ICAEW has called for further guidance to help public sector auditors tailor their approach to focus on the issues that matter to public sector bodies and the users of their accounts. 

Responding to a Public Audit Forum (PAF) consultation on revisions to Practice Note 10 Audit of Financial Statements and Regularity of Public Sector Bodies in the United Kingdom, ICAEW stresses the important role of Practice Note 10 (PN 10) in helping public sector auditors tailor their approach to the needs of the accounts users and the risks that public bodies face. 

PN 10 is a statement of recommended practice that provides guidance about the application of International Standards on Auditing (ISAs) to the audits of public sector bodies in England, Scotland, Northern Ireland and Wales, as well as providing guidance on the audit of regularity.

Its aim is to support consistency in the application of auditing standards while also recognising the specific legislative and regulatory frameworks that apply to the audits of public sector bodies. The Public Audit Forum periodically revises PN 10 because of changes to ISAs or other issues relating to public sector audit. The main revisions proposed in this update are: 

• guidance on applying revised quality management standards; 
• the interaction of the revisions to ISA 240 The auditor’s responsibilities relating to fraud in an audit of financial statements with the regularity opinion;

• additional examples of inherent risk factors in the public sector; and
• further guidance on the determination of materiality following concerns about disproportionate expectations about the audit of operational property valuation.

ICAEW’s response supports the use of ISAs in the audit of public sector bodies to hold them to the “highest standards of international scrutiny” to support public sector audit’s vital role in providing confidence to citizens that public money has been spent effectively. 

However, ICAEW believes that PN 10 could do a better job of meeting the specific requirements of the users of public sector accounts without diverging from the ISA requirements. “The users of public sector accounts have different interests to their private sector counterparts because citizens cannot withdraw their taxes in a way that a corporate shareholder can divest its holding in a private company,” said Oliver Simms, ICAEW’s Manager for Public Sector Audit and Assurance.

For example, ICAEW’s response urges the Public Audit Forum to consider expanding the interpretation guidance for ISA 240 to encourage auditors to consider the risk of fraudulent manipulation of the judgemental adjustments between IFRS and the non-GAAP performance measures, such as the calculation of the minimum revenue provision by local authorities. 

Meanwhile, concerns are rife that current expectations relating to the audit of operational property in the public sector are disproportionate to the business risk and ICAEW believes that PN 10 could form part of a ‘whole system response’ to those concerns.

ICAEW welcomes the additional guidance on applying materiality as “helpful” because it explains “how to avoid the materiality level leading to excessive testing of assets and liabilities that have a gross value significantly higher than total expenditure”.

However, this change alone will not have a significant impact on the work effort required, ICAEW warns. It calls on the Public Audit Forum to consider further interpretations, such as introducing a specific interpretation of ISA 620 Using the work of an expert for operational property with no active market. 

The response also welcomes the guidance on the adoption of the new quality management standard, ISQM 1, but encourages the Public Audit Forum to also include guidance on the adoption of ISQM 2 to support firms revising their quality management arrangements for public sector audits. In particular, ICAEW would welcome guidance on who can perform Engagement Quality Control Reviews but warns against impractical requirements that might add to capacity issues in the local audit market. 

“ICAEW strongly supports the use of International Standards of Auditing in the public sector and would not advocate Practice Note 10 departing from them. However, we believe there is scope for further guidance to help auditors tailor their approach to focus on the issues that matter to public sector bodies and the users of their accounts,” Simms added.

“The Public Audit Forum has a key role to play, alongside changes to financial reporting requirements, in ensuring a proportionate approach to the valuation of operational property in the public sector that reflects that these properties often have no active market and the valuations do not typically affect outturn against budget or the decisions taken by public sector bodies.” 

The 2022 revision of Practice Note 10 is expected to be issued in Autumn 2022. 

You can read ICAEW’s response to the consultation here.