This presentation from Dawn McGeachy, Member, IFAC SMP Committee, includes: an overview of recent international and national audit quality developments and a practical review of the relevant Intenational Standards on Auditing (ISAs) and International Standard on Quality Control (ISQC) 1.  

This presentation from Dawn McGeachy, Member, IFAC SMP Committee, includes: an overview of the IFAC SMP Committee and recent activities including the results of the 2013 year-end IFAC SMP Quick Poll, and the implications of the growing demand for business advisory services from SMPs' small business clients.   

IAASB Chairman Prof. Arnold Schilder addressed the Pre-General Assembly Conference of the Pan African Federation of Accountants (PAFA) in Douala, Cameroon, on May 8, 2014.

In his speech to conference delegates, Prof. Schilder announced that the number of jurisdictions using the clarified ISAs, or committed to using them in the near future, had surpassed one hundred with the addition of a number of jurisdictions from Africa.

Prof. Schilder highlighted the important societal role audit and assurance plays in the global economy, how the audit environment is changing, and the key role auditors play in contributing to high-quality reporting and setting a basis for trust. He also covered some of the IAASB’s responses, including its work on the topic of audit quality and enhancing auditor reporting, to today’s challenges, and recent standards of particular relevance to engagements for small- and medium-entities.

Part I by Paul Thompson, Deputy Director, SME & SMP Affairs, explores the challenges currently faced by SMPs, provides regulators' observations, and offers tips for audit efficiency.

Part II  with IFAC SMP Committee Member Christina Foo covers global insights, general implications for SMPs, new service offerings, and practice management. 

Thank you for the opportunity to speak with you today about the International Auditing and Assurance Standards Board’s work on auditor reporting. As an independent global standard setter, an important aim of our work is to facilitate adoption and convergence of national and international auditing standards. So I commend the PCAOB for arranging this global panel, and note that collaboration with the PCAOB has been a critical part of our work to date.

Why is the IAASB seeking to change the auditor’s report? The topic has been on our radar screen for some time. We first commissioned academic research jointly with the Auditing Standards Board of the AICPA. Ted Mock, a panelist this afternoon, and others provided us with global input about users’ perceptions of the auditor’s report. The financial crisis has heightened the demand for more communication from auditors, and has highlighted overarching concerns about the value of an audit and the relevance of the accounting profession.

This sparked the IAASB’s work to consider how best to respond to the needs of users, and auditor reporting has been our top priority for the past two years. We issued two public consultations on the topic and note the continued support for moving forward to enhance the communicative value of the auditor’s report.

Our most recent consultation in July 2013 focused on auditor reporting on key audit matters, other information, and going concern. It also included other initiatives to increase transparency about the audit and the auditor’s responsibilities. Overall, there is strong global support for the IAASB finalizing its proposals in 2014.

The topic of what we refer to as key audit matters or KAM, similar to the PCAOB’s critical audit matters, is viewed by many as the most significant enhancement to auditor reporting. We proposed to require auditors of listed entities to communicate KAM in the auditor’s report.

We define KAM as those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. KAM are selected from matters communicated with those charged with governance – thereby providing transparency about communications investors have said are important to audit quality. 

Investors, regulators and auditors largely support what we have proposed but have asked for more guidance on how auditors should apply the decision framework. They have also urged us to take steps to ensure that both the matters identified, and how they are described in the auditor’s report, results in meaningful communication to investors. Robust application guidance in our standard, as well as revised examples of KAM, will give an indication of how the IAASB expects the concept of key audit matters to be applied in practice.

Preparers and others who do not support the concept of KAM often cite concerns with the auditor providing “original information” – that is, information that is not otherwise required to be disclosed in the financial statements. And auditors have asked for more guidance on how to deal with circumstances that might result in the auditor communicating about sensitive matters. The Board is exploring how to find an appropriate balance between auditors providing useful information about the most significant matters in the audit that was performed, while at the same time respecting the important concepts of client confidentiality, as addressed in the auditor’s relevant ethical code or requirements, and law and regulation.

We are pleased with the support we have heard from global groups like the International Corporate Governance Network, IOSCO, IFIAR, the Basel Committee, and the World Bank for our concept of KAM. Including KAM in the auditor’s report will be a significant change in practice. So the IAASB will do all it can to support effective implementation to achieve its intended aims. 

Similar to the PCAOB, we have also substantively revised our standard addressing the auditor’s responsibilities for “other information”. Investors and others have emphasized the importance of information included in MD&A and other areas of a company’s annual report. While this information is not audited, the auditor’s attention to it helps to increase users’ confidence in such information. Our proposals included required auditor reporting on other information, including identification of which information has been read by the auditor. We will re-expose this proposal in mid-April for a 90-day comment period.

Our project also addresses the topic of auditor reporting on going concern. Feedback to our proposals has highlighted the need for a holistic approach – that is, that changes in auditing standards need to be considered in tandem with changes or clarifications to accounting standards. We know the PCAOB’s separate project in this area is closely tied to the work of the Financial Accounting Standards Board (FASB).  We have had similar liaison with the International Accounting Standards Board (IASB) to understand how they may address this topic, and are following their developments with interest as we seek to finalize our proposals.

In relation to other improvements, the Board supports requiring disclosure of the name of the engagement partner in the auditor’s report for listed entity audits. We note the PCAOB has a similar proposal in process and we look forward to hearing about the Board’s plans for a way forward.

We are also taking into account relevant developments in Europe, as consensus was recently achieved about similar proposals aimed at audit reform. As you will hear from Nick Land, the UK FRC has already finalized its improvements to auditor reporting, which recognize the important interactions between auditors and audit committees in audit quality. These new reports are now coming into the market, proving it can be done and does result in helpful information for investors and others.  

Stakeholders, including bodies such as the CFA Institute and the Center for Audit Quality, have encouraged us to take every opportunity to seek to minimize differences among the various approaches to auditor reporting. We take that seriously – recognizing that we all have a duty in the public interest to respond to what we have heard through our multiple consultation processes.

In conclusion, through its work on auditor reporting, the IAASB believes it has a unique opportunity to increase the relevance of the audit and trust in the profession. Not only will the auditor’s report become more informative, but we expect that this increased reporting could change the behaviors of not only auditors, but also management and those charged with governance. A renewed focus by the auditor on matters to be addressed in the auditor’s report, together with increased attention by management and those charged with governance on financial statement disclosures, stands to benefit investors and have a corresponding effect on audit quality and the credibility of the financial statements.    

Keeping up with standards and regulation is the biggest challenge facing SMPs. Mats Olsson, Member, IFAC Small and Medium Practices Committee, presents this and additional insights from the IFAC SMP Quick Poll, in addition to tips for audit efficiency, at the KibR Seminar in Warsaw on November 7, 2013.

Presentation given by Mario Abela, senior policy advisor at IFAC, at the Gulf Cooperation Council Accounting and Auditing Organization forum on the history and status of integrated reporting, and what comes next.

Andreas Noodt, member, IFAC Small and Medium Practices Committee, speaks at FEE & ICAEW Event about the SMP Commitee's Guide to Review Engagements. The Guide, published in December 2013, aims to provide implementation support for practitioners in conducting review engagements in compliance with International Standard on Review Engagements (ISRE) 2400 (Revised). 

Good afternoon ladies and gentlemen. It is my pleasure to be here, certainly because of the opportunity to hear perspectives on the important and relevant topics on today’s agenda. However, it is also because this is my first visit to Baruch College—I must say how impressed I am by the cultural diversity of the college’s faculty and student base, and the broad range of countries they represent. Even more impressive, if I may say, is the college’s namesake, Mr. Bernard Baruch himself. At the end of his productive, 95 year life, he is quoted as saying, “I have had a long life, a good one and a full one. But above all I have had the opportunity to serve my country. This has meant most to me.” I am privileged to have such a fitting backdrop for my update on the activities of the IAASB.

The Changing Audit Environment

The speakers before me today already have rightly noted that there is a lot happening in today’s audit environment. Indeed, the environment is changing. The nature of financial reporting continues to evolve: now more complex, more areas of judgment, and more qualitative disclosures. There is changing demand from users, which can be summarized as “we want to hear more”—a call directed not only to preparers of financial statements but also to auditors and others involved in the financial reporting supply chain. Then, as a result of the global financial crisis, some key questions were raised: about the quality of auditing, its effectiveness, and the role of professional skepticism and judgment; and perhaps more fundamental, about the relevance of the audit. For example, if auditors did all that they were supposed to do, yet still did not warn of the risks leading to the financial crisis, what then is the relevance of the audit? I do not see this as a criticism per se. Rather, it is an important inquiry as to whether audit could deliver more – an essential question that must be considered in the wider context of trust in the profession.

As a result, there are many important debates on auditing now happening in Europe, North America, and elsewhere. These debates acknowledge—indeed, emphasize—the importance of ongoing and structured dialogue among, and between, many stakeholders. Audit regulators, for example, are further increasing their dialogue at an international level, and I am pleased to note the leadership of Lew Ferguson, Chairman of the International Forum of Independent Audit Regulators (IFIAR), and Deputy Chair Janine van Diggelen in this regard. These developments underscore the essential importance of interactions among participants as the basis for further improving audit quality.

Interactions

Let me to pause a moment to explore a little further the idea of interactions. This concept has received attention over many decades.

In the early 1930s we learned from the Dutchman Prof. Theodore Limperg, who referred to the relevance of interactions between stakeholders and to the accountancy profession serving a fundamental public interest need. I quote: “The place that accountants occupy in the community, and the confidence inspired by them, are the result of the interaction of the needs of the community and of the manner in which accountants meet those needs.”

Fifty years later this theme was picked up by a Scotsman, Prof. David Flint, who said: “Audit’s foundation in social need is a crucially important characteristic. In a changing and developing society the interpretation of the practical implementations of the audit concept must be the result of a constant interaction between the relevant groups and the auditors.”

In between, there was a monograph in the United States by Mautz and Sharaf, who also described these concepts and further emphasized the importance of interactions.

Throughout history, therefore, it is clear that there has been a strong call for professional accountants to act in the public interest and to take into account the expectations society places on them, and to understand these expectations and respond to them through meaningful interactions. Interactions, therefore, in my view, is more than a concept – rather, an essential and fundamental principal underpinning what we do.

With this backdrop, allow me to highlight some of the IAASB’s key responses to current developments.

Enhancing the Value of Audit

Audit Quality

At its meeting next week, the IAASB intends to finalize a new publication entitled A Framework for Audit Quality: Key Elements that Create an Environment for Audit Quality. Our simple but essential goals for this Framework are to: raise awareness of the key elements of audit quality; encourage key stakeholders to reflect on ways to improve audit quality; and facilitate greater dialogue between key stakeholders on the topic. The Framework is qualitative in nature, describing not only the different elements that create the environment for audit quality at the engagement, firm, and national levels, but also, importantly, their interrelationships. It elaborates on input, process, and output factors, as well as interactions in the financial reporting supply chain and contextual factors. The essence of the Framework is depicted below:

In considering audit quality, focus is often placed on input and process factors, such as standards, methodology, education and training, etc. These are certainly essential, but we should not stop there. Consider the importance of output factors: what users of financial statements see and read on which they base their perceptions and conclusions of audit quality. The current developments in auditor reporting, therefore, are very important. Also consider, for example, context factors such as culture, corporate governance, and the regulator regime and litigation environment. They have the potential to impact financial reporting and directly or indirectly audit quality, and auditors need to respond properly to them. Finally, consider all those involved in the financial reporting process—from the auditor, who is ultimately responsible for audit quality, to management, regulators and inspectors, audit committees, and users. Their roles, and the interactions they have, influence the environment in which audits are conducted, and their actions can meaningfully and positively contribute to audit quality.

We are certainly interested in the U.S. Public Company Accounting Oversight Board (PCAOB)’s efforts on the topic of Audit Quality Indicators, and we will continue to monitor developments. We are simply approaching the issue of audit quality from different, but complementary, perspectives. Our next steps will be to continue the dialogue on audit quality and stimulate organizations to use the Framework in exploring how best they might contribute to helping improve audit quality.

New Proposals for Auditor Reporting

Now, let me turn to the topic of the auditor’s report. Informed by international academic research, global outreach to stakeholders, and two consultation papers, the IAASB unanimously approved and released in July this year a comprehensive exposure draft of proposed new and revised International Standards on Auditing (ISAs) addressing reporting on audited financial statements.

I am pleased to note the degree of similarity between our auditor reporting proposals and those of the PCAOB, which were released shortly after the IAASB’s. The ongoing dialogue between the boards’ leadership and senior staff on this topic had, in my view, helped achieve this positive outcome. We have focused similar efforts in relation to developments in Europe, holding constructive meetings with senior representatives of the European Commission, European Parliament, and Council of the European Union. These actions supplement our broader outreach efforts on auditor reporting globally.

There are many important changes proposed to the auditor’s report—for example, clarification of the responsibilities of the auditor, and giving greater prominence to the auditor’s opinion within the report. But let me focus in on one of the more fundamental changes we propose: new ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report. This proposal involves a new section in the auditor’s report to communicate those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period.

Communicating key audit matters is not a tick in the box. It requires professional judgment, and a careful consideration of what is unique about the specific entity and the specific audit undertaken—and therefore the matters of relevance to users of the auditor report and the entity’s financial statements. The required thought process is inherently no different than that the auditor would go through when preparing for discussion with the entity’s audit committee—a focus on what is important and relevant.

The proposed standard directs the auditor to select key audit matters from those matters communicated with the audit committee. Some have expressed concern that this may prompt the auditor to not communicate certain matters to the audit committee if there is pressure from management against bringing further transparency to an issue, and therefore the standard should indicate a broader source from which the auditor would consider the matters to communicate in the auditor’s report. However, I believe we must continue to appeal to the ‘backbone’ of the auditor to not concede to any such pressure and to communicate what is necessary in the circumstances. In any event, irrespective of the starting point, when there is a key audit matter to be communicated the auditor will certainly inform the audit committee.

I am very pleased that many countries and firms already are preparing now in anticipation of the new standards. For example: the UK has introduced similar new standards; last week while I was visiting the professional and regulatory bodies in Vietnam there was much discussion on how best they may prepare; and several firms already are ‘field testing’ the proposals. As the IAASB moves forward, we will study and respond to comments on our exposure draft and maintain an active dialogue with stakeholders. We have heard the call for continued effort towards a global solution, and we will therefore stay in close contact with the PCAOB and others as developments progress.

The IAASB is fully committed to finalizing its new auditor reporting standards in 2014. I anticipate they will result in significant change to the way auditors communicate information about their audits. They will also be critical to improving the perceived value and relevance of the auditor’s report and the profession as a whole. It is therefore essential that the intentions of the auditor reporting proposals be achieved, and their full benefit realized. Our work on this important topic will therefore not end in 2014—we anticipate taking actions in 2015 and beyond to facilitate adoption and implementation of these standards, including a review after a period of implementation.

Further Enhancement of the Clarified ISAs

Today there are 92 jurisdictions already using the Clarified ISAs, or committed to using them in the near future, and we anticipate more in 2014. In light of this increasing global use of the Clarified ISAs, we seek to capitalize on opportunities to learn about the implementation experience, whether the standards are operating with the intended effects, and where further enhancements may be necessary. In this regard, we have continued our active dialogue with international and national regulatory and audit oversight bodies—strengthening our relationships with groups such as IFIAR, the International Organization of Securities Commissions, the World Bank and the Basel Committee on Banking Supervision. These groups, together with input from both larger firms and smaller practices, national standards setters and others, have been instrumental in providing feedback to the IAASB’s post-implementation review of the Clarified ISAs.

In this regard, the overall feedback has been positive: the Clarified ISAs are more understandable and better fit for purpose, and the revisions to their content a positive contribution to audit quality. Nevertheless, there were also some areas where future review may be appropriate: professional skepticism, quality control, and group audits. In addition, the IAASB has been encouraged to consider new developments in the environment of the audit, such as “big data” and data analytics, and emerging IT risks, and how these may affect standards addressing risk assessment and evidence gathering. Responding to this feedback on the other findings from the Clarity ISA post-implementation review will feature prominently in our future Strategy and Work Program.

Looking Ahead

This brings me to my last topic, the IAASB’s forward strategy.

At its meeting next week, the IAASB intends to finalize for public consultation our strategy for 2015-2019 and the related work plan for 2015-2016. The proposal will include action in a number of areas, including responding to the findings from our ISA implementation monitoring review, supporting the implementation of the new auditor reporting standards, and addressing auditing issues related to financial institutions, including fair value estimates and loan impairment.

Audits of financial statements, however, are not the only service provided by professional accountants for which there is a demand for international standards. I am therefore pleased that in September the board completed the revision of its umbrella assurance standard, ISAE 3000. This standard serves as an important platform for a wide range of assurance engagements by both large and smaller practices, and supports continued innovation in services. We also established our Innovation, Needs, and Future Opportunities Working Group to monitor emerging developments in assurance and related services. Our forward strategy, therefore, will also include efforts to monitor the adoption and implementation of IAASB’s other assurance and related services standards, and consideration of new assurance standards, e.g. in relation to Integrated Reporting.

In Conclusion

Our efforts need to continue to be focused and ambitious. All of us, in our individual capacities and collectively, need to seize the global momentum for stronger corporate and auditor reporting. There will be challenges, but they are not insurmountable.

There will continue to be critical comments with regard to the relevance and effectiveness of audit and assurance, in light of the financial crisis and findings from audit inspections across the world. However, underlying these comments are the positive expectations that many have of the contributions that professional accountants can make to this global, dynamic marketplace, and, in turn, to financial stability and trust. That is the public interest that all of us want to serve.

For me, the essence of our role has not been better expressed than through the compelling words of Mahatma Gandhi: “Be the change that you wish to see in the world.”

Thank you for your attention.

IFAC's Professional Accountancy Organization (PAO) Development and Professional Accountants in Business (PAIB) Committees recently held a landmark joint session while in Beijing, China, for their respective meetings. Hosted by the Chinese Institute of CPAs (CICPA), this seminal session provided an opportunity for the two IFAC committees and an important member body to share objectives and priorities. The session highlighted the mutually reinforcing activities of both groups and underscored the importance of continued collaboration between IFAC committees in working toward a mutual vision. The session also included a presentation by the CICPA, which provided an overview of the steady progress of the profession in China in addition to CICPA’s own experiences and future goals, including continued commitment to the work of IFAC.