Auditing Standards - Change is on the way
Author:
Niall Walsh
Why are auditing standards going to change? The answer is that alleged audit failures (including Enron in the US, and Parmalat in Europe), are driving moves to extend and enhance existing auditing standards and frameworks.
International Influences
So what changes will happen in Ireland? Irish auditing standards will be affected by changes both in Europe and, closer to home, at the APB.
To turn first to Europe, there is movement towards the convergence of auditing standards across Member States. Convergence will happen if the Eighth Directive on Company Law is adopted by the European Commission and European Parliament. That would then require auditors of listed companies to comply with the International Standards on Auditing (ISA) as currently drafted without additional requirements except where defined by law.
The International Audit and Assurance Standards Board (IAASB), the body responsible for publishing ISAs, is in the process of revising the scope and applicability of its standards. The proposed revisions include changing the authority of the current requirements and guidance to having Requirements and Presumptive Requirements. For auditors, this will mean they will have to document decisions as to why particular requirements did not apply to their audit. This is likely to increase the documentation the auditor will have to create as part of the audit.
Opinion amongst observers is divided with some commentators suggesting the proposed changes may in fact decrease rather than increase audit quality.
Irish Changes
The Irish auditing market is primarily an environment in which ‘small’ companies are audited by a multiplicity of smaller audit firms.
On 4 March 2004 the APB announced its intention that the new ISAs (i.e the IAASB standards) relating to audit risk, fraud and quality control should apply in the UK and Ireland for audits in respect of accounting periods commencing on or after 15 December 2004 and that as a consequence significant changes would be required to many existing SAS. At that date the APB announced that it was examining the possibility of a general move towards the adoption of the ISAs in total.
New Standards for Ireland
The APB has subsequently announced and released a consultation paper and the exposure of 29 new standards to make the adoption of ISA in total a reality. The new ISAs (UK& Ireland) alone will have a significant impact on all auditors, even before we adopt the IAASB’s standards relating to Fraud, Audit Risk and Quality Control.
To make these exposure drafts ISAs (UK & Ireland) the APB has presented the ISAs supplemented with content that the APB believes are SAS requirements which are not fully addressed in the IAASB’s standards.
The APB’s objective was to ensure that there was no dilution of their previous standards, therefore they took the full suite of the IAASB ISAs and inserted additional requirements that were extracted from the SASs.
The authority of ‘grey’ letter text which was previously considered as explanatory guidance is now augmemted so that it is in future all of the ‘grey’ text requirements must be considered during an audit.
Incorporated into the ISAs (UK&Ireland) are a number of requirements which may lead to confusion or result in significant new and additional audit procedures:
• The prescription of both the APB Ethical Standards and the IFAC Ethical Code without any reconciliation between the requirements of the two codes.
• New and more extensive requirements relating to reporting to those charged with governance. These include written reports on audit findings even where there are no findings.
Europe's Influence
Adding to the confusion, at European level the 8th Directive will prohibit supplementing ISAs for local reasons, except where required by local law. In addition the 8th Directive will require countries to establish an oversight process for all auditors. Once finalised the 8th Directive will need to be enacted into local law by the country legislature before becoming effective. When this will impact auditors in Ireland is unclear.
So what is clear?
It is clear that the International Standards on Auditing are coming our way. Irish auditors will be subject to the ISAs or the ISAs (UK & Ireland) which will result in a significant change in the work performed and documented as part of an audit. There are still some issues which remain unclear - what the scope to the supplements in the ISAs (UK & Ireland) will be, how the APB will deal with the conflict between ethical standards, and exactly how the new standards will be applied to smaller audits. If the standards are applied as drafted there will be a sea change in the scope and nature of audits in Ireland. This sea change in the auditors’ work will have a significant impact on all auditors in Ireland.
Accountancy Ireland, Vol 36, No 6, December 2004.