proportionality in an evolving environmentseminari... · • audit quality framework: a complex,...

Proportionality in an Evolving

Environment

Brendan Murtagh, IAASB Member

Warsaw, Poland

November 7, 2013

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

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

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

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

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

• 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

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

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

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.

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

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)

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)

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)

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

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)

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

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

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

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

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?

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

http://www.ifac.org/auditing-assurance/clarity-center





http://www.ifac.org/about-ifac/translations-permissions/translations-database








QUESTIONS?

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http://www.ifac.org/

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