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Page 3 | Confidential and Proprietary Information Self-review threat when auditor provides these services Management responsible for financial statements Dialogue between auditor & management appropriate –Application of accounting standards, methods used, journal entries, etc –Account reconciliation problems, technical advice on accounting, etc Audit clients that are not PIEs – routine or mechanical, e.g. –Recording transactions when client has determined or approved account –Posting client-approved entries to trial balance –Preparing financial statements based on information in the trial balance Does client involvement make services mechanical? –Is complex transaction mechanical if client approves account classification Preparing accounting records & financial statements SME / SMP ISSUES
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Page 1 | Confidential and Proprietary Information
SME / SMP ISSUES
Presented by Don Thomson
IESBA Board MeetingDublin, IrelandFebruary 2012
Page 2 | Confidential and Proprietary Information
• Public interest in addressing SME issues• Input on SME & SMP issues from around the world
– Working group, SMP Committee, SMP Forum, standard-setters, others• Preparation of accounting records & financial statements
for audit & review clients that are SMEs– Common practice in many jurisdictions– Widespread confusion about the Code's guidance– Many do not clearly understand whether their services are compliant
• Issue is relevant to more than just SMEs & SMPs– Primarily audit & review clients that are not PIEs (290.171)
BackgroundSME / SMP ISSUES
Page 3 | Confidential and Proprietary Information
• Self-review threat when auditor provides these services• Management responsible for financial statements• Dialogue between auditor & management appropriate
– Application of accounting standards, methods used, journal entries, etc– Account reconciliation problems, technical advice on accounting, etc
• Audit clients that are not PIEs – routine or mechanical, e.g.– Recording transactions when client has determined or approved account– Posting client-approved entries to trial balance– Preparing financial statements based on information in the trial balance
• Does client involvement make services mechanical?– Is complex transaction mechanical if client approves account classification
Preparing accounting records & financial statementsSME / SMP ISSUES
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• Be satisfied that management is responsible– Making the significant judgments & decisions that are their responsibility– Evaluating the results of the service– Accepting responsibility for the actions to be taken arising from the results
• Risk is further reduced when the auditor gives the client the opportunity to make judgments & decisions based on an objective & transparent analysis & presentation of the issues– In a separate sub-section from accounting service guidance– Not readily apparent to many seeking accounting service guidance– Importance not clearly understood
Avoid risk of assuming management responsibilitySME / SMP ISSUES
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• Approve project in principle & subject to a formal proposal to clarify– The guidance in the Code dealing with the preparation of accounting
records & financial statements– The importance of giving an audit or review client the opportunity to make
judgments & decisions based on an objective & transparent analysis & presentation of the issues
• Public interest– Understanding, consistent interpretation & compliance with the Code– Clarity of the Code, rather than interpretive guidance outside the Code– A robust Code, rigorously applied
• Clarification may facilitate Code's acceptance & adoption
Proposed actionSME / SMP ISSUES
