Chapter 8 Professional standards Flashcards
1.1 The need for regulation
Professional standards are in the public interest, they add to quality of assurance services. Audit regulation promotes comparability of accounts which are all audited to the same standards and improves public confidence. All assurance engagements are governed by ethics, risk assessment, terms of engagement and international standards on quality control (ISQCs). UK audits are also governed by Companies Act 2006 and international standards on auditing (ISAs).
2.1 Standard testing
The IAASB is a subsidiary of the International Federation of Accountants (IFAC). IAASB members are nominated by IFAC and the forum of firms (a group set up by large accountancy firms). The IAASB issues a number of different types of professional standard:
- International standards on auditing (ISAs) applied to all audits
- International Standards on Assurance engagements (ISAEs) applied to assurance engagements other than those on historic financial information
- International standards on review engagements (ISREs) applied to assurance engagements to review historic financial information
- International standards on related services (ISRSs) applied to non-assurance engagements
- International standards on quality control (ISQCs) applied to all assurance engagements
2.1 Standard testing
The IAASB is a subsidiary of the International Federation of Accountants (IFAC). IAASB members are nominated by IFAC and the forum of firms (a group set up by large accountancy firms). The IAASB issues a number of different types of professional standard:
- International standards on auditing (ISAs) applied to all audits
- International Standards on Assurance engagements (ISAEs) applied to assurance engagements other than those on historic financial information
- International standards on review engagements (ISREs) applied to assurance engagements to review historic financial information
- International standards on related services (ISRSs) applied to non-assurance engagements
- International standards on quality control (ISQCs) applied to all assurance engagements
2.2 The standard setting process
The process for setting standards can be summarised as follows:
- A subcommittee is established to work on a particular area
- The subcommittee issues an exposure draft for consideration
- Where appropriate, the exposure draft is revised as a result of feedback from interested parties
- Once amendments are finalised/approved, the definitive international standard is published
3.1 Financial reporting council (FRC)
The FRC supervises accounting related issues in the UK. The FRC board oversees the organisation which is divided into three main responsibilities:
- Codes and standards committee: actuarial policy, audit and assurance, corporate governance, accounting, and reporting policy
- Conduct committee: audit quality review corporate reporting review, professional discipline, professional oversight, supervisory inquiries
- Executive committee: oversight of the work of the FRC
3.2 Standards issued by the FRC
The FRC amends ISAs for any specific UK factors then issues them as ISAs. The FRC also issues ethical standards for auditors, practice notes (guidance on applying ISAs to particular circumstances and industries), bulletins (guidance on new or emerging issues), standards for reviews of interim accounts performed by the auditor of the entity and audit quality.
4.1 Current issues – harmonisation
Harmonisation is the process of aligning global standards, so companies are audited in a comparable way regardless of location. The process has been driven by factors such as globalisation and the EU. International accounting standards were adopted by all EU listed companies for periods commencing on or after 1 January 2005. The UK has generally adopted ISAs but:
- The FRC amends and reissues as ISAs
- June 2016 the FRC issued its own series of revised ISAs which include the suite of reporting ISAs (700, 701, 705, 706 and 720)
The EU directive and regulation of April 2014 introduced the following with regard to audit, this led to changes in ethical and auditing standards and the UK corporate governance code:
- Improving the quality of audit and reporting
- Mandatory re-tendering after 10 years
- Change of auditor at least every 20 years
- Ban on providing non-audit services to public interest entities
- Cap on fees for non-audit services
4.2 Professional scepticism
The FRC issued a briefing paper on professional scepticism which recognises the difficultly in exercising scepticism when the culture of audit firms encourages close working relationships with clients. The paper stresses the need to challenge and test management assertions. The FRC identified the following problem areas:
- Year-on-year audits adopting the same approach with changes ignored
- Accepting management explanations rather than forming own view
- Acceptance of unrealistic deadlines
4.3 Big data
Big data is data sets that are large or complex. The IAASB set up a data analytics working group to monitor use of data analytics and the impact on risk assessment, audit approach, analytical procedures, and other audit evidence. Future auditing standards need to reflect the use of data analytics.
4.4 Future of audit
The Kingman review: government announced abolition of the FRC, replacing it with a new audit, reporting and governance authority. The ARGA is expected to regulate big firms, impose larger sanctions for corporate failure, require fast explanations from companies and issue report publications regarding conduct and management.
Competition and market authority review: recommendations made including robust regulatory oversight of committees, mandatory joint audit, operational split between the big Four’s audit and non-audit businesses and a five year progress review by the regulator.
Brydon report: recommendations were create a corporate audit profession governed by principles, extend audit concepts beyond accounts, greater engagement between auditors and shareholders, change of opinion language, introduction of new policies and statements, further audit committee clarity, fraud package and increased use of technology.
4.5 Joint audits
More than one auditor responsible for the audit opinion. Audit performed on joint basis and a joint report issued. In event of litigation firms are jointly liable. The Competition and markets authority proposed the introduction of mandatory joint audits.
4.6 Climate change
FRC announced a review of both company and auditor responses to climate change. Better climate disclosures made. Better practice will be encouraged by the FRC using:
- Sample reviews focusing on climate change compliance requirements
- Sample assess how auditors ensure climate risk impact is reflected
- Assess support resource availability in firms
- Evaluate corporate governance code disclosure quality
- Evaluate adoption of climate-related financial disclosures framework
4.7 Technological advances
Robotic process automation: software used to capture existing applications with the aim of automating activities across systems. They can open emails, copy files, extract data, and make calculations. Cannot mimic human judgements.
Artificial intelligence and cognitive computing: common areas where this is seen as cognitive automation (automate a matching up process for cash), cognitive engagement (using a live chat assistance to resolve FAQs) and cognitive insight (allow full visibility of a system, allowing staff to be proactive and responsive). AI looks to copy behaviours such as learning, understanding, interacting, perceiving, and reasoning.
Blockchain: a digital set of records where individual digital items are linked together in a public database. The information is stored across multiple computers and made public.
