ISA 710 (Redrafted), Comparative Information-Corresponding Figures and Comparative Financial Statements
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
April 2008
Executive Summary
ACCA welcomes the opportunity to comment on the proposed International Standard on Auditing ISA 710 (Redrafted) Comparative Information -Corresponding Figures and Comparative Financial Statements (proposed ISA 710), issued for comment by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants.
Our comments are restricted to the matters on which the IAASB has requested specific comments and changes proposed as a result of applying the Clarity project drafting conventions to san extant ISA that is not otherwise revised.
We agree with the IAASB that the auditor's procedures are broadly the same irrespective of whether the comparative information is presented as corresponding figures or comparative financial statements.
We do not agree, however, that this should result in a change to the structure of proposed ISA 710. We would prefer to retain separate sections for corresponding figures and comparative financial statements as that is more convenient for users.
We suggest that the application of the Clarity drafting conventions should have resulted in an objective that referred to reporting and which was unambiguous as to the necessary work effort.
We make a general comment that more could have been done to eliminate superfluous wording throughout proposed ISA 710.
General Comment
Although the application of the Clarity drafting conventions does much to improve the usability of proposed ISA 710, we are concerned that the detailed drafting has not eliminated as much superfluous wording as it could have done.
Many ACCA members who contributed to this response by reviewing proposed ISA 710 remarked that the draft was lacking in clarity because it was, for example: 'wordy', 'overlong', or 'difficult to read'.
We recognise that there is a trade off between ease of reading and precision but feel that proposed ISA 710 has gone too far towards precision. We recommend that the text be reviewed during the finalisation process to eliminate superfluous wording where that is possible.
We offer three examples of paragraphs that should be considered for shortening:
Paragraph 2 (before the bullet points)
'The nature of the comparative information that is presented in an entity's financial statements depends on the requirements of the applicable financial reporting framework. There are two different broad approaches to comparative information in financial reporting frameworks: corresponding figures and comparative financial statements. The auditor's reporting requirements regarding comparative information in an audit of financial statements differ depending on whether the comparative information is corresponding figures or comparative financial statements. The essential audit reporting differences are:'
We suggest the following alternative to eliminate duplication:
The presentation of comparative information may be as 'corresponding figures' or 'comparative financial statements' . The essential audit reporting differences are:1
Paragraph 9 (with heading)
'Corresponding Figures
9. When the comparative information is presented as corresponding figures, the auditor's report shall not specifically identify the corresponding figures except in the circumstances described in paragraphs 10, 11(b), 12 and 13. (Ref: Para. A2)'
We suggest the following alternative to present the requirement more briefly:
'Corresponding Figures
The auditor's report shall not specifically identify the corresponding figures except in the circumstances described in paragraphs 10, 11(b), 12 and 13. (Ref: Para. A2)'
Paragraphs 14 and 15 (with heading)
'Comparative Financial Statements
14. When the comparative information is presented as comparative financial statements, the auditor's report shall specifically identify each period for which financial statements are presented and on which an audit opinion is expressed. (Ref: Para. A5)
15. When reporting on prior period financial statements in connection with the current period's audit, if the opinion on such prior period financial statements differs from the opinion previously expressed, the auditor shall disclose the substantive reasons for the different opinion in an Other Matter(s) paragraph in accordance with [proposed] ISA 706 (Revised and Redrafted). (Ref: Para. A6)'
We suggest the following alternative to present the requirements more briefly:
'Comparative Financial Statements
14. The auditor's report shall specifically identify each period for which comparative financial statements are presented and on which an audit opinion is expressed. (Ref: Para. A5)
15. If the opinion on any such comparative financial statement differs from the opinion previously expressed, the auditor shall disclose the substantive reasons in an Other Matter(s) paragraph in accordance with [proposed] ISA 706 (Revised and Redrafted). (Ref: Para. A6)'
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.
Work Effort
'Do respondents agree that the auditor's procedures are the same for the two approaches to presenting comparative information, except for the responsibility to obtain written representations for more than one period in the case of comparative information presented as comparative financial statements?'
We do not agree that 'the auditor's procedures' are the same and indeed we are concerned that an undefined 'Audit Procedures' heading has been created in proposed ISA 710. We discuss this immediately below under the heading Scope of proposed ISA 710 .
We expect auditors to determine the work effort in the light of materiality and risk, assessed with reference to, inter alia , any perceived differences in the use made of comparative financial statements and corresponding figures.
We accept, nevertheless, that the requirements of proposed ISA 710, other than for reporting, may be stated in the same way for the two approaches to presenting comparative information. 2
Structure of proposed ISA 710
'... do respondents agree with the structure according to which the proposed ISA has been redrafted to give effect to the auditor's responsibilities in the requirements?'
We do not agree with the proposed structure of the Requirements and Application and Other Explanatory Material (A&OEM) sections. We prefer a division into separate sections for corresponding figures and comparative financial statements as used in extant ISA 720. We suggest that any duplication of wording would be insignificant compared to the gain in usability of the document.
The reasons for our view are:
- The existing structure is well understood and it is not necessary to change it as well as implementing the Clarity drafting conventions.
- Auditors and other who use the ISAs directly will have to focus on the differences between headings and subsections instead of being able to access relevant requirements immediately through the table of contents.
- The bringing together of 'audit procedures' that acts to justify the change is not itself important enough to merit a change affecting reporting aspects.
- The creation of the term 'Audit Procedures' to mean 'requirements of proposed ISA 710 that are not “ Audit Reporting ”' is inappropriate because it is not used in that way elsewhere in ISAs. In normal ISA usage, an audit procedure is that which is performed resulting in (usually) obtaining relevant audit evidence and facilitating a conclusion. Paragraph 11(a) of proposed ISA 710 contains a requirement to carry out an audit procedure ('the auditor shall obtain sufficient appropriate audit evidence that the corresponding figures agree with the amended financial statements' ). This is not under the heading 'Audit Procedures' but is under the heading 'Audit Reporting', confirming the difficulty of introducing this new heading.
Changes made to Enhance the Clarity of Proposed ISA 710
Objectives
The objective is not acceptable because it: (1) does not include reporting, and (2) is open to misinterpretation.
The objective does not extend to reporting although this is an important part of proposed ISA 710. We suggest as a minimum adding: 'and to report appropriately' .
The objective could be interpreted as requiring more audit effort than is meant to be the case. This is particularly important when taken together with our comments later in this response, under the heading Requirements , as we suggest changes to make it clear that the work effort involves no more than the required evaluations (6(a) and (b) and the further work if a possible material misstatement is identified). If our suggestions in relation to paragraph 6 are not accepted, we recommend footnoting the words 'sufficient appropriate audit evidence' to explain as follows:
'The work effort for the comparative information is significantly less than for the audit of the current period figures and is ordinarily limited (unless the auditor becomes aware of a possible material misstatement in the comparative information) to ensuring that the comparative information has been correctly reported and appropriately classified.'
Requirements
Paragraph 6
Paragraph 6 begins with a requirement 'to determine' , which is followed by a requirement introduced by the words 'for this purpose' , to 'evaluate whether'.
It is not clear whether the first requirement is intended to be separate or whether it is intended that the evaluations will satisfy it. Extant ISA 710 is clearer in this regard as a requirement to obtain sufficient appropriate audit evidence is immediately followed by guidance that: 'The extent of audit procedures performed on the corresponding figures is significantly less than for the audit of the current period figures and is ordinarily limited to ensuring that the corresponding figures have been correctly reported and are appropriately classified.'
The way the evaluations have been elevated to requirements causes potential confusion and either they should be moved to the A&OEM section or, if retained, they should be cross-referenced to suitable application material.
The resolution of this problem will be affected by consideration of our recommendations on the objective earlier in this response.
Paragraph 8
We see no reason to duplicate, in paragraph 8, a requirement of another ISA.
We suggest transferring paragraph 8 to the A&OEM section, cross-referenced to paragraph 6. This would also allow simpler wording for the footnote to the objective, as suggested in the section of this response headed Objective .
Other paragraphs
We have commented at length in other responses on the need to structure requirements simply. While we do not repeat those comments in relation to the requirements in proposed ISA 710, we give one example where there is potential for uncertainty as a result. We provide footnoted comments on [identified] parts of paragraph 16:
'16. If the financial statements of the prior period were audited by a predecessor auditor, [in addition to expressing an opinion on the current period's financial statements,3] the auditor shall state in an Other Matter(s) paragraph:
(a) [that the financial statements of the prior period were audited by a predecessor auditor4];
(b) the [type5] of opinion issued by the predecessor auditor and [if the opinion was modified6], the reasons therefor; and
(c) the date of that report,
[unless the predecessor auditor's report on the prior period's financial statements is reissued with the financial statements7].'
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 (see below)
Our response contains comments that are relevant to the above, insofar as the cost burden of imprecision and complexity of wording falls disproportionately on the audit of small entities.
We have no separate comments on public sector aspects, developing nations, or translation of the proposed standard.
1. As the paragraph does not relate to its heading (it does not deal with the nature - just the categorisation) it could be removed entirely as it adds little to the document, given the presence of the Definitions section.
2. Except for the responsibility to obtain written representations for more than one period in the case of comparative information presented as comparative financial statements.
3. Delete as unnecessary.
4. Replace by 'that fact' to remove duplication.
5. 'Type' is not explicit - what is meant?
6. This condition is presumably meant to apply to the disclosure of the reasons, but there is no Clarity drafting convention to stop it applying to the date.
7. A condition precedent should precede the requirements.