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Audit & Assurance
Resource Roundup: Implementation Support for Small- and Medium-Sized Practices
For small and medium-sized practices (SMPs) implementing international standards poses unique challenges. To support this critical constituency, IFAC has a long history of developing implementation support for international standards and offers an extensive suite of material for SMPs.
International Standards on Auditing
IFAC has just released an updated publication—the Guide to Using ISAs in the Audits of SMEs, Fourth Edition (the ISA Guide), to help firms apply the International Standards on Auditing (ISAs) proportionately and efficiently for SME audits. The ISA Guide has been updated to reflect recent changes to the ISAs, including International Auditing and Assurance Standards Board (IAASB) projects on:
- Auditor reporting;
- The auditor’s responsibilities relating to other information; and
- Using the work of internal auditors.
The ISA Guide is designed for use by all practitioners. In fact, since its publication in 2007, it has been downloaded over 100,000 times and has generated demand for translation in 22 languages.
Volume 1 covers the fundamental concepts of a risk-based audit in conformance with the ISAs. Volume 2 contains practical guidance on performing SME audits, including two illustrative case studies—one of an SME audit and one of a micro-entity audit. Both volumes explain and illustrate the three phases of performing a risk-based audit – risk assessment, risk response and reporting.
In addition, a recent article Auditor Reporting Standards Implementation: Key Audit Matters provides further support and includes links to publicly available audit reports grouped by KAM covering matters such as goodwill, provisions, litigation, revenue recognition etc.
Quality control (QC) is important component to deliver consistent, high-quality services to clients. A system of quality control essentially consists of policies designed to achieve the objectives of the firm and the procedures necessary to implement and monitor compliance with those policies. Quality control encompasses the firm and its objectives, the services provided, the delivery of those services, the quality of work, the processes and policies adopted, and the staff and management. The benefits of an effective QC system include:
- Reduced risk of error – reduces exposure to complaints from clients and possible litigation or professional indemnity claims;
- Enhanced reputation and brand value in the marketplace;
- Enhanced risk management;
- Improved client relationships;
- Improved recruitment and retention of employees; and
- Improved efficiencies in the provision of services.
The Guide to Quality Control for Small- and Medium-Sized Practices, Third Edition (QC Guide), published in 2011, provides non-authoritative guidance on applying the International Standard on Quality Control (ISQC 1) Quality Control for Accounting firms that Perform Audits and Reviews of Financial Statements and Other Assurance and Related Service Engagements. The QC Guide has been downloaded nearly 50,000 times and 20 translations have been completed or in progress.
The QC Guide contains the requirements set out in ISQC 1 in addition to implementation guidance, including discussion material and an integrated case study that can be used as the basis for education and training. It features two sample quality control manuals – one for a sole practitioner and another for a 2-5 partner firm. The QC Guide takes a modular approach to the elements of ISQC 1 and covers:
- Leadership responsibilities for quality within the firm;
- Relevant ethical requirements;
- Acceptance and continuance of client relationships and specific engagements;
- Human resources;
- Engagement performance;
- Monitoring; and
Practitioners should also be aware that the IAASB currently has a project to revise and update ISQC 1 and ISA 220, Quality Control for an Audit of Financial Statements, which will result in significant changes to the current standards. Exposure Drafts on each standard are intended to be released in December 2018 and it will be important for all SMPs to review and provide feedback on the proposals.
A compilation engagement, which is used in the preparation and presentation of annual historical financial statements, can be tailored to meet the unique needs of a small business client. It can help SMPs broaden their service offerings and strengthen their practices.
The Guide to Compilation Engagements was published in 2015 and is intended to both help practitioners understand the value of a compilation engagement and to assist them in implementing the International Standard on Related Services (ISRS) 4410 (Revised) Compilation Engagements, which is one of the International Standards on Related Services developed exclusively by the IAASB. Three translations of the Compilation Guide are in progress.
Practitioners can use the Compilation Guide as an introduction to compilation engagements or to deepen their prior understanding and knowledge of a compilation engagement conducted in compliance with ISRS 4410 (Revised). The Compilation Guide includes clear explanations and illustrative examples, covering four elements – accepting, planning, performing and reporting. It has direct extracts from the standard and consider points, including efficiency suggestions. It contains checklists, correspondence samples and reports that practitioners can adapt to meet the requirements and circumstances in their particular jurisdiction.
Many small- and medium-sized entities around the world are not required, or do not elect, to have an audit. They may, however, wish to enhance the credibility of, and confidence in, their unaudited financial statements among their users by soliciting some degree of independent assurance. A review engagement, which offers limited assurance, may be the ideal solution. The nature of the procedures in a review may be less time consuming than those in an audit and a review engagement is normally a lower cost for an entity than an audit (see previous article Why Review Engagements Might Be a Perfect Fit for Your Small Business Clients).
The Guide to Review Engagements (Review Guide) was published in 2013 and provides non-authoritative guidance on applying ISRE 2400 (Revised), Engagements to Review Historical Financial Statements. The standard addresses the practitioner’s responsibilities when engaged to perform a review of historical financial statements and the form and content of the practitioner’s report on the financial statements. The Review Guide includes clear explanations and illustrative examples. To help practitioners develop a deeper understanding of the standard, the Review Guide (with 8 translations completed or in progress) includes the following features:
- Relevant extracts from the standard;
- Practical points for practitioners’ consideration;
- Tips on how to efficiently implement the standard; and
- Checklists and forms that can be adapted to meet the particular requirements/circumstances of individual review engagements and jurisdictions.
Agreed-Upon Procedures Engagements
Agreed-Upon Procedures (AUP) engagements offer a great opportunity for SMPs to grow and provide a valued service to their clients (e.g. see previous article Growing Your Practice: Agreed-Upon Procedures Engagements). A wide range of stakeholders use reports of factual findings for a variety of reasons and the demand for AUP engagements continues to grow.
For many entities, the demand for AUP engagements may be driven in part by the growth in regulation and the need for increased accountability around funding and grants. For example, funding bodies may ask for a report of factual findings to support or complement information such as audited financial statements or grant applications. For smaller entities, the increase in audit exemption thresholds in some jurisdictions may affect demand, prompting stakeholders to look for alternatives to audits.
The international standard that addresses AUP engagements is International Standard on Related Services 4400, Engagements to Perform Agreed-Upon Procedures Regarding Financial Information (ISRS 4400). In 2017, IFAC produced Agreed-Upon Procedures (AUP) engagements – A Growth and Value Opportunity which outlines what an AUP engagement is, identifies the benefits to clients of offering such services and when it is appropriate for use. It covers examples of financial and non-financial information AUP engagements, six short case studies with example procedures that might be applied, and the illustration of an AUP report from ISRS 4400.
The IAASB currently have a project to revise and update ISRS 4400.
Choosing the Right Service
As outlined above, there are many financial reporting services that may be provided that can be uniquely tailored to small- and medium-sized entities (SMEs). In 2016, IFAC produced a brochure Choosing the Right Service: Comparing Audit, Review, Compilation and Agreed-Upon Procedures Services. The brochure is intended to be co-branded with Member Organizations and targeted at SMEs. It provides a basis for practitioners to facilitate conversation with clients around what service is appropriate for them.
Factors to consider include the businesses specific needs, applicable laws or regulations, size, structure and complexity of the entity, financing requirements and future business plans. Consideration with the users of the financial statements may also be helpful.
The brochure outlines what each service financial reporting service is – Audit, Review, Compilation and AUP in accordance with relevant international standards, including the level of assurance, work effort and report that will be issued. It highlights the benefits of each and when the service may be appropriate for use.
IFAC has also recently launched an updated Guide to Practice Management for Small- and Medium-Sized Practices, providing comprehensive guidance to help SMPs operate more efficiently in the increasingly complex and competitive global marketplace for professional services. The revised Practice Management Guide addresses a comprehensive range of topics including:
- Strategic planning;
- Managing staff;
- Client relationship management;
- Risk management;
- Leveraging technology; and
- Succession planning.
The IFAC SMP Committee will continue to develop and share practical guidance with a focus on implementation of international standards and key aspects of practice management, such as technology developments, talent management and building advisory services. Be sure to check the IFAC Gateway often, or sign up for The Latest – the bi-weekly newsletter with all the new articles, videos and resources.
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