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Freelance lecturer and writer John Selwood answers questions on planning and implementing revised standards, agent versus principal in audits, and accepting independent examination engagements.

I understand that there are significant revisions to ISA 315 and ISA 240 to be applied soon. What would you advise my firm to be doing in order to prepare for these changes?

You are referring to:

the International Standard on Auditing (ISA) 315 (Revised 2019) Identifying and Assessing the Risks of Material Misstatement, which was published by the International Auditing and Assurance Standards Board in late December 2019;

ISA (UK) 315, which was revised (with very minimal supplementation) by the Financial Reporting Council (FRC) in July 2020; and

ISA (UK) 240 (Revised May 2021) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, which was revised by the FRC in May 2021. 

These revised ISAs are effective for accounting periods beginning on or after 15 December 2021. In most cases, this means that the changes will apply to December 2022 year ends, but auditors should not forget about short accounting periods.

Also, these ISAs will have a significant impact on the work that will be necessary before interim audits. So, some auditors might need to be ready for the changes in these revised ISAs sooner than they may have been anticipating

ISA 315 – Risk assessment

The revisions to ISA 315 and ISA (UK) 315 will almost certainly require fundamental changes to audit risk models to address the more granular approach to risk assessment, the spectrum of risk and the changes regarding assessing significant risk. This could possibly have knock-on effects on sampling models and possibly other aspects of an auditors’ methodology.

Also, while making such fundamental changes to the audit approach, some audit technical departments might take the opportunity to make other changes to the audit approach, either with the aim of improving audit quality or efficiency.

The March 2022 edition of Audit & Beyond included an article pointing auditors at sources of guidance and other support resources from ICAEW on ISA 315 

ISA (UK) 240 – Fraud

ISA (UK) 240’s revisions will also require changes to audit methodologies, but not in the same fundamental way as the revised ISA 315. However, the revisions in ISA (UK) 240 might still require significantly more staff training to get to grips with what will be needed to ensure the right approach to audit team discussions, decisions on how to use forensic expertise, dealing with whistle-blowers and, in particular, how to further encourage professional scepticism in audit teams.

The March 2022 issue of Audit & Beyond offered practical tips to help the auditor increase the likelihood that a financial statement audit will detect fraud. It also pointed auditors at various fraud-related support resources from the Audit and Assurance Faculty, ICAEW Quality Assurance (QAD), the FRC and the IAASB.
You can access the article here.

Audit methodologies

Audit methodologies are also a factor for many firms as they prepare for the revisions to ISA 315 and ISA (UK) 240.

Most auditors will use audit methodologies produced by training groups, publishers, software companies or networks. Audit firms will be hoping to get their hands on the revised systems and documentation as soon as possible, so that they can plan and progress their rollout. 

Training audit teams in the revised ISAs and the firm’s approach will be vital to the successful application of these revised standards. Like many aspects of the transition, this may take longer than expected. Audit firms that have not yet done so should get their planning under way now.

I have a new UK audit where I have had to challenge the accounting treatment of revenue. The company has an accounting policy to recognise revenue as a principal, but it is my opinion that the company is more likely acting as an agent and should recognise revenue accordingly. Management seems baffled by the points that I am making. To what extent can an auditor guide them to the right accounting policy?

Auditors challenging management is to be encouraged, but you seem to be in a position where management is ill equipped to respond to your challenge. Determining appropriate accounting policies is very much the role of management. In the situation you describe, there is a very significant risk that you could go beyond your role as auditor and begin to perform the role of management, which of course is not permitted by the FRC’s Ethical Standard for auditors.

Providing non-audit services, such as accounting services, is only expressly prohibited if the company is listed, a Public Interest Entity or an Other Entity of Public Interest. Assuming that this is not the case, then auditors are not prohibited from providing accounting services, subject to certain provisions and the application of appropriate safeguards, and providing there is informed management. 

During your audit planning, you may already have decided that there is informed management, but the situation you describe perfectly demonstrates that management can be considered as informed for one set of issues and not considered informed in relation to every issue. 

You may want to review the ‘informed management’ definition in the FRC glossary.

It might be possible for you to supply sufficient information to management about the revenue recognition issues surrounding ‘agent versus principal’, so that it becomes informed management. This may prove a tall order, however, as you describe management as ‘baffled’ by the issue.

Additionally, I have some experience of trying to address ‘agent versus principal’ issues, and they are often difficult. Therefore, it seems likely that this issue might be best dealt with through management engaging its own experts to help consider the position. 

I have been approached by a charity asking me to perform an independent examination. Can I accept this engagement?

Perhaps. Perhaps not. Without more information, your question is difficult to answer and might remain so, even with more information, as there are quite a few matters for you to consider before deciding whether to accept such an appointment.

Does the charity need an independent examination? It might need a full audit or no external financial scrutiny. Size (based on income), audit thresholds and charity governance documents are all factors for consideration in determining the correct level of scrutiny. 

Do you and any staff who would be carrying out the independent examination have sufficient training and knowledge? Are you/they familiar with the relevant charity commission directions and guidance? Do you/they have any charity audit experience? 

I could go on, but I will not. Instead, I will direct you to some helpful resources from ICAEW and the three UK charity regulators.

You can access them through a recent Audit & Beyond article on independent examinations

It highlights some of the associated risks and pitfalls to avoid, and provides links to material from UK charity regulators and ICAEW that will help to inform your decision-making. This includes a technical helpsheet on matters to consider before accepting an independent examination appointment.


Audit & Beyond

This article was first featured in the April 2022 edition of Audit & Beyond.

Audit & Assurance April 2022 cover