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Comfort and joy: getting the right assurance

Fewer entities are engaging firms to audit their financial statements but stakeholders still look for reassurance. Rachel Fielding explains the possibilities offered by assurance reviews.

New exemptions and successive rises in the statutory threshold have removed the legal requirement for the historical financial statements of an increasing number of entities to be audited. But this has left them facing some difficult choices — as many will be well aware.

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The need for some sort of assurance of an entity’s historical financial statements does not automatically or immediately evaporate simply because this is not required by the Companies Act 2006 or the entity qualifies for exemption under the Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012.

Government acknowledges this. “Some companies will still want the increased assurance on their financial statements that comes from an audit; some suppliers, banks or lenders may require audited accounts; others may want to apply for certain grants that oblige them to have an audit, or want to prepare themselves for selling the business,” says Rufus Rottenberg, audit policy assistant director at the Department for Business, Innovation and Skills. So there are many reasons why some now exempt entities will choose to have a voluntary statutory audit, just as there are many reasons why some entities will exercise their freedom to choose in a different way.

When affected entities do consider if and what type of assurance they need for their financial statements, many turn to their auditor for advice. “I usually talk the client through what the difference is between audit and assurance and explain what their options are,” says Andrew Griggs, corporate partner with Reeves & Co, a firm with offices in Kent, Gatwick and London.

“They are not auditors, and they don’t really understand what we do during an audit.” They also need guiding through the range of chartered accountant services that have been designed to give comfort to the users of an entity’s financial statements.

Outling the options

“For most accountants it’s a case of offering clients three options: a voluntary audit, an assurance review or a compilation report and making sure that entities appreciate the differences between them,” says ICAEW assurance technical manager Ruth Ward. “They don’t all provide the same level of comfort to users of unaudited financial statements.”

The section entitled "Support from ICAEW" below outlines some of the material that is available to help with this, including the latest version of the assurance review framework in Interim Technical Release AAF 03/06 "The ICAEW Assurance Service on Unaudited Financial Statements".

This assurance framework has been available for a number of years. After the audit threshold in the UK was revised upwards a number of times to meet EU harmonisation objectives and reached the EU maxima in 2004, ICAEW was heavily involved in the debate on whether a new alternative to audit was needed in the UK.

“At the time, our thinking was to try to put something in its place that would allow an accountant the flexibility to offer a less intensive review of a client’s financial statements,” says Ward. And so, in 2006, Interim Technical Release AAF 03/06 was born.

At that time the interim release took its inspiration from ISAE 3000 "Assurance Engagements Other Than Audits or Reviews of Historical Financial Information" rather than the International Standard for Review Engagements (ISRE) 2400 "Engagements to Review Financial Statements". The latter was felt to be too long and too prescriptive, and it had not been developed with the UK in mind.

However, ISRE 2400 has since been adjusted to be less prescriptive and the Audit & Assurance Faculty has set up a working party of members to review the ICAEW assurance review framework to bring it in line with ISRE 2400 (revised 2012), which comes into force later this year.

The updated version of the ICAEW assurance review technical release (03/06) is also expected later this year, says Ward, who stresses that the current assurance review project is not simply a rewrite of 03/06 and not intended to be a competitor to voluntary audit.

However, recent changes to audit exemptions have led to a growing consensus that more should be done to help members offer assurance of unaudited financial statements (and to offer assurance services in other areas too). Just last year ICAEW published its "Assurance Sourcebook", which covers all possible assurance reviews of unaudited financial statements. You can learn more by visiting our Assurance Sourcebook webpage and by referring to recent coverage in Audit & Beyond.

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Exploring the possibilities

There seems to be plenty of scope for member firms to use the ICAEW Interim Technical Release AAF 03/06 The ICAEW Assurance Service on Unaudited Financial Statements. Last year the ICAEW framework for assurance reviews was used by 117 ICAEW member firms, according to analysis of Quality Assurance Department (QAD) returns. Analysis of these suggests that this has proven worthwhile, as more than 1,000 engagements have been undertaken by firms including Sobell Rhodes, Wingrave Yeats and Reeves & Co, to the satisfaction of entities and other users of their unaudited financial statements (see Client Values Assurance below).

Michelle Fisher, a partner at firm Sobell Rhodes, who chaired the original ICAEW working party into 03/06 is once again heading the working group and is adamant that there is a growing market for these sorts of services. Typical assurance clients include companies where shareholders are not in day-to-day control of the finances, growing companies approaching the audit exemption limit and any company considering a sale over the next few years.

“If there are additional services you can offer to clients in a proactive way to benefit your clients, then this has to be good for them, and you,” she says.

But not everyone shares her bullish outlook on assurance reviews. “I don’t think the cost difference between a voluntary audit and this is big enough,” says Peter Hollis, chairman of the ICAEW’s Practice Committee. “Even those firms that are passionate about them don’t do many. If there’s a need for it people would buy it. I’m not pushing it in my firm because I don’t see the value in it.”

Although entities such as BSL Gas Technologies and their stakeholders clearly value the comfort offered by an assurance review (see Client Values Assurance below), some entities do not. “While I am keen to promote assurance reviews they have been a hard sell because of the general economic climate,” says Catherine Willshire, a director at Price Bailey who also sits on the working group.

“It’s easier with clients who no longer need an audit as you can tailor it to their needs and they understand the benefits of assurance. But companies that have never needed a statutory audit can struggle to see the value it can add when they need to cut costs,” she adds.

Audit still gold standard

For many people both inside the profession and outside it, audit remains the gold standard service, despite recent legislative changes, and Ward is keen to emphasise that the Audit & Assurance Faculty’s renewed focus on assurance services in no way diminishes the emphasis it places on the value of audit.

“The assurance review is not meant to be a competitor to voluntary audit, we are not trying to write audit out of the picture,” says Ward. “It’s about trying to give entities and firms more options.”

The audit market is very flat for many smaller firms, and they are keen to explore services that represent potential sources of income that can also add value to new and existing clients. So when it is presented to entities as an assurance option alongside the voluntary audit, there is a possibility for the assurance review to make a difference both to firms and the entities they serve.

“I can see that there is real usefulness here for small firms with a lot of SME clients,” says Ward. “It’s an opportunity to do something to benefit members of the profession and to act in the public interest.”

Support from ICAEW

As part of its Re:Assurance initiative, ICAEW provides various tools designed to outline the choices for companies that are exempt from audit. These include the diagram on this page, which is taken from a 17-page PowerPoint presentation that explains the services on offer along with more guidance and standards for providers of assurance services.

In this section of the website you will also find the latest version of the framework AAF 03/06 "The ICAEW Assurance Service on Unaudited Financial Statements".

Client values assurance review

Reeves & Co has used Interim Technical Release AAF 03/06 "The ICAEW Assurance Service on Unaudited Financial Statements" to conduct assurance reviews for several clients including BSL Gas Technologies. “The review is more client-facing than an audit,” says Reeves corporate partner Andrew Griggs. It focuses primarily on the areas where material misstatements on the financial statements might be most likely to occur at BSL.

There are subjective figures on the BSL balance sheet — in the age analysis of debtors and stock, say. Reeves & Co looks at these, checks the reconciliations and assures things are ageing correctly. “We don’t do the detailed testing associated with audit,” says Griggs. But the firm still asks questions and checks all the numbers to ensure they make sense.

The Reeves & Co team approach the assurance engagement with a sceptical mindset. “I still get challenged,” says company accountant Margaret Hodson, but she describes the assurance engagement as less disruptive than audit and just as useful for the business. As well as being used in BSL, the assurance report forms part of BSL’s financial statements and is given to its bank, business insurance providers and shareholders. “We still get the same value as with a full audit,” she adds.

A detailed case study on the independent assurance Reeves & Co offers to BSL is available along with other assurance case studies in the Re:Assurance section of ICAEW‘s website.

Get involved

A new range of support material is being developed for assurance reviews. To draw on members’ experiences and identify the sort of support that can be most useful the faculty will shortly be hosting a roundtable. Members who are interested in becoming more involved should email Ruth Ward if they would like an invitation to the event and/or join a mailing list and receive the latest material as it becomes available.

This article first appeared in the April edition of Audit & Beyond, the magazine from the ICAEW Audit and Assurance Faculty.