Tuesday, August 17, 2021

ISA (UK) 210: Agreeing the terms of an Audit Engagement

Before an auditor accepts an audit engagement, he is responsible for agreeing on certain engagement terms with the management, and where required, with those charged with governance. ISA 210 requires the auditor to accept an audit engagement only when the following bases for an audit has been established:

1.    Preconditions for the audit are present.

2.    The auditor and management conform to a common understanding of the terms of the audit engagement.

Agreeing to the terms of an audit engagement is particularly important as it enables both the parties i.e. the auditor and the management to understand their respective responsibilities towards the conduct of an audit.

Preconditions for an audit engagement

The preconditions for an audit entail the following.

1.    Adoption of an acceptable financial reporting framework (FRF) by the management for the preparation of the entity's financial statements.

2.    Management's acceptance of its responsibility for the preparation of financial statements in accordance with the applicable FRF, implementation of adequate internal controls, and provision of access to the auditor to all the required information.

The acceptability of the FRF adopted by the entity varies with the nature of the entity, the nature, and purpose of the financial statements, and the requirements of the applicable law and regulations.

Agreement on the terms of an audit engagement

An auditor shall ensure that the management adequately understands and agrees to the terms of an audit engagement. These terms primarily include the scope and objective of the audit, the responsibilities of the auditor and the management, reference to the applicable FRF, the form and content of the audit report, and other relevant information. Once agreed, these terms are to be set out in the audit engagement letter.

Implications for Recurring Audits

The auditor is not required to send a new engagement letter for recurring audit engagements. However, certain circumstances may necessitate the revision or reiteration of the existing audit terms. These might include a significant change in the senior management or ownership of the entity, misapprehension of the previously laid out terms, change in the reporting requirements, etc.

Practice

It is only if the above-stated criteria are met that an auditor should accept and continue an audit engagement. In case the preconditions are not met, the auditor must take up the matter with those charged with governance. An auditor might often be required to change the terms of the engagement once the audit engagement has been accepted. However, such changes shall not be accepted until there is a reasonable justification to do so. For example, the conversion of a public entity into a private entity exempt from the requirements of audit of its financial statements. An auditor must issue a new engagement letter in case of a change in audit engagement terms.

References:

https://www.frc.org.uk/getattachment/b245bc7f-453f-49b8-ad9b-2ce992f6ca67/ISA-(UK)-210_Revised-June-2016_Updated-July-2017.pdf


Wednesday, August 11, 2021

Auditing and Assurance Standards in UK

Auditing standards are professional standards or requirements for the performance of an audit of financial statements. They include objectives for the auditor, together with requirements and related application and other explanatory material. Preparation of a uniform set of standards for auditing practice in UK was started back in March 1976 when the Auditing Practices Committee (APC) was established by the Consultative Committee of Accountancy Bodies (CCAB) to formalize the existing co-operation of the CCAB bodies on audit practices. At the time of its establishment the role of the Auditing Practices Committee was defined as:

“To provide a framework of practice for the exercise of an auditor's individual judgement, by proposing for the approval of the Councils of the governing bodies statements of explanation and guidance on auditing, and definitive statements of auditing standards.”

In 2004 the Financial Reporting Council (FRC) took over responsibility for the setting of audit standards through the Auditing Practices Board (APB) which became a subsidiary board of the FRC. The FRC was also charged with monitoring and enforcing these auditing standards. In the same year of 2004, the UK’s Auditing Practices Board (APB) took the decision to base UK and Irish auditing standards on ISAs. One of the reasons for this alignment was to benefit from future improvements to them.

New standards were issued by the International Federation of Accountants (IFAC) through the IAASB and were adopted in the UK in October 2009 as ISAs (UK), and apply to audits of financial statements for periods ending on or after 15 December 2010. Where necessary, the APB has augmented the international standards with a small number of additions to address specific UK and Irish legal and regulatory requirements. The FRC, in June 2016, stated that references to Standards (UK) have been amended to Standards (UK).

The Financial Reporting Council (FRC) is now the authorized body for setting auditing standards in the UK in accordance with the Companies Act of 2006 and Statutory Instrument on Statutory Auditors (Amendment of Companies Act 2006 and Delegation of Functions etc.) Order 2012 (SI 2012/1741). The Companies Act of 2006 establishes mandatory audit requirements (statutory audits) for all companies unless they qualify for exemptions based primarily on size, nature of activity and company type, or whether they are dormant.

To sum up the discussion, all financial statement audits in UK must be conducted in accordance with International Standards on Auditing (UK) issued by the FRC. The current International Standards on Auditing (UK) are based on the International Standards on Auditing (ISAs) of the same titles that have been issued by the International Auditing and Assurance Standards Board, published by the International Federation of Accountants, with some additions to account for UK Company law.

 

References:  

                      https://bit.ly/2VmXF8K

https://bit.ly/2TQkDoh

https://bit.ly/3je2o4Z

https://bit.ly/3lnG2kb

https://bit.ly/3rUddNl

https://bit.ly/2TOJHMm

Friday, August 6, 2021

Comparison: Old vs Revised ISA (UK) 220

While the revised standard mandates application of the revised guidelines for the financial statement audits commencing on or after 15th December 2022, it has also allowed voluntary early application to ensure the quality of the audit is maintained throughout the audit engagement. Here’s a comparison of the old standard vs. revised standard on quality of audit for financial statements.

Old Vs. Revised ISA (UK) 230 - Key Differences


Particulars

Old Standard

Revised Standard

Focus

More focus on exercising control over the Quality of the audit engagement.

Focusing the overall Quality of the audit is Managed responsibly. 

Audit Concern

The firm’s policy decides the process, objectives and controls of the audit engagement.

Considering each firm’s risks, the audit quality management, process, objectives, procedures, and control should be decided.

Emphasis

The audit engagement should be accurately and effectively adhere to the audit quality controls. 

More accurate and complete information and communications to maintain the quality of the audit. 

Specific Requirements

Overall leadership responsibilities. 

Active participation from the key auditor as well as the team members emphasizing on the accountability as well. 

Documentation of Processes

Documenting and testing of the processes is not specified. 

Specifically requires processes to be documented and tested. 

Reference to ‘Resources’

The resources refer to the Human only

Wider reference so as to include Humans, intellectual, technological components 

 

Challenges on the Practical Implication 

  • The main challenge will be of an overall application as there are a lot of requirements and making all of those work together would be a bit of a hardship.

  • The revised standard requires documentation and testing of the processes, which is quite challenging as the methods might be in place but documenting them could be cumbersome.

  • The requirement of the risk-based approach makes it complicated to set the objectives, procedures based on the individual firm’s risks and threats. Such an approach will then become too subjective.

The best strategy to manage the transition period would be to match your firm’s objectives with the revised standard and create policies and procedures that meet the standard’s requirements.


References: 

  1. ISA (UK) 220_Revised July 2021_final

  2. https://www.frc.org.uk/getattachment/615b6684-314e-44ae-a47f-1fc8ffa92bac/ISA-(UK)-220_Revised-November-2019-With-Covers.pdf

  3. New standards continue drive toward better audits

Wednesday, August 4, 2021

Quality Management for an Audit of Financial Statements

The ISA (UK) 220 (revised July 2021) on Quality Management for Audit of Financial Statements will be applicable for the audits of financial statements on or after 15 December 2022. The recent revision imposes significant responsibilities on the engagement partner (key auditor) to conduct the audits most effectively to maintain the audit quality so that the audit quality is maintained throughout. Let’s discuss these responsibilities in detail with the help of a practical example. 

Overview and the Purpose of this Standard

The standard focuses on the responsibilities carried out by the auditor to conduct the audit following the applicable professional standards, rules, and regulations. 

The standard requires from the key auditor the following to maintain the quality of the audits:

  • Leadership responsibilities 

  • Ethical compliances including independence of the auditor

  • Determining policies and procedures to accept and continue the relationships with the clients and the audits  

  • Availability of sufficient resources and the environment to the audit team from time to time

  • Take responsibility to direct and supervise the work carried out by the audit team and review their work.

  • Documentation, monitoring, and remediation related responsibilities 

Practical Implication with the Help of an Example

The Key Auditor and his team are conducting an audit of a stock broking company. To verify the transactions of such a vast company, the auditor will need a well-equipped Information Technology set-up at his firm. He will also need such an audit team that knows how to run verification reports. 

In the above example, the revised standard requires the key auditor of the firm to take leadership in maintaining the quality of the audit. His duty will be to direct and supervise the audit team members on how to verify the transactions of the stockbroking company and the understanding of how to conduct the entire audit effectively to ensure adherence to the standard. 

He is also responsible for making available necessary audit environment that enables the team members to conduct the audit more efficiently. The availability of sufficient IT infrastructure in the given example would be the responsibility of the key auditor. 

Thus, there have been substantial changes concerning the engagement partner’s responsibilities (key auditor) through the revised standard. The purpose is to maintain the utmost quality of the audit where the early adoption of the standard is also allowed.  

References:

  1. ISA (UK) 220_Revised July 2021_final

  2. The FRC's new requirements of auditors

Tuesday, July 20, 2021

The future of audit: Industry-wide commitment to innovation required to save profession’s reputation

The UK government’s consultation on audit and corporate governance reform, proposes a major overhaul for company directors and auditors in the wake of big name company collapses. With the public consultation now closed, the government hopes to publish its response by mid-October.

Reference:

Accountancy Age: https://www.accountancyage.com/2021/07/16/the-future-of-audit-industry-wide-commitment-to-innovation-required-to-save-professions-reputation/



Wednesday, July 14, 2021

Audit is cool!!!: Audit Procedures: Final Stage

Audit is cool!!!: Audit Procedures: Final Stage: The incentive for writing this post was recent article by Lisa Weaver, ACCA Advanced Audit examiner, on the topic of audit completion. Fol...

Audit is cool!!!: Audit Method: Best practices in Audit Documentation

Audit is cool!!!: Audit Method: Best practices in Audit Documentation: ISA 230 , deal with the auditor’s responsibility to prepare the audit documentation. Audit Documentation is defined in ISA 230 as “The r...