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Home / ... / International Standards on Auditing (An Update)

The International Standards on Auditing (ISA), for UK and Ireland, have been issued by the Auditing Practices Board and are effective for periods commencing on or after the 15 December 2004. Although these ISA are practically hot off the press, they are really based on the International Standards on Auditing previously issued by the International Auditing and Assurance Board which have been in development for some time.

This article sets-out the history behind the new International Standards on Auditing for UK and Ireland and looks at the impact of the first major change to auditing standards on the accountancy profession.

A BRIEF HISTORY The groundwork for an international set of standards on auditing began back in 1969 with the publication of a number of reports focusing on international auditing by the Accountants International Study Group, which compared situations in Canada, the UK and US. In the late 1970s, the Council of International Federation of Accountants (IFAC) (subsequently renamed the IFAC Board in May 2000) created the International Auditing Practices Committee (IAPC). Between 1980 and 1991 the IAPC issued International Auditing guidelines (IAG) and the first International Standards on Auditing (ISA) were issued in 1991. In mid 2002, as a result of a review task force set up by the IFAC Board to address the futures of ISA, the IAPC was renamed as the International Auditing and Assurance Standards Board (IAASB) and introduced changes to the processes and transparency of its work, and a widening of its membership to include non-auditors. The IAASB has now been charged with the responsibility of enhancing and expanding the worldwide use of auditing standards. Its objective is to improve the quality and uniformity of international practice by: - Issuing international standards on auditing - Issuing guidance on the application of such standards - Promoting the adoption of the Board's pronouncements as the primary source of national standards and as guidance in cross-border offerings - Promoting the endorsement of the standards by legislators and securities exchanges, and - Promoting debate with practitioners, users and regulators throughout the world to identify user needs for new standards and guidance.

On the 1 January 2003, the IAASB made available a copy of the International Standards on Auditing, which is available on its website, www.frc.org.uk/apb.

GROWING ACCEPTANCE Since their release, there has been a growing acceptance of the ISA by national accountancy bodies across the globe and other organisations and institutions such as the Organisation for Economic Cooperation and Development, the Federation des Experts Compatables European (European Federation of Accountants - FEE) and the European Commission.

FEE proposed in November 2001, that by 2005, EU national auditing standard setters should require auditors to perform audit procedures that comply with ISA and to report on the financial statements in accordance with the same international standards.

In May 2003, the European Commission issued the communication Reinforcing the Statutory Audit in the European Union which included a number of short and medium term priorities. The requirement to have ISA for all EU statutory audits from 2005 was identified as a short term priority.

The convergence of auditing standards across Member States will happen if the 8th Directive on Company Law is adopted by the European Commission and European Parliament. It is worth noting that the Institute of Chartered Accountants in England and Wales (ICAEW), along with other bodies, has been consulting with the European Commission over the last year or so in support of modernised and expanded principles -based on the 8th Directive. The ICAEW believes that this Directive should be unequivocal in mandating the endorsement of the ISA as a whole for application in the European Union in the shortest possible timeframe.

On the 6th May 2004 in the United Kingdom, the Auditing Practices Board (APB) announced its intention to adopt both the ISA and the International Standard on Quality Control (ISQC), which is issued by the IAASB. As explained by the APB, the international standards are in the process of being revised and strengthened. Where necessary the APB has augmented the international standards with additional standards and guidance to maintain the requirements and clarity of the UK and Ireland Statements of Auditing Standards (SAS) This additional material is clearly differentiated from the original wording of the international standards by the use of 'grey shading'.

THE POSITION NOW It is against the above background that the Auditing Practices Board has issued International Standards on Auditing (ISA) for UK and Ireland and the International Standard on Quality Control (ISQC) (UK and Ireland) 1.

EFFECTIVE DATES The ISA (UK and Ireland) apply to all audits of financial statements for periods commencing on or after the 15 December 2004. The APB's previous standards, the SAS, are applied for audits of financial statements for periods commencing before that date.

The International Standard on Quality Control (ISQC) (UK and Ireland) 1 is to be implemented by audit firms by the 15 June 2005.

International Standard on Quality Control (ISQC) (UK and Ireland) 1 Before the issue of this Standard, guidance on quality control procedures for audits of financial statements was covered by ISA 220. (UK and Ireland) and was relevant at the individual audit level.

The new Standard, International Standard on Quality Control (ISQC) (UK and Ireland) 1, is relevant at firm-wide level and will require systems of quality control not only for audits and reviews of historical financial information, but also for other assurance and related service engagements.

The impact of this new standard will be to cause more time constraints on the engagement partner who is charged with the responsibility of ensuring compliance with elements of a system of quality control as described in the standard.

ISA (UK AND IRELAND) IN ISSUE There are currently 30 ISA (UK and Ireland) in issue. You can view a list of the ISA (UK and Ireland) on the Institute of Chartered Accountants in Ireland website (www.icai.ie)

The standards that are likely to have the greatest impact on auditors in the UK and Ireland are: - ISA (UK and Ireland) 315 Understanding the entity and its environment and assessing the risks of material misstatement The objective of this Standard is “to establish standards and provide guidance on obtaining an understanding of the entity and its environment, including its internal control, and on assessing the risks of material misstatement in a financial statement audit”. This ISA supersedes SAS 210 Planning and SAS 300 Accounting and Internal Controls and Audit Risk Assessments. - ISA (UK and Ireland) 330 The Auditor's procedures in response to assessed risks The objective of this Standard is “to establish standards and provide guidance on determining overall responses and designing and performing further audit procedures to respond to the assessed risks of material misstatement at the financial statement and assertion levels in a financial statement audit. This ISA supersedes SAS 300 Accounting and Internal Controls and Audit Risk Assessments. - ISA (UK and Ireland) 240 The Auditor's responsibility to consider fraud in and audit of financial statements. The objective of this Standard is “to establish standards and provide guidance on the auditor's responsibility to consider fraud in an audit of financial statements and expand on how the standards and guidance in ISA 315 and 330 are to be applied in relation to the risks of material misstatement due to fraud. This ISA supersedes SAS 110 Fraud and Error.

IMPACT The first real notable impact is the sheer volume of written guidelines for the new ISA. For example, the three Standards mentioned above alone are covered by over 150 pages of written guidelines in comparison to the forty-so pages covering the SAS that they supersede.

The language used in the ISA is much more comprehensive, complex and forceful than the language used in the SAS and there is a requirement to link the assessed risk of material misstatement and fraud or error to the audit procedures used and to have comprehensive documentation of same.

In the first year of adoption, we shall see a real impact on auditors in terms of a substantial increase in the amount of time and cost spent documenting, in a suitable format, in-depth knowledge of the client (including internal controls), the industry, the environment and the risks of operation. In many cases this knowledge is already in existence in various forms (e.g. audits, tax, correspondence files and knowledge of key audit team members), but is now required to be contained on the audit file as a key document which will identify the assessed risk of material misstatement and the response to those risks.

Looking at the impact from a client perspective, the new Standards may be an advantage as it could be viewed as an excellent opportunity to stand back and take a fresh look at the areas being documented, such as internal systems of control and developments in the industry, to see if there are any opportunities or threats on the horizon.

The ISA are effective for the audit of financial statements for the periods commencing on or after the 15 December 2004 and therefore will have an impact on clients with short accounting periods, clients requiring an interim audit but not yet for clients with 31 December 2005 year end.

I guess the full effect in terms of advantage and disadvantages of the ISA for practitioners and clients will be felt in 2006.

Deirdre Pierce is an Audit Manager with FGS.

I want detail of newly issued standards on Auditing SA 315 and 330

very essential for my profession

The improvements in the new auditing standards will improve the auditors knowledge and understanding of the clients operating environment and the clients business thereby risks identified at the planning phase will be addressed.

The improvements in the new auditing standards will improve the auditors knowledge and understanding of the clients operating environment and the clients business thereby risks identified at the planning phase will be addressed.