Changes you will see in your next audit

The suite of clarified ISAs (UK and Ireland) took effect for the audits of accounting periods ending on or after 15 December 2010. The revised standards will mean potentially significant changes to some audit engagements.

Changes to auditing standards – what these mean for your next audit

In conducting the audit of your accounts, we are required to follow auditing standards issued by the Auditing Practices Board. These standards – known as International Standards on Auditing (ISAs), were recently revised and the new rules will apply to your next audit.

The new ISAs will mean some changes to the way we carry out our audit work. Whilst the approach we take to the audit is not wholly new, below is a summary of the changes and extra focus, so that you will know what to expect when this year's audit process begins.

Greater focus on risk

The revised ISAs place even more focus on risk assessment. We are required to thoroughly assess the risks that there are material misstatements (whether due to errors or omissions) within the accounts. We then design and carry out tests that respond to those specific risks.

To properly assess the risks on your audit, we will need to continue to:

thoroughly understand the background to your business and industry (including the major issues that you face);
record the processes – such as sales, purchases and payroll – that lie at the heart of your business; and
review the draft accounts information for unexpected results or movements since last year.

Our risk assessment may mean we focus on certain aspects of your business or accounts to a much greater extent than other areas. The approach may vary from previous years but the good news is that the areas that we will focus on are the areas that matter most to you. We promise to communicate our plans in good time so that you can provide the information we will need without undue cost or delay.

Greater focus on communication

The new ISAs place greater emphasis on communication between you and us. In particular, you may notice the following changes:

You may have recently signed or we will issue new terms of engagement that reflect the relevant changes.
We are required to discuss aspects of the business with 'those charged with governance'. This term usually refers to the board of directors (who are also shareholders for governance purposes). Therefore, although we may continue to deal with your internal accountant on day-to-day queries, we will also request one or more meetings with yourselves to discuss the business, the risks of error and our proposed approach.
As in previous years, we will continue to communicate our findings on the audit to you. These findings include errors or omissions in the accounts as well as qualitative matters such as weaknesses in your accounting systems for which we can suggest improvements.
We will ask you for a letter making certain representations to us, as in previous years. We will send you a copy of this letter near the end of the audit, and would ask you to provide us with a final signed copy on completion.

Related parties

The new ISAs focus a lot more on related parties.

In brief, a related party is a person or organisation which either controls or significantly influences the decisions and operations of your business, or vice versa. This would include the company's directors and significant shareholders, as well as people (such as close family members) and organisations connected with them. We will discuss the definition with you and ensure that you are able to identify all such related parties.

Whilst the accounting requirements to disclose material related party transactions are not new, the new ISAs focus attention on the fact that transactions with related parties are sometimes unusual in nature, may not occur at arm's length, and could significantly distort the 'true and fair view' of the accounts. Therefore it is vital that we understand who the related parties are and the way in which they transact with the company or influence its decisions.

Because of this, we will:

ask you for a list of all such related parties and likely transactions involving them, so we can understand their relationship with the company.
ask you about any systems or controls you may have to identify related parties and their transactions, to ensure these are correctly dealt with;
pay special attention to non-routine accounting entries, such as management journals and 'period-end' adjustments. Please ensure that any such entries posted by management are clearly recorded and explained, to ease this review;
seek audit evidence to support any transactions described in the accounts as being at arm's length; and
raise issues with you if we have concerns about the way in which related party transactions are treated or disclosed in the accounts.

Accounting estimates

The ISAs increase our responsibility to consider accounting estimates reflected in your accounts. Examples of these are provisions for bad debts, provisions for obsolete stock, the valuation of assets such as properties, and the decision whether or not to recognise provisions or liabilities for legal claims against the company.

We will particularly focus on those estimates which involve 'high estimation uncertainty'. For example, the judgement about whether a legal claim will lead to a probable or possible liability could mean a material expense is either included or omitted from the accounts. In these cases, we will seek reasonable evidence that the judgements behind these decisions are true and fair.

Practically, this will mean that we will:

spend time understanding the background behind any such estimates, and the basis on which figures are calculated;
review the outcome of estimates made in previous years, to determine how accurate these assessments have been in the past;
look for evidence of bias in the calculations which could distort the true picture in the accounts; and
derive our own estimate of the likely values to attribute to these estimates (this may be a range of values) to compare to those reflected in the accounts. On occasions this may mean agreeing with you to obtain expert opinions (such as the use of a specialist valuer).

Groups

Because of the increased number of requirements in relation to the audit of groups, we may be required by the group auditors to perform additional work on your accounts to assist them. If requested to do so, we will discuss this matter with you and, if necessary, with the parent company management and their auditors.

Conclusion

The new ISAs increase the quality of the audit process and we are confident that this will result in an audit that is both risk-based and rigorous. Audits are intended to give confidence and assurance to users of your accounts. While the increased requirements may in some cases lead to additional time and costs, we will ensure our work is efficient, targets the right areas and provides you with a robust audit opinion.

If you would like to speak to us about the new ISAs, and what they will mean in more detail for your next audit, please don't hesitate to contact us