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Thinking small firstTowards better auditing standards for the audits of less-complex entities The Association of Chartered Certified Accountants November 2018About ACCA ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants, offering business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. ACCA supports its 208,000 members and 503,000 students in 179 countries, helping them to develop successful careers in accounting and business, with the skills required by employers. ACCA works through a network of 104 offices and centres and more than 7,300 Approved Employers worldwide, who provide high standards of employee learning and development. Through its public interest remit, ACCA promotes appropriate regulation of accounting and conducts relevant research to ensure accountancy continues to grow in reputation and influence. ACCA is currently introducing major innovations to its flagship qualification to ensure its members and future members continue to be the most valued, up to date and sought-after accountancy professionals globally. Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity and accountability. More information is here: accaglobalThinking small firstTowards better auditing standards for the audits of less-complex entitiesAbout this reportThis report responds to concerns that International Standards on Auditing (ISAs) can be burdensome when applied to the audits of some smaller and less complex entities. The report proposes that ISAs could be drafted using simpler language and a simpler structure that starts with the most basic requirements and builds up. The report identifies that this approach would benefit regulators and the general public as well as auditors.ContentsExecutive summary 5History of the problem 6Why is finding a solution so difficult? 7Simplifying the language of auditing standards is a better approach 8The benefits of simpler auditing standards 9Challenges in implementing this approach 10Conclusion 11For some time, it has been recognised that there are challenges in applying auditing standards to the audits of smaller and non-complex entities. In response, there is growing pressure to address these challenges. The solutions proposed so far include exempting smaller companies from audit or creating a separate set of auditing standards for those audits.This report suggests an alternative way of addressing these challenges. Instead of exemption or separate auditing standards, this report proposes that auditing standards should be written using simpler language and a simpler structure for all audits. To make this proposal more manageable, it could be applied prospectively rather than retrospectively.Executive summary5Simpler language and a simpler structure would benefit all auditors, as they would be able to understand auditing standards more easily, and could identify more quickly the requirements that apply to their specific situation. There would also be benefits for audit regulators and for the public understanding of audit.There is a growing perception and concern that auditing standards are designed primarily for the audits of public-interest entities. 6Some practitioners are worried that auditing standards can be difficult to apply when auditing certain smaller or less-complex companies and that the standards require procedures that, in these practitioners professional judgement, are unnecessary. And practitioners worry that in these circumstances regulators will expect the requirements of auditing standards to be followed regardless of their appropriateness.CREATING SOMETHING SPECIAL FOR SMALLER ENTITIESWhile the benefits of audit are obvious for the largest companies, policymakers have debated how to respond to the cost-benefit question for smaller companies. Many countries have experimented with audit exemption for smaller companies while others have experimented with different types of assurance engagement for certain types of entity, such as the review engagement in the US. Some countries, for example France, have even developed their own standards for simpler entities. And in 2015, the Nordic Federation issued a consultation on its proposal for an auditing standard for smaller entities1.These pressures are continuing to grow and it is time to address them.THE CLARITY PROJECTIn 2004, the International Auditing and Assurance Standards Board (IAASB) commenced the significant project of revising and reformatting all its auditing standards to simplify their wording and structure. Responding to concerns that standards were too complex, the IAASB reworked every standard to separate its requirements from the application material that helps explain how to implement it properly. Every requirement has been expressed using the verb shall so users have certainty over what each standard requires. Similarly, the application material content has been reviewed to ensure that it only explains the requirements of the standard concerned and does not create new ones.This process, known colloquially as the Clarity Project2, took up a lot of staff and volunteer time and resources. It has produced standards that are easier to read and make it easier for users to identify the requirements. This can also reduce disagreements between audit regulators and auditors as to what a financial statement audit requires.ACCOUNTANCY EUROPES COGITO PUBLICATION ON SME AUDITIn 2018, Accountancy Europe published a report, as part of its Cogito series, entitled Simplifying Auditing Standards for Small or Non-complex Entities: Exploring Possible Solutions3. This looks at some of the difficulties of applying the International Standards on Auditing (ISAs) that users have reported. It also considers the practicality of developing a standalone standard that is specifically tailored to the needs of small or less-complex entities.THE IAASB IS THINKING AGAIN ABOUT THE NEEDS OF SME AUDITORSThe IAASB has a project team that has been collecting views from practitioners in order to understand the areas that concern auditors of small and medium-sized entities (SMEs). This feedback will be used to guide the IAASBs possible future responses.An initial discussion was held in a private session in March 2018, at which the IAASB agreed to formalise the project. An update was provided to the Board in September 2018.History of the problem1 revisorforeningen.no/fag/nyheter/Nordic_standard2 iaasb/clarity-center3 accountancyeurope.eu/publications/simplifying-auditing-standards-small-non-complex-entities/7Concerns about the appropriateness of ISAs for SME audits have existed for some time, and there are a number of proposals for addressing those concerns. Nonetheless, each of these proposals suffers from one or more limitations. As a result, there has yet to be significant progress on this issue.MAINTAINING A UNITARY APPROACH TO AUDITHistorically, standard-setters have attempted to maintain a unitary approach to audit. This concept has sometimes been summarised by the phrase an audit is an audit. Standards have attempted to protect audit as a single product that can be applied in a scalable and proportionate manner to all types of entity, recognising that a larger and more complex entity will result in a larger and more difficult audit.An advantage of viewing audit as a single offering that can be applied to any size of entity is that the size of the audited entity is not a factor in determining audit quality. And one firms opinion and another firms opinion can be considered to be equivalent because both are an audit and both firms followed the same standards.On the other hand, some proposed solutions do not maintain a unitary approach to audit. For example, it is difficult to maintain the view that an audit is an audit where there are multiple, incompatible standards. In the hypothetical situation where one firm has followed ISAs to arrive at an (audit) opinion for an entity and another firm has followed a very different set of standards for the same entity, it is hard to argue that these opinions are equivalent. We define the former as an audit, so can the latter also be called an audit?SUSTAINING PUBLIC CONFIDENCE IN THE RIGOUR OF AUDITAn important factor in audit quality is that the public need to have confidence that standards are being maintained. The main approach involves establishing an inspection regime for audits that reviews the audit files of some completed audits, and talking to key staff involved in the engagement to understand whether auditing standards were followed. To the extent that auditing standards have not been followed, the inspection regime will expect the firm to make improvements to its processes so that the deficiency is not repeated.Why is finding a solution so difficult?This process requires a certain specificity of the basic requirements of auditing standards. Where standards for some audits for example, the audits of less-complex entities provide less detail, it may be more difficult for the inspection regime to identify deficiencies and seek improvements. ACCAs position is that it is preferable to maintain a unitary approach to audit and to ensure that public confidence in the rigour of audit is sustained.ACCA believes a better solution is for the IAASB to establish a process for writing new standards in a simpler language and with a new structure that accommodates the needs of auditors of smaller and less-complex entities.8In addition to this, over the medium term, the IAASB should commit to rewriting all existing standards in this format.WHAT ARE THE ADVANTAGES OF THIS APPROACH?A common complaint about auditing standards is that they tend to scale down rather than scale up. In other words, the standards reflect the expectation that the user is an auditor of a larger entity and that SME auditors will merely do less. A better approach would be to explain what every auditor must do and then elaborate the requirements as the size and complexity of the audited entity increases. It is important that standards have a simple basis from which they can build up, rather than starting with complex issues and expecting auditors of smaller entities to work out what to remove.Writing the standards in a scalable way would be proof that the IAASBs standards are scalable. It is also efficient for the IAASB themselves to demonstrate the scalability of their standards, rather than putting the onus on firms.HOW MIGHT THIS APPROACH BE IMPLEMENTED?The IAASB has good programmes for supporting high-quality implementation of its newly issued standards, including formal post-implementation reviews for its most important projects. These also consider of how best to support users of new standards, with resources including additional materials, scalability explanations, frequently asked questions and Staff Practice Alerts.ACCA proposes that some of this support process can be folded into the standard-setting process itself. For example, some of the thinking about workflow and scalability could be brought forward and communicated within standards.In addition, more of the actual drafting of each standard could be undertaken by specialist drafting teams, with less done in full board meetings. This would be in line with the proposal, as set out in the Monitoring Groups consultation on the future of audit-related standard setting4, for a more strategic board.Simplifying the language of auditing standards is a better approachLESSONS FROM ISA 315The Key Concepts section of the proposed ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement5, is written in simpler English which is much more accessible to users than the rest of the proposed standard. This allows users to understand the overall flow of the rest of the standard more quickly. ACCA believes that, with the right support, the IAASB could move towards drafting all its standards in similar language.4 iosco/library/pubdocs/pdf/IOSCOPD586.pdf5 ifac/publications-resources/exposure-draft-isa-315-revised-identifying-and-assessing-risks-materialWriting auditing standards using simpler language and a simpler structure would benefit auditors of less-complex entities directly, as they could more readily understand the intention of standards. In addition, it would make it easier for the auditor of a less-complex entity to find the specific requirements that apply to their situation, instead of having to distil complicated standards into more basic procedures.In addition to the direct benefits for auditors of less-complex entities, there would also be benefits for other stakeholders in auditing standards.SIMPLER AUDITING STANDARDS BENEFIT ALL AUDITORSSimpler language and a simpler structure would also benefit the auditors of larger or more complex entities. It would achieve this by separating the overall flow of the standard from its more detailed requirements and by structuring the requirements in a way that allows users to identify more easily those applicable to their specific situation.The benefits of simpler auditing standards9SIMPLER AUDITING STANDARDS WOULD BENEFIT AUDIT REGULATORS AND OTHER STAKEHOLDERSSimpler auditing standards would also benefit audit regulators and other stakeholders with an interest in auditing. This is because simpler standards would make it easier to understand a standards expectations of an auditor and to find the requirements of that standard applicable to a specific situation.Given that some of the concerns of auditors of less-complex entities relate to differences of opinion between the auditor and audit regulator, it would be helpful to reduce opportunities for misinterpretation or disagreement over what auditing standards intend.SIMPLER AUDITING STANDARDS BENEFIT THE PUBLICPublicly, there is a lot of suspicion about whether auditors are fulfilling their responsibilities under auditing standards. The structure and complex language of the standards can make them difficult for lay users to understand. Research by ACCA6shows that only one quarter of respondents to a survey of members of the public were able to accurately identify what an auditor does. Writing auditing standards that have simpler language and a simpler structure should allow a wider range of users to understand them, helping to inform public understanding of audit.6 accaglobal/gb/en/news/2018/november/audit-expectation-gap.html10REWRITING ALL THE AUDITING STANDARDS WILL TAKE A LONG TIMERevising auditing standards is a time-consuming process. The IAASB faces significant time and resource constraints in its standard-setting and remains under pressure to respond to public interest concerns. The IAASBs previous pro
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