All change (again) on Auditing Standards

Just this month (October 2009) the Auditing Practices Board issued a whole new set of ISA’s. This was as a result of the IAASB (the international board) issuing their revised ISA’s following their clarification project. These new standards apply for periods beginning on or after 10 December 2010.

What does this mean for your standards? Well, firstly they’ve all been ‘clarified’. That means each standard:

  • has an overall objective clearly stated
  • has separate Requirements & Application sections
  • has the required work prefaced by the word ‘shall’ rather than ‘should’
  • has had other ambiguities in the language taken away

Our UK versions of these standards are slightly different in that they:

  • have extra requirements to bring the standards in line with UK legal requirements included in a grey shaded box
  • do not adopt ISA 700 on Audit Reporting. We have kept our own version but we can still state that our audits have been done in line with the full ISA’s as the requirements of our standard are so similar

The key changes are that 2 new standards have been added and twelve existing standards have been changed, three of these existing standards have had significant changes, according to the APB’s own Staff Paper on the changes.

New Standards

1. ISA 265: communicating deficiencies in internal control to those charged with governance & management

Basically if there’s a control that’s no good in stopping misstatements or if there isn’t a control in place at all then let those responsible for governance know. Also let those responsible for management know. It sounds simple enough but as always there are lots of words to plough through before you come around to the conclusion that you’d probably do that anyway!

2. ISA 450: evaluation of misstatements identified during the audit

It’s both individual and cumulative errors that can be material. No change there then. Interestingly though the standard tells us that we should reassess the materiality level at the end of the audit as our judgement of the figure may have changed.

We should also state a de minimis limit below which we would think any error would be ‘trivial’ and therefore not worth considering even in our cumulative list of individual errors. This limit should be documented.

We should also document all other misstatements regardless of whether they are corrected or not.

This standard links in with the revised standard 320 on Materilaity

Revised Standards with a significant changes

1. 540:Fair Values & Estimates

The idea behind this one is to provide guidance on how to audit areas where management may have been creative with their estimates, including fair value estimates. The changes were driven by the problems of management bias in providing estimates that may have been beneficial to them personally or to their company.

The standard focuses on the auditor using professional scepticism when reviewing these estimates, including looking back at historical estimates and how they have actually turned out in reality.

2. 550: related Parties

The background to these changes is that recent financial scandals have often involved related parties being engaged in inappropriate transactions with companies. The emphasis is on the auditor taking a nmore rigorous approach to identifying both the parties and the types of transactions they are involved in, paying particular care to those transactions outside the entity’s normal business.

3. 600: Group issues

This one looks at the difficulties involved in auditing a group of companies, in particular when you don’t audit all of the subsidiaries. The group auditor will need to consider how involved he can be or needs to be with the auditors of components. He also needs to think about the existence of group-wide controls that may reduce the need to rely on the work of component auditors.

 

All in all there’s a lot to read through, but you can focus your initial reading on the above five areas and then eventually get in to the other nine amended standards and before you know it it will be Christmas 201o. Happy reading…