Following a period of consultation, the Auditing Practices Board (APB) is announcing its intention to update its auditing standards for the new, clarified, International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB).  The new UK and Irish auditing standards will be effective for audits of financial statements for periods ending on or after 15 December 2010.

The APB is announcing its intention at the earliest possible opportunity so as to provide auditors, and those third parties that support them, with as much time as possible to prepare for the implementation of the new standards.

Background

In 2004 the APB made the strategic decision to base UK and Irish auditing standards on ISAs, supplemented with additional standards and guidance where necessary to maintain the requirements and clarity of the previous UK and Irish auditing standards.

One of the reasons for adopting ISAs was to benefit efficiently from future improvements in them.  The IAASB has recently completed an important project to update and reformat the ISAs. This, so called, ‘Clarity Project’ was undertaken with international regulatory support in order to improve the understandability of the ISAs and make them more compatible with regulatory frameworks, including the EC’s Statutory Audit Directive.

In parallel with the Clarity Project, ISAs on important topics such as auditing groups, estimates (including fair values) and related party transactions have been revised and improved to reflect the latest developments and thinking.

 The intention of the IAASB is that all the ISAs redrafted in the Clarity format, including those that have been revised, should come into effect internationally on the same date – for audits of financial statements for periods beginning on or after 15 December 2009.  The EC is debating adoption of the ISAs under the provisions of the Statutory Audit Directive.  Although the decision and timetable for endorsement of the new ISAs within the EU has not yet been established, the APB anticipates that such endorsement, if any, will be at a later date than the effective date established by IAASB.

As the improvements that have been made are designed to improve audit quality and the Clarity Project has been undertaken primarily to improve the understandability of the ISAs, the APB believes that it is appropriate to introduce these new standards in the UK and Ireland as soon as is practicable.

In October 2008 the APB published a consultation paper seeking views on this proposal.

Responses to the consultation

The responses to the consultation paper contained very strong support for:

•Updating the ISAs (UK and Ireland) to adopt the new ISA

•Such adoption to be as soon as practicable having regard to the date set by the IAASB

•The view that the same standards should apply to all audits

Respondents made clear that this course of action was important to:

•Enable UK and Irish auditors to benefit from the clarification of the requirements and guidance 

•Ensure that UK and Irish auditing standards reflect the leading audit practices as embodied by the IAASB in the new ISAs
 
•Support international harmonisation of auditing standards and prevent the UK and Ireland lagging behind other countries that have already made the decision to adopt the new ISAs

The view that the same standards should apply to all audits was considered important as otherwise there would be a risk of creating a two tier level of auditing which could undermine the credibility of smaller audits, and possibly cause confusion for companies and investors as well as for auditors.

Smaller audits

In its Consultation Paper the APB provided some information about the possible costs of adopting the Clarity ISAs.  The APB’s view is that, particularly for smaller audits, any cost impact can be minimised if there is effective training and support provided to audit firms.  Whilst training is not part of the APB’s remit, the APB has been liaising with the accountancy bodies on this and is committed to providing appropriate support to them.  As part of this exercise, the APB will consider the nature of guidance it can provide to help apply the new standards to the audit of smaller entities.

Future timetable

Publication by the IAASB of all the finalised ISAs is expected in March 2009. Before the end of April APB plans to issue an exposure draft of a complete set of proposed new ISAs (UK and Ireland) with a three month consultation period. The goal is to  finalise the ISAs (UK and Ireland) in the autumn.

The proposed new ISAs (UK and Ireland) will adopt the new ISAs as issued by the IAASB with some supplementary requirements and guidance.  Supplementary material will be proposed where considered necessary to:

•Address specific UK and Irish legal and regulatory requirements 

•Provide other guidance relating to legal and regulatory matters relevant to an audit

•Maintain other current APB requirements and guidance that are, in the APB’s view, necessary to prevent changes in audit practice to the detriment of audit quality

Because of the improvements in the new ISAs, the quantity of supplementary material is expected to be reduced significantly from that in the current ISAs (UK and Ireland).

Auditor’s Reports

The new ISAs include three standards relating to auditor’s reports; ISA 700, “Forming an Opinion and Reporting on Financial Statements,” ISA 705, “Modifications to the Opinion in the Independent Auditor’s Report,” and ISA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report.”

The APB will be adopting the new ISAs 705 and 706 but will not be adopting the new ISA 700.  It has recently completed a process of review and public consultation on the form of auditor’s reports and in early April will be issuing a revision of its own ISA (UK and Ireland) 700 that takes account of the conclusions reached.  ISA (UK and Ireland) 700 (Revised) has, however, been designed to ensure that compliance with it will not preclude the auditor from being able to assert compliance with the ISAs issued by the IAASB.

Richard Fleck, Chairman of the APB, commented:

"Since its inception APB has worked to establish UK and Irish auditing standards as being regarded as the strongest in the world. In recent years, recognising both the importance and the inevitability of convergence of auditing standards internationally, we have worked closely with the IAASB in the clarification and reinforcement of its standards. Now that IAASB has completed this work, APB has concluded that the Clarity ISAs are the most robust set of standards currently available.

Throughout IAASB’s Clarity Project we have been conscious of the impact that the new standards might have on smaller audits. Our SME audit sub-committee has been heavily involved in helping us respond to exposure drafts and achieve important changes in the final standards.

The responses to our consultation demonstrate how committed the profession is to having a single set of standards for audits of all sizes.

For these reasons APB has concluded that the benefits of implementing the new standards exceed initial costs and have decided that they should be applied as soon as is practicable.

Responses to our consultation emphasise the importance of high quality training and implementation support being provided to auditors if the new standards are to be implemented in a cost effective manner. APB is committed to providing appropriate support to the profession to help achieve this."