Audit News June 2018
Welcome to Audit News 62, your regulatory update containing the latest technical guidance and best practice advice. In this issue: Audit Registration Committee reminders: Groups audit considerations and trustee shareholdings, audit updates including this year’s Audit Monitoring report, changes to the disciplinary process and new resources including details about our latest training film, Without Question.
In this issue
Group audit considerations
The Audit Registration Committee (ARC) has seen an increase in firms not complying with the group auditing requirements of ISA (UK) 600, Special Considerations – Audits of Financial Statements (including the work of component auditors). A number of firms have been reported to the ARC because significant improvements are required in the audit of groups – particularly where the group audit involves a component auditor. Examples of issues being reported to the ARC include:
- Insufficient consideration of the planning requirements of ISA (UK) 600, including:
- the lack of a coherent strategy including consideration of which components are significant and how to obtain the necessary evidence;
- a lack of clear instructions to the component auditor about the nature and extent of required audit procedures the component would perform; and
- no specific audit plan agreed with the component auditor.
- The group auditor failing to obtain sufficient evidence of the audit of material trading subsidiaries by component auditors.
- Reliance on overseas component auditors without the group auditor carrying out any audit procedures on the component’s work.
- Lack of documentation to justify reliance on component auditors.
- Insufficient evidence of the group auditor’s involvement in the component auditor’s risk assessments.
- Insufficient consideration of the requirements of ISA (UK) 600 at the completion stage, including:
- no documented review of the work of the component auditors; and
- issues obtaining timely component auditor sign-off for the purposes of subsequent events and going concern.
These type of monitoring visit findings often result in the ARC imposing conditions or restrictions on a firm’s ongoing audit registration eg, a requirement for the group auditor to obtain an external hot file review of all subsequent group audits until the ARC is satisfied the firm is complying with ISA (UK) 600, or imposing a restriction on a firm to prevent it from carrying out any group audits.
The ARC recognises group audits that involve component auditors can be particularly challenging, with the need to coordinate effectively with the component, who may be from a different firm or network to the group auditor, and/or in a different country. The following ICAEW resources are available to support firms with group auditing.
- Group Audits webinar
- The practical audit of owner-managed international groups
- Auditing Groups : A Practical Guide and Auditing in a Group Context
The ARC encourages firms that act as group auditor, to familiarise themselves with the requirements of ISA (UK) 600, together with the above guidance materials to help ensure that group audits are carried out to the appropriate standard. Members can also contact ICAEW’s Technical Advisory Service on +44 (0)1908 248 250 with specific queries on the group audit requirements of ISA (UK) 600.
Changes to annual return in respect of Irish audits
Following a recent review, IAASA, the Irish Competent Authority has requested that we ask firms for more detailed information about their Irish audits and procedures, to enable us to monitor the risks that may relate to such audits. We have therefore built in additional questions to the audit clients section of the annual return to ask for details of Irish audits separately from UK audits, and to ask firms to confirm they have appropriate and up-to-date procedures in place to audit them. This updated version of the annual return will go live in June. Firms that have Irish audits should put procedures in place to capture this information to enable them to provide the additional details on their next annual return.
Applications for responsible individual status
The application form that firms must use when wishing to designate a principal or employee as a responsible individual (RI) under Chapter 4 of the Audit Regulations and Guidance has been updated.
The key changes are:
New information requested
- Firms will need to outline the internal process undergone by the applicant in order for the audit compliance principal (ACP) to support the application for RI status. This process may involve the applicant completing a series of positive peer reviews of completed audits, shadowing an existing RI, or internal interviews that have to be passed before the RI application is submitted. Providing us with these details will assist our assessment of the application.
- First-time applicants will also need to provide details of any induction, mentoring and training undertaken in anticipation of their role as RI.
Clarifications to existing questions on the firm
- We now ask all applicants to give us details of their audit hours over the last 24 months, together with details of their current role and responsibilities.
- We have clarified the CPD information we need from each applicant to help demonstrate to us that they have achieved the competencies outlined in International Education Standard 8, Professional Competence for Engagement Partners responsible for audits of financial statements (revised).
- The new application form also includes examples of the different types of CPD activities that are acceptable in addition to courses (eg, writing articles, research, professional development).
- We have re-worded the guidance on the type of engagement examples applicants should provide in Appendix A, and have explained which engagements should not be included (eg, internal audit engagements).
- A note has been added to the form asking the applicant to provide an explanation if less than 10 engagement examples are provided in Appendix A.
- We have also added a statement to the form explaining there may be circumstances where ICAEW staff do not have the delegated power to approve the application, and that in these cases the application will be considered by committee together with the potential outcomes.
In addition to the changes, we will also make a Word version of Appendix A available on our website which applicants may find easier to complete than the editable pdf version currently used. The new form will be available here in June 2018 and must be used for all new RI applications submitted to us from 1 July 2018.
The auditor's responsibility to report to a charity's regulator
The FRC reminds auditors of charities that they are required to carry out their audit in compliance not only with the FRC's ethical and auditing standards, but also applicable legal and regulatory requirements.
This new report brings together the latest results from our monitoring visits and highlights the most common pitfalls and how to avoid them. Findings include learning points following the introduction of FRS 102 and a summary of the main reasons for reports to the Audit Registration Committee.
Disciplinary process changes
Revised Guidance on Sanctions effective 1 July 2018
A revised Guidance on Sanctions has been approved by the ICAEW Regulatory Board to come into effect from 1 July 2018. This follows extensive consultation with ICAEW’s disciplinary and regulatory committees and liaison with ICAEW’s Members Board and Practice Committee. The revised guidance gives more comprehensive cover to possible issues, focusses on consistency and has a clearer explanation of the thought processes to go through in arriving at sanctions. The wider use of non-financial sanctions and the introduction of discounts for full admissions are also included.
From 1 July, ICAEW will launch a new process that will enable certain types of minor, compliance-type complaints to be dealt with by way of fixed penalty. The process will only apply to complaints which the ICAEW Regulatory Board has determined are suitable for the process and where the complaints and proposed penalty are agreed by respondents / respondent firms. The process will avoid the need for less serious complaints to considered by the Investigation Committee, which will benefit respondents as matters will be dealt with more quickly and for less cost.
Changes to streamline the disciplinary and fitness processes
Amendments to the regulations governing the operation of the Investigation, Disciplinary, Appeal and Fitness Committees come into effect 1 June 2018. These technical changes have been made to update the regulations and clarify and streamline the disciplinary and fitness processes.
Without Question provokes discussion and debate around many issues and challenges that accountants face in their day to day work. Issues such as the importance of audit risk assessment, professional scepticism and the benefits of a strong risk management culture.
Without Question and the supporting training material can be used for both internal sessions and for business development opportunities.
Join us at a facilitated film training event – later this year, we will hosting some facilitated film training events. Dates and locations (around England) are to be confirmed shortly.
New substantive audit evidence webinars
As part of our series of webinars sharing insights from audit monitoring, we have launched two new webinars. The first covers substantive analytical review and the second covers tests of detail.
Guidance for auditing culture
Most organisations understand the impact that culture can have on protecting or eroding their reputation. But assessing culture is not easy. Internal audit needs to be clear how it intends to approach this task.
To support auditors, ICAEW’s Internal Audit Panel has produced guidance which provides practical advice on preparing and conducting an audit of culture. The guide includes eight key tips to follow, a list of areas that should be considered when planning an audit and a series of questions to help organisations understand their culture.
2018 PA principles, re-launched web pages, top tips & more.
‘Bannerman paragraph’ update
ICAEW has published a revised version of Technical Release AAF 01/03 The audit report and auditors’ duty of care to third parties, which positions the ‘Bannerman paragraph’ as the final section of the audit report, directly preceding the auditor’s signature, with the subheading ‘Use of our report’.