ISA (UK) 200 deals with the independent auditor’s overall responsibilities when conducting an audit of financial statements in line with International Standards on Auditing UK (ISAs UK).
The objective of an audit is to boost the amount of confidence of intended users in the financial statements. This is accomplished by the declaration of an opinion by the auditor on whether the financial statements are prepared in accordance with relevant financial reporting mechanism.
There are few elements to ISA (UK) 200
1. Objectives
2. Definitions of the key terms
3. Requirements
1. Objectives:
ISA (UK) 200 states there are two overall objectives of the auditor. First: 'To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.' Secondly: 'To report on the financial statements, and communicate as required by the ISAs in accordance with the auditor's findings
2. Definitions of the key terms given in standard:
· Applicable financial reporting framework
· Audit evidence
· Audit risk
· Auditor
· Detection risk
· Financial statements
· Historical financial information
· Management
· Misstatement
· Professional judgment
· Professional skepticism
· Reasonable assurance
· Risk of material misstatement
3. Requirements:
ISA (UK) 200 carries five separate requirements.
a) Ethical Requirements Relating to an Audit of Financial Statements— Comply with relevant ethical requirements.
b) Professional Skepticism— plan and perform an audit with professional skepticism.
c) Professional Judgment— exercise professional judgment in planning and performing
d) Sufficient Appropriate Audit Evidence and Audit Risk— sufficient appropriate audit evidence to reduce audit risk to an acceptably low level
e) Conduct of an Audit in Accordance with ISAs— comply with all ISAs relevant to the audit, understand the entire areas of ISA.
Practice
As we discussed above that according to ISA (UK) 200 there are basically two overall objectives, (a) to obtain reasonable assurance, (b) to report on financial statements. Experts suggest that ISA (UK) 200 is of vital importance therefore due care should be given to its compliance while conducting audit. The auditor shall design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity. ISA 200 contains an objective relating to situations where reasonable assurance cannot be obtained, in which case the auditor, depending on the circumstances, may qualify the audit opinion, or disclaim an opinion, or withdraw from the assignment.
References:
https://www.accaglobal.com/sg/en/member/discover/cpd-articles/audit-assurance/isa-200.html
https://www.researchgate.net/publication/46534009_Recently_aspects_regarding_International_Auditing_Standard_200_Overall_Objectives_of_the_Independent_Auditor_and_the_Conduct_of_an_Audit_in_Accordance_with_International_Standards_on_Auditing
Monday, September 20, 2021
Thursday, August 19, 2021
ISA (UK) 220: Quality Control for an Audit of Financial Statements
The
auditor is responsible for the quality control of the audit of financial
statements. This responsibility is not solely outlined through ISA 220, but
also through ISQC 1 and is further to be corroborated through the applicable
ethical requirements. Each audit firm is responsible for the implementation and
maintenance of a quality control system in order to ensure that the firm and
its personnel comply with the ethical, legal, and regulatory requirements
[L&RR] and that the audit reports issued by the firm are appropriate.
Responsibilities of an Engagement Partner
Being
the leader of the audit team, the engagement partner observes a higher need for
the maintenance of quality control throughout the audit. He, being responsible
for the overall quality of the audit engagement, should stay alert and
skeptical for any instance of non-compliance with the ethical and regulatory
requirements by any member of the audit team.
Ethical Requirements
While
the ethical requirements may vary from jurisdiction to jurisdiction, the
fundamental principles of ethics laid down by the IESBA Code of Ethics include
Integrity, Objectivity, Professional Competence, Confidentiality, and
Professional Behavior. Additional ethical requirements may be imposed on an
auditor through the local codes of conduct prevalent in different
jurisdictions.
Engagement Team and Performance
The
engagement partner must ensure that the team deployed on the audit of financial
statements under his audit engagement is competent and capable enough to comply
with the professional standards and applicable L&RR. The audit team must
have the necessary competence to enable an audit report under the given
circumstances.
The
responsibility for the audit report and its validity, however, rests with the
engagement partner. He is also responsible for the direction, oversight, and
performance of the audit engagement in accordance with the applicable LR&R
and professional standards.
Practice
While
accepting or continuing an audit engagement, an engagement partner shall obtain
information from the firm and network firms to identify any potential threats
of non-compliance with the applicable quality control requirements. In the
instance of identifying any such threat, an auditor is advised to immediately
report the matter in his reporting line, or seek the application of safeguards
that reduce the threat to an acceptably low level, or where appropriate,
withdraw from the audit engagement. Any inability to resolve a given matter
should be disclosed to the firm immediately for appropriate action.
It
is also advised to conduct a thorough and rigorous review of the audit
documentation and working papers before or on the date of the audit report to
be satisfied that sufficient and appropriate audit evidence has been obtained
by the audit team to base the audit opinion on.
References:
https://www.frc.org.uk/getattachment/615b6684-314e-44ae-a47f-1fc8ffa92bac/ISA-(UK)-220_Revised-November-2019-With-Covers.pdf
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:
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
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:
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:
Tuesday, July 20, 2021
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...
Business Idea: Shamrock Audit Firms
No, it is not St. Patrick’s Day and we are not going to praise Guiness in this article J
I am currently studying different forms of business organisation and try to apply this knowledge in the field of audit. I was interested by Handy’s concept of shamrock organisation, which is defined in BPP P3 study text as follows:
“The shamrock organisation, or flexible firm, has a core of permanent managers and specialist staff supplied by a contingent workforce of contractors and part-time and temporary workers.”
Thus, in this post I would like to discuss the concept of flexible firms, which might change not only the value chain and network of audit firms, but also the whole audit market.
Problems
Audit businesses face number of problems:
1. Financial crisis – clients less keen on paying for audit and there is the necessity to cut costs;
2. New Legislation – the split of audit and advisory services would lead to problems in staff utilization. Firms might face the issue of overstaffing or understaffing (before it was more leeway to balance advisory and audit projects).
3. Employee expenses – as a result of the two issues above, fixed expenses related with employees become burdensome for audit firms. Fixed salaries, pension schemes and other elements of package expose pressure on profit.
4. Efficiency – are resources invested in junior staff employees show real pay off?
5. Focus – to pick up appropriate people for audit job accounting firms should maintain comprehensive recruitment department, waste time of managers involved in the process, which might seen as waste of resources and shift of focus from delivery of quality services.
I think that flexible firm structure might help to address these problems and change marker
Answer: Concept of Shamrock Organisation
The shamrock concept comprises four so called leaves or elements.
The first leaf is professional core, which consists of professionals defining organization’s core competence. In audit firms it could be employees above manager assistant level or even higher grade staff. They would elaborate methodology, business processes, communicate with clients on major negotiations, review audits and sign up audit reports, establish and implement strategy.
The second element is self-employed professionals and technicians. For audit firms it could be extremely relevant element. IT services might be outsourced and there no need to be reliant on huge army of salary-paid IT specialists; tax, legal, valuation personnel and audit seniors could be hired separately for each audit project. To satisfy demand for these services freelancers as well as specialised firms could be hired.
The third leaf is contingent work force. The hire of this type personnel would totally depend on the external demand for audit firm’s services. I always wandered why audit firms hire people with higher education to do stock counting or cash section audit? Give me a week or two and I will teach secondary school graduates how to audit not only above mentioned sections but also receivables, payables, and even deferred taxes provided that these guys would know that 2x2=4 and more or less have common sense.
Thus, the contingent work force would cover the work of junior level staff, second and third year associates; this might include also the work of senior auditors in some cases (small project; tightly controlled by manager).
The forth element is supposed to be the contribution of consumers. Indeed, unlike other industries there are whole bunch of opportunities for better interaction with client in audit, e.g. audit committee, internal audit departments. I am going to expand this idea further.
Practical Implications
The question is rather simple: how is this model going to work? I would outline following solutions:
· Active markets of freelance professionals;
· Human resources (staffing) firms specialising in recruiting and training staff in certain area. For example, such kind of company might develop diverse skills in secondary school graduates and utilize this employees’ hours efficiently by outsourcing them both to audit, advisory, financial and other firms (e.g. data input/processing centers; call centers). Thus, the contingent work force could be provided by special HR firms;
· Overseas professionals. The new developments in IT and communication allow audit firms to transfer part of work to overseas professionals achieving economy in costs. Tax section and legal contact within audit project could be easily reviewed by specialist in China or India
· Consumer intervention. The model might provide client with means to influence costs. For example, there are two HR firms (A and B) providing contingent work force for audit services: A has brand name, B is less known but charges lower fees. An audit firm might provide opportunity to client to chose the firm (A or B) to be included into audit budget.
The implementation of shamrock concept might lead to rise of staffing firms specialising on low skilled financial employees. Audit firms would be focused on recruitment experienced high skilled professionals. The necessity in audit seniors (also known as “audit executives” or “assistant managers”) could be liquidated: the managers should be able to undertake some tasks and delegate less complicated issues to temporary workers.
The exchanges (analogy to stock exchanges) of professional and semi-professional labor should become more developed, elaborated and structured. They should provide businesses/audit firms with access to information about freelancer’s previous works, rate per hour, references. There are professional and freelance internet projects (e.g. Odesk or LinkedIn), but they are patchy and not so developed as commodity or stock exchanges. I would be glad if you share your thoughts on this subject. May be you have some reservations regarding this idea or you might offer the other ways to make audit business more profitable and professional
References
BPP. (2011). Paper P3. Business Analysis. Study Text. London
Disclaimer:
"This group is not associated with or approved by ACCA and the views expressed on this page do not necessarily reflect the views of ACCA".
Disclaimer:
"This group is not associated with or approved by ACCA and the views expressed on this page do not necessarily reflect the views of ACCA".
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