Most smaller firms have read the articles with interest, but on the basis that the changes are only mandatory for listed companies, they have concentrated on matters they consider more urgent.
There has been much less written about the proposal to implement international standards on auditing (ISA) which, in due course, are likely to replace our own statements of auditing standards. The difference here is that once ISA are implemented they may be applicable to all audits, and affect all firms of whatever size which carry out audits.
The raising of the audit exemption limit to £5.6m may mean that many firms will no longer undertake audits, but many smaller firms – including my own – will continue as auditors, albeit for a smaller number of clients.
The International Auditing and Assurance Standards Board (IAASB) is currently issuing much material for comment. The Audit and Assurance Faculty of the ICAEW has set up an ISA implementation sub-group with the responsibility for responding to the drafts, and for ensuring that sufficient consideration is given to the practical implications of ISA implementation. Several CCAB bodies are represented on this sub-group.
ISA are intended to apply to audits of all entities, large or small. But reading through many of the recently released ISA it is clear that their application to smaller entities needs some thought. These new ISA and recent exposure drafts provide brief general commentaries on their application to smaller entities, but smaller practitioners will probably need some help in applying the standards effectively and efficiently on small audits. The draft on fraud, for example, assumes segregation between management and those charged with governance; in most smaller entities this does not exist
With the best will in the world, the sheer volume of paper being produced by IAASB means that no matter how interested the average practitioner is in the changes being proposed, few will have sufficient time to go through the ISA in detail. The majority of practitioners in the smaller firms will rely on those involved in the ISA implementation sub-group to try to ensure the final ISA are not only relevant to them, but can be applied in practice.
This is perfectly possible, but particular consideration needs to be given to the changes that need to be made by smaller firms. The technical departments of larger firms are already working on revised audit manuals incorporating the proposed changes that will result from the implementation of ISA.
For the smaller firm this revision of audit manuals will almost certainly be done by one of the training consortia. The ISA implementation sub-group has already met with the main training consortia to try to ensure that everything will be ready in time for the firms to ensure their staff are properly trained.
These changes are to the advantage of all concerned. The real purpose of the implementation of international standards is an increase in across-the-board quality of audits. This can only be good for auditing in general.
What we want to achieve is effective audits using an enhanced audit approach, and provided we ensure that the ISA are readily applicable to all audits, this should be the result.
All firms, and smaller firms in particular, will need to plan well in advance. The changes in the way audits are carried out will need to be explained not only to staff but also to clients. This will be particularly important when discussing with those clients with a turnover of less than £5.6m, whether or not they require an audit. Remember the benefits an audit can give to your clients’ overall financial well-being. If the quality of audits improves, so will the benefits. There is a danger that some firms will see the changes as another reason not to undertake audits if the majority of their clients no longer require an audit. Firms may wish to think seriously about the long-term implications for their clients before coming to this conclusion.
So how will ISA impact on the smaller firm? There will clearly be major changes to the way they do an audit, but hopefully these changes will serve to improve what in the UK we believe is already a good product.
The timetable for implementation is likely to be very tight, with ISA possibly applying to audits ending on or after 31 December 2005. If you do audits, ISA will affect you, and the sooner you start thinking and planning the better.
- Clive Jones, chair of the ICAEW Audit and Assurance Faculty’s Practitioner Services Committee.