March

Bank of England consults on interaction of the PRA with external auditors and actuaries

03 Mar, 2015

The Bank of England has issued a consultation paper introducing two proposals on the interaction of the Prudential Regulation Authority (PRA) with external auditors and actuaries. The consultation paper ‘CP8/15 ‘Engagement between external auditors and supervisors and commencing the PRA’s disciplinary powers over external auditors and actuaries’ is open for comment until 27 May 2015.

The paper proposes that the external auditors of each of the largest UK-headquartered banks and building societies (those with a balance sheet total in excess of £50bn or are members of groups with a balance sheet total in excess of £50bn) that are not subsidiaries of non-UK firms should be required to provide a written report to the PRA as part of the statutory audit of that firm.  The written report will consist of answers to specific questions set out in advance by the PRA, designed to gather qualitative information about key judgement areas within the audit. Two example questions, covering loan loss provisioning and provisions and contingencies for customer redress and litigation, are included in the consultation paper.

The PRA intends to engage with stakeholders ahead of the 2015 reporting season to identify how 2015 year-end audits could be used as an opportunity for a ‘dry run’ of the process. This proposal is expected to be introduced in relation to the audits of financial reporting periods ending on or after 1 November 2016.

The paper is also consulting on a draft supervisory statement setting out how the PRA intends to use its disciplinary powers over actuaries and auditors under s345A of the Financial Services and Markets Act 2000. The PRA has been able to exercise these powers since 20 February 2015. The draft supervisory statement sets out the PRA’s approach as to whether a penalty is warranted and, if so, to the determination of an appropriate level of penalty.

The full consultation paper can be accessed from the Bank of England website.

Summary of the ITCG February 2015 meeting

03 Mar, 2015

The IASB has issued its meeting notes on the IFRS Taxonomy Consultative Group's (ITCG) meeting held on 11 February 2015.

Topics discussed were:

  • Exposure Draft Disclosure Initiative (Proposed Amendments to IAS 7)
    ITCG members were pre­sen­ted with an update on the exposure draft, which includes the proposed IFRS Taxonomy Update as accompanying material.
  • Approaches for a potential 2015/2016 Common Practice project
    The staff sum­marised its research on potential approaches to determine the scope of a 2015/2016 Common Practice project and presented a combined approach consisting of “an empirical review focussing on the disclosures of specific activities” and a review of the disclosures in Standards with upcoming IASB post-implementation reviews during 2015/2016. In general, the ITCG agreed with the staff’s combined approach.
  • Terms and conditions of using the IFRS Taxonomy
    A description of the changes to the IFRS Taxonomy’s terms and conditions was presented to the ITCG. These changes are expected to be implemented around the same time as the issuance of the 2015 IFRS Taxonomy.

For more information, see the meeting notes on the IASB’s website.

FRC compendium of Audit and Assurance Standards and Guidance 2015 now available

03 Mar, 2015

The Financial Reporting Council (FRC) has announced that its compendium of ‘Audit and Assurance Standards and Guidance 2015’ is now available.

The compendium contains the FRC’s audit and assurance standards in issue at 1 February 2015.  Accordingly the compendium includes:

  • International Standards on Auditing (ISAs) (UK and Ireland) (including ISA 260 Communication with Those Charged With Governance, ISA 570 Going Concern and ISA 700 The Independent Auditor’s Report on Financial Statements) (all links to FRC website);
  •  International Standard on Quality Control (ISQC) (UK and Ireland) 1;
  •  International Standard on Review Engagements (ISRE) (UK and Ireland) 2410;
  •  Standards for Investment Reporting (SIRs);
  •  Ethical Standards for Auditors;
  •  Ethical Standard for Reporting Accountants.

Selected Practice Notes and Bulletins are also included. 

The compendium is priced at £65 and is available on the FRC’s website.

The press release can be accessed from the FRC website.

Report recommends enhanced governance arrangements for IPSAS

03 Mar, 2015

The IPSASB Governance Review Group has published it's final recommendations on the future governance of the IPSASB. The Review Group concludes that the International Public Sector Accounting Standards Board (IPSASB) should continue to operate under the auspices of the International Federation of Accountants (IFAC). At the same time, however, the group recommends that a new governance body, the Public Interest Committee, should be established to ensure that the public interest is served by the standard-setting activities of the IPSASB.

The final report is the result of a public consultation that was conducted from 17 January to 30 April 2014 and discussions held at the Review Group's meetings on 31 May 2013 and 22 September 2014. Among the questions asked in the consultation paper was whether the needed strengthening of the monitoring and oversight of the IPSASB would best be served by moving it under the auspices of the IFRS Foundation, whether it should be established as a standard-setter in its own right or whether the IPSASB could continue to work under the auspices of the IFAC if the governance arrangements were enhanced.

The Review Group's final report contains the following recommendations:

  • The IPSASB should continue to operate under the auspices of the IFAC.
  • A new governance body (Public Interest Committee) should be established to ensure that the public interest is served by the standard-setting activities of the IPSASB.
  • The Committee should be independent from IFAC and distinct from the existing governance bodies overseeing the IFAC's private sector standard-setting activities.
  • The Committee would review and advise the IFAC and the IPSASB on the terms of reference, the nomination and appointment of members, and the procedures for formulating the strategy and work plan and development of IPSAS of the IPSASB.
  • The Committee should not have a direct role in the development, adoption, and implementation of accounting standards.
  • The Committee should conduct a first review of the terms of reference, nomination procedures, and standard-setting arrangements no later than the first semester of 2015.
  • The Committee should meet at least annually thereafter to review progress against the recommendations following from their review.
  • The initial membership of the Committee should include individuals with expertise in public sector financial reporting and an interest in promoting high-quality and internationally comparable financial information. Members should not be compensated and serve for a limited period (not longer than three years).
  • The functioning of the Committee should be defined in public Terms of Reference.
  • The Committee will receive reports from the IFAC and the IPSASB regarding procedures and progress against goals.
  • The IFAC should establish a separate Consultative Advisory Group (CAG) for the IPSASB.
  • A further public consultation on the improvements to the IPSASB's governance arrangements should be undertaken no later than 2020.

Please click for access to the full report on the IFAC website. It also contains an appendix with suggested Terms of Reference for the Public Interest Committee.

FRC publishes survey reviewing how auditors have applied new extended auditor reporting requirements

02 Mar, 2015

The Financial Reporting Council (FRC) has today published the results of a survey into how auditors have applied the new “extended auditor’s report” requirements. The survey, of 153 extended auditor’s reports (63 of which were FTSE 100 companies) explored both whether the new requirements had been complied with and also areas of innovation. The FRC is encouraged by the response of audit firms to these new requirements.

In response to calls from investors to make audits more transparent, the Financial Reporting Council (FRC) issued revisions to ISA 700 (UK and Ireland) The Independent Auditor’s Report on Financial statements in June 2013. The revisions require auditors reporting on companies which comply with the UK Corporate Governance Code to provide significantly increased disclosure around risks, materiality and scope of the audit.  The revisions are designed to complement changes to the UK Corporate Governance Code in October 2012 and are effective for the audits of financial statements for periods commencing on or after 1 October 2012.

The results of the survey indicate that auditors have met the new requirements and “in many cases had made, sometimes quite radical, further changes to auditor’s reports going beyond the changes required by the FRC”.

The key areas of innovation highlighted by the survey were:

Disclosing the materiality benchmark used.

Disclosing the magnitude of unadjusted differences being reported to the Audit Committee.

Reporting of detailed audit findings with respect to identified risks.

Experimentation with detailed broader explanation of the audit scoping process.

Improved presentation of auditor’s reports through the use of diagrams and graphs.

Addressing going concern disclosures in auditor’s reports.

Locating the auditor’s opinion at the beginning of the report rather than at the end.

Moving generic descriptions of the scope of an audit to a web-site.

The key areas identified where further improvement might usefully be made were:

Increasing the granularity of risk reporting (i.e. being as entity specific as possible)

Improving the discussion of the auditor’s application of materiality and why a particular benchmark or level was chosen and addressing other aspects of materiality.

Making a clearer linkage between the discussions of risks and materiality and the description of how these influenced the scope of the audit.

A number of the suggested improvements were supported by investors and audit firms during post-survey meetings held by the FRC.  Investors and audit firms also suggested that more disclosure of comparative information and explanations of changes from one period to another would be an improvement.  A number of other ‘aspirational changes’ were proposed by investors and audit firms including:

Introducing a discussion within either the auditor’s report or the Audit Committee report as to why an auditor raises a risk that is not also dealt with by the Audit Committee in its report.

Including the new information provided in the extended auditor’s report in the preliminary announcement.

Providing an opportunity for stakeholders to challenge the proposed scope of the audit by publishing the audit plan in advance of the year end.

Providing more encouragement for the reporting of issues arising from the quality of company’s systems.

The survey highlights that there has been a move away from the traditional binary pass/fail model of the past.  The FRC is keen to maintain the momentum of this initiative and encourages investors and other users of annual reports to continue to provide feedback to audit firms on the usefulness of the extended auditor’s reports; highlighting what they find most useful and what is of less use.

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