Comments from ACCA to the Financial Reporting Council (FRC), July 2012.
Our comments are presented mainly as answers to the questions in the consultation paper. Our attitude to standards generally may be summarised as:
We recognise that the changes are intended to give effect to the FRC Effective Company Stewardship proposals in the UK and Ireland, so we apply a further consideration: are the proposals necessary to do that?
Q1: Is the scope of the proposed changes appropriate? If not, please explain the scope you consider would be appropriate.
Auditors could arguably provide audit committees with the information necessary to implement the Effective Company Stewardship proposals without extending auditing standards; it would be a matter of negotiation between the parties. We recognise that the FRC has decided to make the change visible by amending standards and we do not dispute that approach. Our comments below are focussed on the detail of the proposals, where we feel that improvements may be made.
Q2: Is the proposed effective date, which is linked to the intended effective date of the FRC’s proposed revisions of the UK Corporate Governance Code, appropriate? If not, please give reasons for your view and indicate the effective date that you would consider appropriate.
The proposed effective date is appropriate.
Q3: Are the proposed changes to ISAs (UK and Ireland) 260 and 265 appropriate? If not, please give reasons and, if applicable, indicate how you believe they should be modified.
The proposed changes are appropriate.
Q4: Are the proposed changes to ISAs (UK and Ireland) 700 (Revised) and 720 Section A appropriate? If not, please give your reasons and, if applicable, indicate how you believe they should be modified.
ISA (UK and Ireland) 700 (Revised)
The wording of the new requirement (underlined) seems to us to be unnatural:
In addition, we read all the financial and non-financial information in the [describe the annual report] to identify material inconsistencies with the audited financial statements and to identify any information that is apparently incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit.
The first part was written at a time when the FRC had not proposed making explicit the fact that the auditor does not empty his or her head before reading the annual report. It would be better to rewrite the whole rather than add the new material. We suggest:
In addition, we read all the financial and non-financial information in the [describe the annual report] to identify any that is apparently incorrect or materially inconsistent with the audited financial statements, or the knowledge acquired by us in the course of performing the audit.
Taken as a whole, proposed paragraph 16(c) is inconsistent in how it refers to ‘material’. The last sentence refers to ‘material misstatements or inconsistencies’ but the sentence before it (as proposed), while it refers to ‘materially inconsistent’, does not restrict ‘incorrectness’ to that which is modified by the word ‘material’.
We also wonder why the word ‘incorrect’ is used in the proposed new material rather than the usual ‘misstated’. This makes the final sentence lacking, as it does not refer to apparent incorrect information.
ISA (UK and Ireland) 720
The requirement in ISA 720 paragraph 6 is proposed to be expanded by the inclusion of the underlined words:
The auditor shall read the other information to identify material inconsistencies, if any, with the information contained in the audited financial statements.
This is unnecessary and potentially confusing. Firstly, it is implicit that the audited financial statements contain information. Secondly, the introduction of wording designed to make that explicit has the unintended consequence of raising doubts: is there something in the financial statements that is not information – perhaps null-or miss-information. Is the auditor ignoring the parts of the financial statements that are not information?
If such wording is retained after exposure, should the FRC not also introduce the word ‘financial’, to give ultra-precision?
Adding such wording goes against two principles that should guide standard setters: brevity and the need to implement international standards without change unless absolutely necessary. We do not believe that it is necessary to make this change to implement the FRC Effective Company Stewardship proposals nor indeed to make such changes visible (see our answer to question 1 above).
The new requirement at paragraph 6-1 is as follows:
The auditor shall also read the other information to identify any information that is apparently incorrect based on, or materially inconsistent with, the knowledge acquired by the auditor in the course of performing the audit.
Although the requirement is consistent with the choices made by the FRC for reporting, we do not agree with the way the requirement is worded. We have suggested better wording above in relation to ISA 700.
We suggest redrafting paragraph 6-1 as:
The auditor shall also read the other information to identify any that is apparently incorrect or materially inconsistent with the audited financial statements, or the knowledge acquired by the auditor in the course of performing the audit.
Q5: Do you agree that it would be inappropriate to extend to all audits the reporting requirement to provide an explicit conclusion arising from the auditor’s work under ISA (UK and Ireland) 720 Section A? If not, please give your reasons.
We agree that extension to all audits would be inappropriate.
Q6: Do you agree that the associated costs of the proposed changes should not be significant compared to total audit costs? If not, please give reasons and your estimate of the level of impact.
While we agree that the costs should not be significant compared to total audit costs, it is easy to argue that because there are many hundreds of requirements in ISAs compared to the few considered here.
Q7: Do you agree that the benefits of the proposed changes will outweigh any costs? If not, please give reasons.
The benefits of the proposed changes in auditing standards have to be assessed in the light of the overall changes to effective company stewardship. We agree that the overall benefits will exceed these associated costs.