How to change audit standards
There is at last, says Fiona Wilkinson, a broad appetite to change auditing standards for less complex entities. The question is, how?
Since auditing standards were codified, first into the Statements of Auditing Standards and then into the International Standards on Auditing (ISAs), they have applied to all audited entities, no matter what their size, and it has been a tenet of auditing that “an audit is an audit”.
Periodically, however, questions have been asked as to whether standards which are used to audit large international groups or entities such as banks are fit for purpose when auditing small entities such as owner-managed businesses with simple systems. There are concerns that the length and complexity of the ISAs act as a barrier to their being read and properly understood.
This can lead to over-reliance on checklists with a focus on compliance and a corresponding decrease in the use of professional judgement. In 2015, the Nordic countries issued a consultation paper on the audits of small entities which was received with mixed responses but led to a call for action. In April this year, the International Auditing and Assurance Standards Board (IAASB) issued a discussion paper entitled “Audits of Less Complex Entities” (LCEs) to try to co-ordinate views on how such entities should be audited. Options considered in the paper include: whether the ISAs should be revised, which could include setting out basic requirements with additions for more complex circumstances; whether a separate standard should be developed for LCEs; or whether separate guidance should be issued for the auditors of LCEs to sit alongside the ISAs.
The consultation on this discussion paper closed in mid-September and we now await with interest the results of the submissions to the IAASB. Like other bodies, ICAEW has for several years been raising the issue of the lack of scalability of auditing standards. We believe that the holistic nature of LCE audits has been eroded by requirements that are more appropriate for larger organisations. We are also concerned that, unless the IAASB listens to the views and acts quickly and decisively, it risks losing control of standard-setting for LCE audits to more responsive governments, regulators and professional bodies. ICAEW’s Council discussed this issue at its conference in July and audits of LCEs will again feature at its meeting in October. Views so far have been mixed but there is definitely a clear appetite for change. Whether the ISAs are re-written taking better account of the needs of the auditors of less complex entities. or a whole new standard for LCEs is developed, I hope it is done expeditiously. There does seem to be broad agreement that the status quo is unsustainable.
Events
Financial Reporting Conference 2019
10 October
This one-day conference is suitable for UK GAAP and IFRS reporters and for those in practice and in business. Topics include: climate related reporting; narrative reporting; triennial review amendments in UK GAAP; and implementation challenges for IFRSs 9, 15 and 16. London
Volunteering – Getting The Most Out Of It
10 October
The dos and don’ts of volunteering and volunteering from a charity perspective. Speakers will also talk about their roles as school governors, trustees, chairs of audit committees and volunteer consultants. Tiverton
Five Key Questions Boards Should Ask About Fraud
16 October
This lunch time webinar, presented in conjunction with the Fraud Advisory Panel, is designed to explain what the board can do to support its fraud team. It is presented by Rachel Sexton, a partner and head of financial services – forensic & integrity services at EY.
CFO Conference 2019
18 October
The 12th CFO conference focuses on empowering the strategic leader with sessions by industry experts who share their knowledge, experience and effective business strategy. Keynote speakers include Institute of Fiscal Studies director Paul Johnson, CBI president John Allan and Heather Stanning, double Olympic rowing champion. London
Valuation Community Annual Conference
23 October
Brexit uncertainty has a major impact on business valuation and this conference is designed to keep people up to date. Sessions cover the art of communicating numbers, the skills needed for the valuation of intangible assets, and the challenges of being an expert witness. London
Originally published in Economia on 4 October 2019.