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Revisions to auditing standards

As we approach a period of change for auditing standards, ICAEW’s Technical Advisory Service highlights a number of key revisions to International Standards on Auditing (ISAs) effective for periods commencing on or after 15 December 2019 and beyond.

Revisions for periods commencing on or after 15 December 2019

The revised ISA (UK) 540 Auditing Accounting Estimates and Related Disclosures (as well as consequential amendments to a number of other ISAs) becomes effective for periods commencing on or after 15 December 2019 (early adoption permitted). It introduces a requirement to separately assess inherent and control risks when assessing the risk of material misstatements at the assertion level, and also introduces the concept of a spectrum of inherent risk (something which will also be reflected in the revised ISA (UK) 315 – see below).

It also introduces a number of more prescriptive documentation requirements around risk assessment, linking audit procedures with the assessed risk and judgements related to accounting estimates. The IAASB has produced Illustrative examples for auditing simple and complex accounting estimates to support implementation of the revised ISA.

The revised version of ISA (UK) 570 Going Concern is effective for periods commencing on or after 15 December 2019 (early adoption permitted). As part of the revisions, the responsibilities of the auditor change such that there is now a specific requirement to obtain sufficient appropriate audit evidence regarding, and conclude on, whether a material uncertainty related to going concern exists. This is likely to result in an additional level of work around going concern.
 
In addition to more prescriptive requirements, the revisions also include a need to more robustly challenge management’s assessment of going concern and a ‘stand back’ requirement to consider all evidence obtained (whether corroborative or contradictory) when drawing conclusions about going concern.
 
Furthermore, where the auditor concludes that no material uncertainty related to going concern has been identified, a statement that, based on the work they have performed, the auditor has not identified a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue, is required in the auditor’s report.
  
The revised version of ISA (UK) 700 Forming an Opinion and Reporting on Financial Statements also becomes effective for periods commencing on or after 15 December 2019 (early adoption permitted). It introduces a new requirement for the auditor’s report to explain to what extent the audit was considered capable of detecting irregularities, including fraud (previously this requirement was only applicable to audits of Public Interest Entities (PIEs)). Further information is available in the guide How to report on irregularities, including fraud, in the auditor’s report – a guide for auditors.

The FRC’s Bulletin: Illustrative Auditor’s Reports on United Kingdom Private Sector Financial Statements has been updated to reflect these revisions, and ICAEW’s Audit and Assurance Faculty is currently updating its faculty guides to reflect the new requirements. 

Looking further ahead

The revised version of ISA (UK) 315 Identifying and Assessing the Risks of Material Misstatement is effective for periods commencing on or after 15 December 2021 (early adoption permitted). The effects of this revision are wide ranging as it fundamentally changes the risk assessment process by introducing new inherent risk factors to aid risk assessment, a new spectrum of risk and a requirement for inherent and control risks to be assessed separately, as well as other changes.  

Despite it being some time before the revised ISA is effective, firms should plan ahead for what will be fairly fundamental changes to their audit methodologies and work programmes. More information is available in the article Revised ISA 315 for 2022 audits and the IAASB’s factsheet

Revisions are also expected for ISA 600 'Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)'. The IAASB is currently considering comments on its exposure draft. Proposals include changing the definition of a component; a focus on identifying and assessing the risks of material misstatement of the group financial statements and the importance of designing and performing procedures that are appropriate to respond to those assessed risks (a risk-based approach); and new guidance on addressing restrictions on access to people and information.

Questions?

If you’re an ICAEW member, affiliate or member of staff in an eligible firm with member firm access, you may discuss your specific situation with the Technical Advisory Service