Guidance on Auditing Complex Financial Instruments
John Fogarty, Chair, Former IAASB Deputy Chair
Jon Grant, IAASB Member
Tomo Sekiguichi, IAASB Member
Greg Fletcher, External Member (US)
John Hughes, External Member (UK)
Tom Omberg, External Member (US)
Marc Pickeur, External Member (Switzerland)
Objective(s) of project
To develop guidance for auditors dealing with complex financial instruments.
In December 2007, the IAASB approved ISA 540 (Revised and Redrafted), Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures.
A Working Group, comprised of interested parties with relevant perspectives and expertise, considered aspects of the audit of financial statements measured at fair value, consulted with auditors on current issues and practice, and recommended that additional fair value auditing guidance be developed.
The IAASB received an update on the Working Group's activities to date at its September 2008 meeting. In October 2008, staff of the IAASB issued an alert to assist auditors by highlighting areas within the ISAs that are particularly relevant in the audit of fair value accounting estimates in times of market uncertainty.
The IAASB further considered the recommendations of the Working Group at its March 2009 meeting in the context of its strategy and the current environment and agreed that a project proposal be developed to revise International Auditing Practice Statement (IAPS) 1012, Auditing Derivative Financial Instruments.
Task Force progress / Board discussions to date
The IAASB approved a project proposal to revise IAPS 1012 at its June 2009 meeting. The project includes:
- The development of a "briefing paper" (or equivalent) to raise awareness and highlight a number of practical considerations that are currently posing challenges in audits of complex financial instruments; as well as
- The revision of IAPS 1012 to bring it in line with the clarified ISAs and, as appropriate, to further expand it for additional guidance for auditors when applying ISAs in the context of complex financial instruments.
The IAASB agreed that the UK Auditing Practices Board's (APB) work to revise its Practice Note (PN) 23, Auditing Complex Financial Instruments, should be leveraged in achieving these objectives.
The IAASB CAG considered the topic at its September 2009 meeting.
At its September 2009 meeting, the IAASB considered and approved a Consultation Paper seeking views on a number of matters that require consideration in relation to the IAASB's plans revise IAPS 1012. It incorporates the work of the APB as an Appendix, and asks specific questions about how that guidance might be adapted or supplemented for application in the international context.
The Consultation Paper, was issued in October 2010.
At its December 2009 meeting, topics addressed included: requirements in the ISAs that may warrant specific guidance in the context of complex financial instruments; how best to ensure that the IAPS will be broadly applicable to entities of all sizes and to financial instruments of varying complexities; and the need for further guidance describing the auditor's obligations when a management's expert is engaged. The IAASB also acknowledged that decisions on the form and content of the revised IAPS will be informed by the IAASB's decisions regarding of the status and authority of future IAPSs.
At its March 2010 meeting, the IAASB considered significant comments received on the October 2009 Consultation Paper, together with a first draft of revised IAPS 1012. Amongst other matters, the IAASB deliberated the proposed scope and title of the IAPS; the auditor's responsibility to understand the methods and assumptions, including models, used by management's experts in valuing financial instruments; the linkage within the IAPS to the fair value hierarchy used in accounting standards; and additional guidance relating to the auditor's consideration of presentation and disclosure of financial instruments.
At its June 2010 meeting, the IAASB considered issues relating to, and a revised draft of, proposed IAPS 1012. Amongst other matters, the IAASB deliberated the structure of the IAPS; the nature and extent of guidance relating to assertions and disclosures; and the effective date for the IAPS.
At its September 2010 meeting, the IAASB approved for exposure proposed IAPS 1000, Special Considerations in Auditing Complex Financial Statements.
At its June 2011 meeting, the IAASB was provided with an overview of the significant issues raised by respondents on the Exposure Draft (ED) of proposed IAPS 1000, Special Considerations in Auditing Complex Financial Statements. Amongst other matters, the IAASB deliberated the primary audience of the proposed IAPS, the coverage of financial instruments and enhanced material on responses to valuation techniques. The IAASB also considered whether proposed amendments to the application material in ISA 500, Audit Evidence, and ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, would improve the guidance available to auditors.
The IAASB approved International Auditing Practice Note (IAPN) 1000, Special Considerations in Auditing Financial Instruments at its September 2011 meeting. IAPN 1000 is the first of a new suite of material that the IAASB uses to provide practical assistance to auditors and is available for immediate use. A Basis for Conclusions provides background to the project, main comments received on the exposure draft, and the IAASB's conclusions regarding these comments in developing the final IAPN. An “At a Glance” publication is also available which provides an overview of the IAPN. IAPN 1000 is the first of a new suite of material that the IAASB uses to provide practical assistance to auditors. For more information about IAPNs, please refer to the amended Preface to the International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncement.
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