The introduction of International Auditing Standards in 2005 has had a major impact on the profession and the way in which firms – typically those at the smaller end of the scale – deal with auditing issues.

There is a dividing line between commercial reality/cost v benefit and adherence to ‘the book’ as well as a sense of uncertainty as to what various International Auditing Standards actually (a) require the auditor to do and (b) the documentation required to be placed on the audit file to support the audit evidence.

This article looks at how audit firms acting for smaller companies can try to reduce their costs and at the same time produce an audit file which would stand up to scrutiny.

It goes without saying that the international regime has certainly put the cost of audit up and in most cases, the extent of these costs are sometimes irrecoverable – meaning that audit is becoming more of a hindrance to professional firms than a benefit.  Invariably, clients will express their dissatisfaction at their fees going up by anymore than the annual rate of inflation and even that can sometimes ‘ruffle feathers’.

So why did the standards change so dramatically, and how can firms at the smaller end of the scale manage the increased costs inherent with the audit process?

Well-publicised corporate disasters (Enron, WorldCom and such like) contributed hugely to the overhaul of the auditing standards, as well as the convergence of the UK to the international regime in both audit and accounting standards.  It is true to say that the now defunct Statements of Auditing Standards (SASs) in the UK were not as arduous as the International Standards on Auditing (ISAs).   In particular, with reference to the well-publicised corporate disasters, ISA 240 (“The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements”) places much more emphasis on the auditor to consider fraud at the planning stage than the old SAS 110 did.

However, as an auditor myself, what I found to be the biggest surprise was the sheer size of an audit file prepared under ISAs after completion, when compared with another file prepared under SASs.  Why? The reason is the sheer amount of audit documentation which the ISAs now require.

Invariably, when following an audit programme under SASs, most auditors would tick a box to say that they had completed an audit task.  The ISAs now require, not only for auditors to complete a task (and show they have completed a task), but ISAs expect a schedule documenting exactly what the auditor has done, rather than just write ‘completed’ without any detail as to the procedures undertaken. This has contributed to the sheer increase in paperwork placed on an audit file and in turn has also contributed to the additional costs faced by professional firms because the amount of ‘corner cutting’ a firm can do has now been significantly wiped out.

When attending CPD seminars, it is obvious from comments made by delegates and speakers alike, that the administrative burdens associated with audit and the increases in cost that these extra burdens brings, frustrates accountants – because ultimately the reason they are in business is to make a profit.  So how can smaller firms deal with the increase in the costs and still produce a good standard audit file which would face up to scrutiny?

In September 2007, the Auditing Practices Board (APB) issued Practice Note 26 (“Guidance on Smaller Entity Audit Documentation”) which replaced Practice Note 13 (“The Audit of Smaller Businesses”).  The key aspect of the practice note is that it is directed at those companies that are either audit exempt, but choose to have an audit and for those smaller entities where the ownership is smaller and the operations, processes and internal controls within the entity are relatively straightforward.  Needless to say, the consultation draft was widely supported throughout the profession.

ISA 315 (“Obtaining an Understanding of the Entity and its Environment”) is a very comprehensive and long-winded standard which details the various requirements auditors have to undertake to obtain an understanding of their audit client.  Invariably, this results in masses of paperwork being stored on the planning section of the current and permanent audit files.

The key feature of practice note 26, which auditors will no doubt welcome, is the fact that under the practice note, it is not necessary to document every single aspect of the auditor’s understanding of its client.  The practice note allows auditor’s of smaller companies to merely document the key points relevant to the audit, which should save time and reduce costs.  The practice note goes on to say that audit documentation may be in simple form and relatively brief.

Another feature of the practice note is that at the back of practice note, there are examples of what smaller audit documentation may look like and how they can be put to good use in a smaller audit.  These examples were welcomed by the profession as ISA 315 appeared to be the main area where costs had increased.   There was also the issue that professional firms were uncertain as to the extent of documentation required to be put on their files to support the audit evidence obtained in understanding the entity especially when documenting the entity’s internal control environment.

Whilst audit documentation is still crucial under ISA 230 (“Audit documentation”), practice note 26 may help firms at the smaller end of the scale reduce the time spent on various aspects of the audit, and in turn reduce the associated costs.  It is worth noting that practice note 26 is designed to be persuasive rather than prescriptive and is designed to assist audit firms in applying the ISAs to particular circumstances and industries for companies at the smaller end of the scale.

The APB is currently undergoing a further overhaul of its auditing standards aimed at clarifying and improving the standards.  The APB recently announced that its complete set of clarified ISAs will be effective for audits of financial statements for periods beginning on or after 15 December 2009 and we can only wait until then to see how effective the APB’s clarity project has actually been.

Practice Note 26 can be downloaded free of charge here.

Steve Collings is audit manager at Leavitt Walmsley Associates Ltd.

This article is also published on accountingweb.co.uk

Auditors in the United Kingdom have a statutory responsibility to form an independent opinion on whether or not a reporting entity’s financial statements represent a true and fair view. Note the term independent means an unbiased opinion.

This article considers some of the reports an auditor is obliged by statute to give when they have arrived at their opinion. This article will look at the auditor’s opinion and illustrate these, using scenarios as to which type of report to give in particular circumstances.

Download the full article Here. PDF Format

In 2005, International Standards on Auditing (ISAs) replaced the Statement of Auditing Standards (SASs) that governed the audit profession in the UK and Ireland. The introduction of ISAs saw more emphasis being placed on the auditor’s responsibility relating to fraud and error.

Prior to the introduction of ISAs, fraud and error were dealt with in SAS 110: Fraud and error, which was issued in January 1995. Fraud and error are now dealt with in ISA 240: The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements.
Download the full article Here. PDF Format

Over the last few years the accountancy profession has become increasingly more and more bureaucratic, with much more emphasis being placed on disclosures and the overall way in which financial statements are prepared.

Limited companies in the UK have to prepare financial statements in accordance with Generally Accepted Accounting Practice (commonly referred to as ‘GAAP’). The GAAP in the UK specifies the framework in which financial statements are to be prepared and details the relevant disclosure requirements which must be disclosed within the financial statements (either within the primary financial statements themselves, or by way of note).

Download the full article Here. PDF Format

Auditing in the United Kingdom and Ireland has become somewhat arduous over the last couple of years. More stringent regulations i.e. the International Standards on Auditing and an increased emphasis being placed on technical compliance means that Auditing can be particularly complex.

One of the key features of the audit process is the actual planning of the audit. Thorough and concise planning means that the detailed audit work carried out will also be concise and thorough.

This article considers some of the testing the auditor will do during their audit and looks at the different types of risk associated with the audit process.

Download the full article Here. PDF Format