted) The Independent Auditor's Report on General Purpose Financial Statements as a result of ISA 580 (Revised and Redrafted) Written Representations.
Do you agree with the proposed description of management's responsibilities in the ISAs?
The description of management's responsibilities is limited to those that are preconditions for an audit. We agree with this focus and with the way that the responsibilities are described in a manner which should be generally applicable.
We note that proposed ISAs 200 and 580 refer to the premise that management and, where appropriate, those charged with governance have certain responsibilities; whereas proposed ISA 210 refers to this as one of the' necessary preconditions for an audit' .
We suggest that proposed ISA 200 ought to explain the interaction between the premise and the preconditions for an audit; ideally, proposed ISA 210 should be rewritten to avoid the creation of the term 'necessary preconditions for an audit'.
Do you agree that the description of management's responsibilities in the terms of the audit engagement, written representations and auditor's report may use the wording of the law or regulation if the auditor has determined that the law or regulation includes responsibilities that are equivalent in effect to those described in the ISAs?
We agree that wording derived from law or regulation ought to be used where necessary to avoid duplication of wording otherwise prescribed by ISAs. This is most obviously the case in relation to the content of the auditor's report, but it is sensible to adopt that approach consistently throughout. It is important that auditors are not placed under an onerous obligation to carry out a determination of equivalence that arguably is only capable of being performed properly by a lawyer. We note that paragraph A20 refers to guidance from the accounting profession or national standard setter in a jurisdiction. The intention of this wording is, presumably, that the auditor may reasonably rely on such guidance and that should be made explicit. The wording refers to the equivalence of the description rather that (see immediately below) the equivalence of the effect of the description. This wording should be conformed with the wording discussed below.
Paragraph A20 does not refer to the equivalence of the wording of management's responsibilities as described in paragraph 4(b) as compared to law or regulation; it uses the words 'equivalent in effect' . This wording may have been chosen simply because the words themselves cannot be equivalent (but see point immediately above), so the test is on their 'effect' . This may mean, however, that auditors are to determine the effect of the wording in paragraph 4(b) and the effect of the wording in law or regulation, and then determine the equivalence of the two effects. This is potentially complex, arguably outside of the expertise of auditors and largely unnecessary. The wording, alternatively, might have been chosen to indicate a necessary degree of imprecision in the evaluation.
We suggest that paragraph A20 should state that auditors may accept the wording in law or regulation in whole or part if: (1) the accounting profession or national standard setter in a jurisdiction provides guidance to that effect, or (2) the wording sets out management's responsibilities for the preparation of financial statements and cooperation with the auditors that encompass those in paragraph 4(b).
Do you agree with the proposed conforming amendments to proposed ISA 700 (Redrafted)?
Paragraph 3a is acceptable and is preferable to using a new term to refer to 'those responsible for the preparation and presentation of the financial statements'.
We agree with the majority of the other changes and in particular the option to use wording from law or regulation. We note, however, that paragraph A23 uses both 'equivalent' and 'equivalent in effect' and refer to our comments immediately above in relation to paragraph A20 of proposed ISA 210. The resolution of those comments may give rise to the need for corresponding changes to proposed ISA 700.
Are there any residual concerns about the way in which management's responsibilities are dealt with that may cause difficulty in any particular jurisdiction?
We have no residual concerns.
Changes made to Enhance the Clarity of Proposed ISA 210
Objective
The objective of proposed ISA 210 is acceptable but the drafting could be improved by avoiding reference to 'necessary preconditions for an audit' (see our answer to the question ' Do you Agree With the Proposed Description of Management's Responsibilities in the ISAs?') . This would involve dealing separately with the premise and the financial reporting framework.
Requirements
We are generally in agreement with the requirements. We offer a general comment on layout and a suggestion to improve the drafting of paragraph 6.
General
The requirements are extensive and diverse, in part because they incorporate material designed to address circumstances where law or regulation are in possible conflict with proposed ISA 210, or the financial reporting framework may not be acceptable. This does not promote usability, as auditors will not immediately see which requirements are not applicable in the particular circumstances of an audit. In our view, relatively few audits will take place in circumstances where the financial reporting framework is unacceptable or where the auditors are unable to refuse to undertake the engagement. In the absence of any further division of the material into separate ISAs, however, we suggest that the Contents page should expand to show the diverse nature of the 'Additional Considerations in Engagement Acceptance' . Consideration should be given to the use of diagrams (decision charts) in the A&OEM section, although we recognise that such material may be more appropriate to an ISA Guide publication in due course.
Paragraph 6
The second sentence of paragraph 6 is very long and its meaning difficult to comprehend, nor does it follow logically from the first sentence.
We suggest that paragraphs 5 and 6 be swapped so that the material in paragraph 6 follows the first paragraph in which the preconditions for an audit are mentioned (whether that term is retained or not).
The second sentence of paragraph 6 should be rewritten as separate paragraphs, as illustrated below:
'6a If the applicable financial reporting framework is unacceptable (except if the requirements of paragraph 19 are met), or if the agreement referred to in paragraph 4(b) has not been obtained, the auditor shall not accept the proposed audit engagement (except as set out in paragraph 6b).
6b If the auditor is required by law or regulation to do so, the auditor may agree to accept the audit engagement.'
Other Matters
The Explanatory Memorandum forming part of the Exposure Draft invites comments on the following other matters:
- Special considerations in the audit of small entities
- Special considerations in the audit of public sector entities
- Developing nations
- Translation
- Undue costs
Our response contains comments that are relevant to the above except we have not made a distinction between developing nations and others, as the audit of small entities may be present in both. We have no separate comments on public sector aspects of the proposed standard.