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Page 1
Proportionality in an Evolving
Environment
Brendan Murtagh, IAASB Member
Warsaw, Poland
November 7, 2013
Page 2
Agenda
• Global use and adoption of the ISAs
• The clarified ISAs and ISQC 1
• Applying the ISAs and ISQC 1 proportionately in SME
audits
• ISA Implementation Monitoring
• ISA Implementation Resources
Page 3
The International Context – Global Use of the ISAs
• 90 countries already use, or are committed to using, the Clarified ISAs
• Significant acceptance of ISAs for financial statement audits of foreign issuers among the world’s largest stock exchanges, as well as for public sector (“ISSAIs”)
• Endorsement/expression of support for Clarified ISAs – IOSCO, Financial Stability Board (FSB), Basel Committee,
INTOSAI, UNCTAD, World Bank, World Federation of Exchanges
• Top 24 global auditing networks’ methodologies align
• International and national liaison activity – IASB, IFIAR, IOSCO, European Commission, INTOSAI, FSB,
NSSs, US PCAOB
Page 4
Global Adoption of the Clarified ISAs
Jurisdictions Using Clarified ISAs Already, or Committed to Using in Near Future
Europe
35
Americas
17
Asia and
Oceania
20
Africa/Middle
East
18
Page 5
A Strong Platform: The Clarified ISAs and ISQC 1
• ISAs and ISQC 1 need to be understandable, clear and capable of consistent application to enhance quality and uniformity of practice worldwide
• Emphasis on the use of professional judgment and professional skepticism, i.e., a “thinking audit”
• Clearly sets out objectives of each standard
• Robust requirements in key areas
‒ Risk assessment, materiality and evaluating misstatements
‒ Audit evidence, auditor reporting and communications
‒ Quality control for audits
Page 6
A Strong Platform: The Clarified ISAs and ISQC 1
• ISQC 1 and ISA 220 establish quality control requirements at the firm and engagement levels
• Together address many of the inputs to audit quality
– People: education, ethics, mindsets
– Audit evidence and auditor judgment
– Client acceptance and continuance
– Monitoring
The Clarified ISAs
Page 7
• Audit Quality Framework: A complex,
multi-faceted topic, in which auditing
standards are not the only influence
• For audits of all entities – considerations
for SME audits not separated
• Recognizes importance of context factors
• Consultation Paper (CP) issued Jan
2013; 65 comment letters
• CP identifies areas for further
consideration by other stakeholders
• Expect to finalize Framework in
December 2013
Audit Quality Framework
Page 8
Applying the ISAs and ISQC 1 in SME Audits
• Ensuring the applicability of the ISAs and ISQC 1 to SME
audits is a core strategic objective of the IAASB
• Effective implementation is key to realizing full benefits of
clarified ISAs and ISQC 1
• Some challenges to audits of SMEs
‒ Applicability of ISAs to smaller audits
‒ Perceived burden of audit documentation
‒ Inspection requirements
‒ Cost effectiveness
Page 9
Proportionality of ISAs for SME/SMPs
• Application of ISAs and ISQC 1, including documentation
requirements, designed to be proportionate in view of size,
nature and complexity of audited entities
– Proportionality ≠ modification of requirements
• Requirements are not prescriptive
– Application material highlights specific SME considerations and
alternative procedures
– Professional judgment needed to determine relevant procedures
• Every audit is not planned and performed in exactly the
same way
– Risk-based approach is to be applied based on the engagement
Page 10
Scalability of ISAs for SME/SMPs
• Focus on matters that the auditor needs to address
• Need to also consider impact of regulators / audit
inspectors to determine an appropriate balance
Potential Scalability of the ISAs–
Documentation Examples Regulator / Inspector Views
Documentation may be simple and relatively brief – e.g., record various aspects (such as planning) in a single document with cross references
Documentation that is too brief is not acceptable – e.g., a three line planning memo.
Documentation of significant matters arising during the audit required – not every aspect of the audit
Documentation must be sufficient to understand the significant matters / issues and how they were audited / resolved. Need to understand judgments made and why, including alternatives considered.
Page 11
Scalability of ISAs for SME/SMPs (cont.)
Potential Scalability of the ISAs – Other Examples
Regulator / Inspector Views
ISAs do not require auditors to comply with a
requirement if it is not relevant in the
circumstances e.g., holding an engagement team
discussion if there is only one person
Expected that an engagement team
discussion is not required if only one
engagement team member
ISQC 1 does not suggest a specific approach to
implementation – judgment required to apply to
specific circumstances. E.g., for a sole
practitioner with no staff, requirements to
establish policies and procedures for assignment
of appropriate personnel to the engagement
team, and review responsibilities, will not be
relevant
Expected that it is not required to be a
documented policy or procedure,
however, where requirements are
relevant it is expected that these will be
documented
Page 12
Tools for Applying ISAs and ISQC 1 Proportionately
• IAASB Staff Q&As
• Applying ISAs Proportionately with the Size and Complexity of an
Entity (August 2009)
• Applying ISQC 1 Proportionately with the Nature and Size of a Firm
(October 2012)
• IFAC SMP Committee
• Guide to Using International Standards on Auditing in the Audits of
Small- and Medium-Sized Entities (Third Edition)
• Guide to Quality Control for Small- and Medium-Sized Practices
(Third Edition)
Page 13
ISA Implementation Monitoring
• Post-implementation review commenced in June 2009
IAASB to undertake an assessment of the implementation
of the changes and whether the objectives of the Clarity
Project were achieved
– Phase I: Pre-implementation information (completed in October 2010)
– Phase II: Post-implementation review of implementation of the clarified
ISAs (Report issued in July 2013)
• Findings from the project will inform the IAASB Future
Strategy 2015–2019 and related Work Programs
– Key priority projects to address issues from ISA Implementation
Monitoring Findings, including proportionality issues (e.g., ISQC 1)
Page 14
Phase II Findings – General Comments
• IAASB had generally achieved goals in revising the ISAs
• Many thought the clarified ISAs were clear and
understandable
– Improvement on ISAs that preceded them
• Some had the view that clarified ISAs helped auditors
better focus on risk areas
• General consistency within audit firms and countries
(influenced by national implementation efforts)
• Implementation support needed (not necessarily from
IAASB)
Page 15
Findings – Key Issues Identified
• Skepticism
• ISA 220, Quality Control for an Audit of Financial
Statements – EQCR, including consequential amendments to ISQC 1
• ISA 600, Special Considerations—Audits of Group Financial
Statements (Including the Work of Component Auditors) – Adequate involvement of the group auditor
– Component materiality
• ISA 315, Identifying and Assessing the Risks of Material
Misstatements through Understanding the Entity and Its
Environment – Controls relevant to the audit
– Identification of significant risks
Page 16
Findings from ISA Implementation Monitoring –
SME Audits
• Clarified ISAs developed with a view to being applied to
audits of all sizes
• Concerns raised in Phase I about application of clarified
ISAs to smaller audits
– Need for specific information on the extent and nature of implementation
difficulties
– Survey initiated in two parts for countries who had already initiated the
clarified ISAs
• Phase II findings – general comments and concerns
– Call for more guidance to demonstrate scalability of ISAs and ISQC 1
– Over-documentation
– Implementation of certain standards in the SME environment (e.g., ISA
550)
Page 17
Findings from SMP Survey
• Survey covered two audit cycles – First year after implementation
– Second year after implementation
• Responses received from 70 SMPs from 10 countries
Page 18
Main Findings from SMP Survey
• Clarified ISAs had impacted audit work, in particular audit
planning
• Improved planning with more of a focus on risk
• Audits more likely to identify material misstatements
• Improvement in quality of management letters
• Impact on time of using the revised and new standards
was judgmental and hard to separate from other changes
impacting the audit
Page 19
Main Findings from SMP Survey (continued)
• About half had the view that implementation challenges
would have been reduced with more training and/or
guidance
• Views on proportionality of the ISAs varied – About half did not think further changes to the ISAs were needed
– More than half had the view that the ISAs could satisfactorily be applied to
smaller audits without modification; others thought changes were needed
to the ISAs for very small audits
• Most frequent request for changes to the ISAs were to – Reduction in number of detailed rules for SME audits to allow more
principles-based approach
– Reduction in documentation requirements
Page 20
Other SMP Survey Findings – Impact of Adopting
Clarified ISAs
• Lower impact of adopting the clarified ISAs – Canada, UK, New Zealand, Australia
• Higher impact of adopting clarified ISAs – South Africa, Hungary, Netherlands, Malta, Singapore, Slovenia
• Reasons could be – Maturity of auditing profession in that jurisdiction
– Use of ISAs (not clarified) previously
– Translation issues
– Provision of training / implementation guidance by national standard
setters / professional institutes
– Availability of software
Page 21
SMP Survey – Some Specific Comments
Positive
• More awareness on the need for professional judgment
• Better documentation relating to key areas
• Improved communication with those charged with
governance – in particular more focus regarding controls
• Efficiency realized in second year
Unfavorable
• Audit engagement team could be overly focused on filling in
checklists and preparing documentation
• Some standards seen as overly excessive for smaller
audits (e.g. ISA 540 (auditing fair values) and ISA 600
(group audits)) – applicability in all cases?
Page 22
ISA Implementation Resources
• IAASB clarity center: http://www.ifac.org/auditing-
assurance/clarity-center
– ISA Modules (“the Clarified SA, Audit Documentation, and SME Audit
Considerations” particularly relevant)
• IFAC’s translation and permissions function (ISAs
available in several languages: http://www.ifac.org/about-
ifac/translations-permissions/translations-database)
• Supporting staff publications, FAQs, Practice Notes
• Collaboration to support effective implementation (e.g.,
IAASB–National Standard Setters meeting, EC)
• IFAC SMP Committee – Guides on ISA and Quality
Control
Page 23
QUESTIONS?
www.iaasb.org