John Selwood's Q&As
Given all the upcoming changes to the Companies Act 2006, it is easy to forget the changes that took place for auditors when the Act came in. The following questions may remind some auditors of these legal opportunities and requirements, and related issues.
Q) When I am first appointed auditor I nearly always arrange to visit the predecessor auditor. However, when I make the request I sometimes get a frosty response along the lines of "you are the first auditor to ask". Also, a number of my partners never visit the predecessor. Am I doing something that is unnecessary? What is everybody else doing instead?
A) It appears to me that you are taking an opportunity that many auditors are missing. Without visiting the predecessor, some auditors make life much more difficult for themselves and in practice sometimes fail to meet the requirements of the International Standards on Auditing (ISAs).
The key issue here is that ISA 510 (UK and Ireland) Initial Audit Engagements – Opening Balances requires that auditors obtain sufficient appropriate audit evidence on opening balances. Paragraph 6 of the standard requires that this is achieved by:
"Peforming one or more of the following: (Ref: Para. A3-A7)
- where the prior year financial statements were audited, reviewing the predecessor auditor's working papers to obtain evidence regarding the opening balances;
- evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances; or
- performing specific audit procedures to obtain evidence regarding the opening balances."
As you can see, auditors could choose not to visit the predecessor auditor and perform analytical procedures and/or rely on current period audit evidence instead. However, in my view, the visit to the predecessor can be much more efficient. This obviously depends, in part, upon the nature of the entity’s balances. Different balances will respond in different ways to these tests. For instance, if stock is a material balance, existence of opening stock might be difficult (or impossible) to support without looking at the evidence that the predecessor auditor obtained.
An additional benefit of visiting the predecessor auditor is that this might accelerate the process of understanding the entity and risk assessment. The successor auditor can sometimes get to grips with the problem areas much more quickly by looking at what the previous auditor did.
It surprises me how rarely auditors take advantage of the right to inspect relevant information in the predecessor’s files. If you want to find out more about the practicalities, take a look at Technical Release AAF 01/08 Access to information by successor auditors (tinyurl.com/ ABYTechRel). This provides a framework to assist auditors in managing the process in relation to such access, outlines the legal background, the relevant ISAs and deals with practicalities such as the format, timing, period and costs associated with access.
Do not forget that this right of inspection is conferred by the Companies Act (CA) 2006 alone and does not apply to the initial audit of other entities.
This is an extract from an article in the November 2015 edition of Audit & Beyond, the magazine of the Audit and Assurance Faculty.
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