The proposed enhancements, including the focus on material misstatements arising from non-compliance, the introduction of a risk assessment process, and the switch to an outcome-based approach, demonstrate a progressive approach to audit ethics.
In a bid to enhance audit quality and instil confidence in financial statements, the Association of Chartered Certified Accountants (ACCA) has expressed its support for the proposals put forth by the Financial Reporting Council (FRC), the UK’s accounting regulator.
The FRC aims to strengthen auditor requirements, particularly in detecting and reporting material misstatements arising from non-compliance with laws and regulations. These proposals seek to improve the usability and informativeness of audits, providing users of financial statements with greater assurance.
The FRC’s proposed enhancements to ISA (UK) 250 and ISA (UK) 2X0 aim to reinforce auditor responsibilities in identifying and reporting material misstatements resulting from non-compliance with laws and regulations.
By updating these standards, the FRC intends to provide users of financial statements with a more comprehensive assessment of potential misstatements. This, in turn, would enhance transparency, accountability, and stakeholder confidence.
“Enhanced requirements for auditors to consider and address relevant laws and regulations will promote transparency and accountability, ultimately bolstering investor and stakeholder confidence,” says Jessica Bingham, Policy & Insights Lead, (EEMA & UK), ACCA.
The proposed changes acknowledge the need for auditors to focus on the laws and regulations that are most likely to have a material impact on the financial statements. This approach promotes transparency and accountability, aligning with ACCA’s goal of bolstering investor and stakeholder confidence.
To assist auditors in identifying relevant laws and regulations, the FRC is introducing a more robust risk assessment process. This process will enable auditors to identify those laws and regulations that have, or may potentially have, a material effect on the financial statements. By adopting a risk-focused approach, auditors can exercise professional judgment and allocate resources effectively.
While ACCA supports the proposed updates, it urges the FRC to carefully consider the potential impact on auditors’ workload. Shifting the burden of identifying and addressing compliance issues from management to auditors could pose challenges in practice.
However, ACCA recognises the importance of striking a balance between enhancing auditor responsibilities and avoiding excessive demands on limited resources.
The FRC’s proposed switch from a procedural approach to an outcome-based approach is a significant aspect of the enhancements. This shift allows auditors greater flexibility and discretion in their assessment of materiality and likelihood of misstatements arising from non-compliance.
By focusing on outcomes rather than rigid procedures, auditors can exercise comprehensive professional judgment, resulting in a more effective and efficient audit process.
ACCA acknowledges the resource constraints faced by smaller entities but emphasizes the need for the proposed changes to eventually apply to listed entities as well. While the burden on those with limited resources should be avoided, ACCA believes that the practical guidance offered by ISA (UK) 2X0 on identifying and addressing suspicions of non-compliance would be valuable for auditors of listed entities.
This extension of scope would further enhance transparency and accountability in financial reporting.
The revised ISA is set to come into effect for audits of financial statements for periods commencing on or after 15 December 2024. This timeline allows auditors and entities sufficient preparation time to adapt to the updated requirements.
ACCA encourages auditors to familiarise themselves with the proposed changes and begin incorporating them into their audit processes well in advance of the implementation date.
