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1 Summary of current issues

3 General issues

At this level in your studies you are expected to be familiar with currentdevelopments affecting the audit and assurance profession. Currently, many ofthese relate to international regulation.You must read Student Accountantand the wider professional press to keep upto date with these.

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Study guide

Exam guideYou may be asked to discuss current developments and must be prepared to argue for or against any nenproposals from the point of view of either a preparer or user of assurance reports.

1 Summary of curent issuesThis Study Text has covered the wide range of current issues within the relevant topic chapters. Thefollowing summary should remind you of the issues you have studied up to this point,

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Social and environmental auditing 15

2 Update2.1 The IAASB's Glafity ploiectAs you know from earlier chapters in this Study Text, in 2009 the IAASB reviewed the drafting conventiorsused in its lSAs with a view to improving the clarity and therefore the consistent application of its lSAs.The IAASB also implemented a plan to complete the revision of certain lSAs and the redrafting of all lSAsin accordance with the new conventions. This project was completed in February 2009.The following table shows the lSAs which have been issued and are included in your examinabledocuments listing. A summary of the key revisions is given here.

ISA 200 )verall objectives of theindependent auditor and theconduct of an audit inacco rdance with i nte rnati ona Istandards on auditing

Clarifies objectives of an audit and the auditorMore detailed explanations of ethical requirements relating to an auditof financial statements, professional scepticism, conduct of an audit inaccordance with lSAs and audit riskRequirement to obtain sufficient appropriate audit evidence has been

G5 0ther current issues(a) Explain current developments in auditing standards including the need for

new and revised standards and evaluate their impact on the conduct ofaudits

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(b) Discuss other current legal, ethical, other professional and practical mattersthat affect accountants, auditors, their employers and the profession 3

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All misstatements must be communicated to management on a timelybasis, not just those which are materialAuditors must request management to conect all misstatementslf management refuse to correct misstatements, the auditor mustcommunicate the individual misstatements to those charged withgovernance and request that these be corrected, mentioning any effecton the opinion in the auditor s reportWritten representations must be obtained from management, andwhere appropriate those charged with governance, that they believethe effects of any uncorrected mistakes are immaterial bothindividually and in aggregatev9f9llfitsg!!q99!T9!!qli9i"rjq!!ryTglltlgtguqilor! _ :

W PartG currentissuesand devetopments I t8:currentissues

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ISA 706 Enphasis of matterparagraphs and other matterparagraphs in the independentauditor's report

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lnternational Standard on 0ualityControl (lSOC) 1 Quality controlfor firms that pertorm audits andreviews of financial statements,and other assurance and relatedservices engagements

An ISA dealing with additional communication in the auditor's reportwhen the auditor considers it necessary to include an emphasis ofmatter (EOM) or other matters (0M) paragraphEOM and 0M paragraphs do not aflecl lhe audit opinionStandard highlights certain circumstances where the auditor mayconsider it necessary to include an EOM or 0M paragraphAuditors must communicale with those charged with governance ifthey expectto include an EOM or 0M paragraph in the auditor'sreport, letting them know the exact wording of the paragraph

Definition of engagement team has been updated to exclude anauditor's external expert

Auditors procedures are similar in respect of corresponding figure andcomparative financial statements but the audit report differs for eachThe auditor must request written representations for all periodsreferred to in the audit opinion in respect of comparative financialstatementsln the case of corresponding tigurm written representations are,loeue$or the if Hancf al siate m ents of th e C u i@Urio@y'=Specific written representations must be obtained regarding anyrestatement to correCt a figure in prior period financial statements thataffects the com parative inf ormation

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Please note that this is not an exhaustive listing and that the clarity lSAs should always be referred to infull when carrying out future audit work.2.1 Applicability of the Glarity conuentions 0n the IFAG Gode ot Ethics forPtofessional AccountantsThe requirements and guidance in the ACCA Code of Ethics and Conducf was designed to comply with therequirements of the IFAC Code of Ethics for Professional Accountants.Chapter 2 highlighted that the IFAC code was revised in July 2009 and described the key alterations to theindependence requirements. The revised code also included changes following the assessment of theimplications on the IFAC Code of the Clarity project. The changes included:(a) Requirements in the code are n0w identified with 'shall' (for example instead of 'should'). This isconsistent with the approach used in the lSAs.(b) The description of a threat and descriptions of each category of threat (self-interest, self-review,advocacy, familiarity and intimidation) were revised.(c) The term 'clearly insignificant' is no longer used as a description of threats for which safeguardsare not required. lnstead there is a positive explanation of when safeguards are necessary. Thecode now states that safeguards are necessary when 'the professional accountant determines thatthe threats are not at a level at which a reasonable and informed third party would be likely toconclude, weighing all the specific facts and circumstances available to the professional accountant

at that time, that compliance with the fundamental principles is not compromised'.(d) A section addressing the independence issues arising (and steps to be taken) when a firm becomesaware that an audit client is involved with a merger or acquisition. Essentially the new sectionrequires the audit firm to identify any interests or relationships the firm has with the new related

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entities that create independence issues, and to terminate any interests or relationships that are -:f.permitted underthe Code. When the interest or relationship is permitted with safeguards the fir'*must apply safeguards to eliminate the threats or reduce them to an acceptable level(e) An additional paragraph recommending that the professional accountant consult the member b::,or relevant regulator upon encountering an unusualcircumstance in which the application of aspecific requirement of the Code would result in a disproportionate outcome or an outcome tha:may not be in the public interest.(f) A new paragraph has been added requiring the auditor to document the rationale for concluding :safeguard was unnecessary in response to a threat where, after significant analysis, the threat ,,,::considered to already be at an acceptable level,(g) There are other various editorial changes to the definitions in the Code to bring them in line wi:'the definitions used in the lSAs.

The ACCA rules had not been revised to re{lect the changes in the IFAC Code prior to the drafting of th :study text.You should continue to monitor the ACCA website for news and articles on the development of the etl' -=codes. During revision you should referto the BPP practice and revision kit which willdetailany fudhe'updates in the ethical codes and ethical standards.

2.2 Guidance on smaller auditsln generalterms, the IAASB takes the view that'an audit is an audit', and that all audits should beconducted in accordance with the same auditing standards. However, this does not mean that there w :*special considerations for audits of smaller entities.ln August 2009 the IAASB issued a Questions & Answers publication, Applying ISAs proportionately w:-the size and complexity of an entity,tocusing on matiers relevant to the audit of SMEs in the context c'implementing the new Clarity lSAs. The IAASB reiterated that the text of the lSAs is authoritative and i':-::.be followed, even in the audit of SMEs.However, the IAASB did state that the work that an auditor will need to do in order to comply with an lSrwill vary - a small, simple entity being likely to require less work than a large and complex one. Theauditor needs to use professionaljudgement in applying the lSAs, in order to determine the proceduresthat are necessary to comply with their requirements.To take a specific example, the IAASB stated that the requirement in ISA 315 to obtain an understanding :'the entity and its environment is relevant to smaller entities, but that because smaller entities are typica "simpler, it will be much easier to obtain this understanding.2.3 IAASB Practice Alert Audit Eonsiderations in Bespect ol EoingConcern in the Cunent Economic Environmenf (Jan 2009)ln January 2009 the IAASB issued a Practice Alert on going concern in the context of the global econon :downturn. lts key message were as follows:

. The going concern assumption is a fundamental principle in the preparation of f inancial stateme":.. The assessment of an entity's ability to continue as a going concern is the responsibility of theentity's management.. The appropriateness ol the use of the going concern assumption is a matter for the auditor toconsider on every audit engagement.. ISA 570 Going Concern establishes the relevant requirements and guidance with regard to theauditor's consideration of the appropriateness of management's use of the going concernassumption and auditor reporting.

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. The credit crisis and economic downturn have led to a lack of available credit to entities of all sizes,which may affect an entity's ability to continue as a going concern; this and other factors may berelevant in the auditor's evaluation of forecasts prepared by managementto support its goingconcern assessment". The extent of disclosures in the financialstatements is driven by management's assessment of anentity's ability to continue as a going concern, coupled with the disclosure requirements of theapplicable financial reporting f ramework.

Consideration of the need for an emphasis of matter paragraph in the auditor's report will be a difficultmatter of judgment to be made in the context of the entity's circumstances; the mere existence of thecredit crisis, ihough referred to in the financial statements, does not of itself create the need for anem phasis.

2.4 IAASB Ptactice Alert Challenges in Auditing Fair Value AccountingEstimates in the Eurrent Market Environmenf (0ct 2008)ln October 2008 the IAASB issued a Practice Alerl, Challenges in Auditing FairValue Accounting Estimatesin the Current Market Environment.lt discussed the following key points:. Challenges faced in accounting on the basis of fair value;. Requirements and guidance in standards that are particularly relevant to fair values;. Other considerations in audits of fair value accounting estimates;. lnitiatives of the lnternational Accounting Standards Board; and. Recent revisions to extant standards on auditing accounting estimates and fairvalue measurements

and disclosures which, while notyet effective, may be helplulto auditors.2.5 IAASB Q&A paper Auditor Gonsiderations Regarding Signiticant,Unusual or Highly Complex Transactionslssued in August 2010, this IAASB Question & Answer paper dealt with significant/unusual/highly complextransactions, which may by nature carry a higher risk of material misstatement, and thus merit heightenedattention from users. The IAASB emphasises the importance of the auditor exercising professionaljudgement and scepticism. The auditor is required to considerthe susceptibility of the financialstatementsto material misstatement by fraud, which includes consideration of fraud risk factors (eg significantcomplex transactions, which may pose questions of 'substance over form' and fraudulent financialreporting). The auditor then needs to design audit procedures that gather audit evidence in relation tothese risks.

2.6 IAASB 0&A papen XBRL: The Emerging Landscapeln January 2010 the IAASB issued a Question & Answer paper to highlight the growing interest in, and useof, XBRL, and to raise awareness of how XBRl-tagged data is prepared and how it may affect financialreporting. The paper contained the following key messages:. XBRL is an electronic business information format expected to provide benefits in the preparation,analysis and communication of business information.. The use of XBRL can vary by lurisdiction and may be driven by regulatory requirements or voluntaryapplication.. Under the current lSAs, auditors are not required to perform procedures or provide assurance on

XBRL-tagged data in the context of audited financial statements. Accordingly, the auditor's report inaccordance with the lSAs on the financial statements does not coverthe process by which XBRLdata is tagged, the XBRLtagged data that results from this process, 0r any representation of XBRL-tagged data.

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The IAASB is currently undertaking a consultation to determine the needs of preparers and users ofXBRl-tagged data. This consultation will assist the IAASB in assessing whether it is necessary andin the public interest to develop a pronouncement addressing association with and/or assurance onXBRL-tagged data.

2.7 ISAE 3402= Assurance Reports 0n Controls at a Service 0rganizationln December 2009 the IAASB issued ISAE 3402 Assurance Reports on Controls at a Service )rganization,which covers assurance reports given by outsourcers to the entities that use them. The ISAE effectivelysupersedes the commonly-used but older SAS 70 (issued by the Assurance Reports on Controls at aService 0rganization).

3 General issuesThere has been a lot of discussion within the profession over the last few years on the related issues of therole of the audit generally, and the role that was played by auditors in the financial crisis.ln the UK, the Financial Review Council (FRC) recently issued a joint paper with the Financial ServicesAuthority (FSA) entitled Enhancing the auditor's contribution to prudential regulation. The paperquestioned aspects of the quality of audit work - in particular, whether the auditor has always beensufficiently sceptical and has paid sufficient attention to indicators of management bias. The paper thenwent on to make a number of suggestions of changes that could be made to the way auditors work. Thepaper has generated intense debate within the profession, with auditors strongly defending the viewthatthey were independent in the run up to the financial crisis.Fundamental questions are being asked about the very nature of audit and the value it provides. Many takethe view that auditors have not been sufficiently independent from their clients. For example, in the UK aMay 2009 Treasury Select Committee report stated that:

We strongly believe that investor confidence, and trust in audit would be enhanced by a prohibitionon audit firms conducting non-audit work for the same company [...]

This is a strongly-worded statement, made in the context of the recent financial crisis, which calls for amajor review of all independence requirements relating to UK auditors. Needless to say, it has beenstrongly challenged by auditors. You should keep an eye on the financial press for any developments hereas this is an area of ongoing debate which is unlikely to be resolved for some time.lndividualclarity lSAs include guidance on specific points relating to smallentityaudits. The purpose ofthis guidance is to assist in the application of the requirements of the ISA to a small entity audit. lt doesnot limit or reduce the responsibility of the auditor to apply and comply with the requirements of the lSAs