Track B: Future IAASB Projects for SMPs

Phil Cowperthwaite, IAASB Member

IFAC SMP Forum 2011

Istanbul, Turkey

21 March 2011

To obtain participants’ views about:

•Current IAASB Standards and tools to assist SMPs

in implementing the standards in the SME

environment

•Current IAASB activities, including standards

under development

•Future IAASB direction, in the context of the

proposed IAASB Strategy and Work Program for

2012–2014

Session Objectives

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• Standard-setting relevant to SMEs

– Reviews and Compilations in progress

– No new or revised ISAs to be effective until 2013 or later

• Other projects of particular relevance to SMEs

– Tools to support implementation of the clarified ISAs

– ISA implementation monitoring project

– Audit quality (effectiveness and efficiency)

– Auditor reporting

Current IAASB Activities Relevant to SMPs

Session Objectives

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• Effective implementation is key to realizing full

benefits of Clarified ISAs

• Some view this as a particular challenge to audits of

SMEs:

– Applicability of ISAs to smaller audits

– Audit documentation burden

– Inspection requirements

• Ensuring the applicability of the ISAs to SME

audits is a core objective of the IAASB

Applying the ISAs in SME Audits

Clarified ISAs and SMEs

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Clarified ISAs and SMEs

• ISAs recognize there are differences between audits of SMEs

and those of large entities

– Audit approach varies with circumstances (e.g., simpler vs.

more complex types of entity)

• Requirements do not usually specify audit procedures

– Professional judgment is needed to determine procedures

• Application of ISAs, including documentation requirements,

designed to be proportionate in view of size, nature and

complexity of audited entities

– Proportionality ≠ modification of requirements

• ISA Staff Q&A issued August 2009

Proportional Application of the ISAs

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• ISA Modules – 12 in total

– Videos and slide decks to highlight key areas of revision within

the ISAs

– “The Clarified ISAs, Audit Documentation, and SME Audit

Considerations” particularly relevant

• IAASB Clarity Center (www.iaasb.org/clarity-center)

• ISA Implementation Monitoring

• IFAC SMP Committee – Guides on ISAs and Quality

Control

• Links to URLs provided for reference at the end of this

presentation

Implementation Support Activities and Messages

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Clarified ISAs and SMEs

• Phase 1 report issued November 2010 acknowledges need for

SMP input

• Runs from October 2010 to December 2012 with the

assistance of National Auditing Standard Setters (NSS) in each

country:

– 14 countries invited to participate with a wide variety of regions,

languages, stage of development represented

– Six firms per country selected by NSS

– SMP Committee input to survey tool

• Report Q4 2012

SMP Survey about ISA Implementation

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Clarified ISAs and SMEs

• How many of the participants have started to implement the

clarified ISAs in your 2010 audits?

• If you have not, what does your implementation timeframe

look like?

• Have you referred to any of the IAASB and IFAC

implementation material?

• If so, what did you find useful and what did you find was not

useful?

Questions

8

Clarified ISAs and SMEs

• A complex, multi-

faceted topic

• ISAs not the only

influence on AQ

• IAASB thought

piece issued Jan

2011 to stimulate

thoughts and

discussions on AQ

• IAASB

consideration of

project on AQ

Audit Quality

QC and Audit Effectiveness and Efficiency

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• ISQC 1 and ISA 220 establish framework for QC at the

firm and engagement levels

• Together, they address many of inputs to AQ

– People: education, ethics, and mindsets

– Audit evidence and auditor judgment

– Client acceptance and continuance

– Monitoring

• IFAC SMP Committee’s Guide to Quality Control

– 2nd Edition issued 2010

– To facilitate effective implementation of ISQC 1

Quality Control

QC and Audit Effectiveness and Efficiency

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• Do you see implementation of clarified ISAs/ISQC 1 in

your firms affecting audit effectiveness or efficiency?

– If so, what improvements in audit effectiveness or efficiency

have you noted?

– In what areas?

• What challenges have you encountered in implementing

the clarified ISAs and ISQC 1?

– Are there areas in the standards that have caused particular

implementation difficulties?

• What specific actions have you taken to try to address

these challenges?

Questions

QC and Audit Effectiveness and Efficiency

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• Demand for a range of services capable of meeting the

unique needs of SMEs and users of their financial

information

– Changes in mandatory financial reporting and auditing requirements

affecting SMEs (incl. rising audit- exemption thresholds)

– Need for alternative services focused on user needs

• IAASB project commenced in 2009, to develop appropriate

responses in both assurance and related services

• During 2009-2011, development of revised standards for

reviews (assurance) and compilations (related services)

• Next stage may be to focus on standards for agreed-upon

procedures

Responding to Diverse Needs of SMEs

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IAASB Projects for SMPs

• Exposure drafts (EDs) issued in 2010:

– Proposed International Standard on Related Services 4410 (Revised),

Compilation Engagements (comments by Mar 31)

– Proposed International Standard on Review Engagements 2400

(Revised), Engagements to Review Historical Financial Statements(comments by May 20)

• These EDs will hopefully lead to revised IAASB standards

that enable practitioners to assist SMEs through providing

assurance services (either audit or review), or when

assurance is not needed, services relevant to the preparation

of financial information for external use

Reviews and Compilations

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IAASB Projects for SMPs

• Practitioner applies accounting and financial reporting

expertise to assist management of an entity in preparing and

presenting financial information in accordance with an

applicable financial reporting framework

• Main features:

– Applicable financial reporting framework

– Depth of knowledge required of practitioner

– Communicating about the engagement performed & reporting

– No assurance given (users’ confidence in compiled financial

information is enhanced through practitioner’s involvement)

Compilation Engagements

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IAASB Projects for SMPs

• Are compilations frequently performed in your jurisdiction?

If not, why not?

• If so, do you consider:

1. The proposed ISRS contains helpful clarifications about

compiling financial statements? If not, what further

guidance or clarification would be helpful?

2. The proposed changes are helpful for practitioners

performing compilations? If not, what requirements

might need to be rethought and why?

Questions

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IAASB Projects for SMPs

• Practitioner’s objective is to:

“(a) conclude, through performing primarily inquiry and analytical procedures,

and evaluating the sufficiency and appropriateness of evidence obtained,

whether anything has come to the practitioner’s attention that causes the

practitioner to believe the financial statements are not prepared, in all

material respects, in accordance with an applicable financial reporting

framework and (b) report on the financial statements as a whole, and

communicate in accordance with this [i.e. proposed] ISRE.”

• Main features:

– Limited assurance

– Depth of knowledge required of practitioner

– Communicating about the engagement performed & reporting

– Distinct assurance engagement (different from an audit)

Review Engagements

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IAASB Projects for SMPs

• Are reviews of financial statements frequently performed in

your jurisdiction? If not, is there a specific reason?

• If yes, what factors typically drive performance of reviews?

Do users understand reviews?

• Do you consider:

1. The proposed ISRE contains helpful clarifications about

reviewing financial statements? If not, what further

guidance or clarifications would be helpful?

2. The proposed changes are helpful for practitioners

performing reviews? If not, what requirements might

need to be rethought and why?

Questions

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IAASB Projects for SMPs

• IAASB proposing to retain its current areas of strategic

focus

– Development (and revision) of standards, including ISAs

and other assurance standards

– Monitoring and facilitating adoption of those standards

– Responding to concerns about the implementation of

standards by activities designed to improve the

consistency with which they are applied in practice

• Key question will be how should the Board

prioritize its agenda in achieving these objectives?

IAASB Strategy and Work Program for 2012 – 2014

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Next Steps for SMEs and SMPs

• In relation to the ISAs:

– Communicating on the benefits of adopting the clarified

ISAs

– Sharing success stories of SMPs

– Consideration of further actions to assist in the

implementation of ISQC 1

– Working with others to respond to implementation

challenges

• In relation to other assurance and related services:

– Revision of the standard on agreed-upon procedures

– Future – hybrid engagements? Other alternatives to audit?

Possible Actions Identified in the Consultation

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Next Steps for SMEs and SMPs

• Do SMPs need additional resources to help them in

interpreting and applying the ISAs on an appropriate and

proportional basis?

– If so, in what form do you think this support could best be

provided?

– What type of additional guidance are SMPs looking for?

– Is the demand generic or country-specific?

• For example:

– Are SMPs appropriately applying the risk assessment

standards?

– Staff publication on recent major revisions to ISAs

planned for 2011

Questions

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Next Steps for SMEs and SMPs

• What single thing could the IAASB, as a

standard-setter, do to assist SMPs?

• To answer this:

– Your feedback during this forum is much

appreciated

– IAASB is looking for SMP input on its

strategy consultation

– Findings from the SMP survey on the ISA

Implementation Monitoring project will be

relevant

Questions

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Next Steps for SMEs and SMPs

• SMP Committee monitors IAASB projects and

provides feedback

• SMPs encouraged to respond to strategy and other

consultations

– Short and focused responses are welcome

• Track projects at www.iaasb.org/projects.php

• Subscribe to IAASB and IFAC SMP eNews [insert

website]

Further Involvement by SMPs in the IAASB’s

Work Is Needed

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Next Steps for SMEs and SMPs

• IAASB Clarity Center – ISA Modules, November 2010 ISA

Implementation Monitoring report

• Publications and Resources site – web.ifac.org/publications

IAASB: Handbook of IAASB pronouncements, Staff

publications; IFAC SMP Committee: ISA and QC Guides

• IAASB Exposure Drafts and Consultation Papers –

www.iaasb.org/exposuredrafts.php

• Meeting Diverse Needs – Publication explaining audits and

reviews, compilations –

web.ifac.org/download/IAASB_SME_Services_Brochure.p

df

For More Information, Visit

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Reference Materials