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Analysis of the main potential changes in auditing standards arising from the Exposure Draft of ISA 720 (Revised)

28 Dec 2012

The UK Financial Reporting Council (FRC) invites comments on IAASB exposure draft of the revised auditing standard on the auditor’s responsibilities relating to other information accompanying audited financial statements before it finalises its response to the IAASB. In this connection, the FRC staff has prepared a detailed analysis of the main changes proposed in the exposure draft compared to the requirements in order to to assist those seeking to understand the implications of the proposals in the IAASB’s exposure draft.

Attachment 2 of the document perepared by the FRC staff includes a table comparing the IAASB exposure draft published in November 2012 and ISA (UK and Ireland) 720 covering the objectives, definitions and requirements. ISA (UK and Ireland) 720 adopts the text of the current ISA 720, with supplementary wording added by the FRC. The additional wording added by the FRC is differentiated in the table by the use of grey shading and thus easily identifiable which renders the table also a useful tool for interested parties not based in the UK or Ireland.

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IFAC policy paper on governance, risk management, and internal control

17 Dec 2012

The International Federation of Accountants (IFAC) has issued Policy Position Paper 7, 'Effective Governance, Risk Management, and Internal Control', to highlight good practice and the role of professional accountants in business.

The paper notes that IFAC believes that establishing an integrated and effective system of governance, risk management, and internal control is desirable for all types of organisations and can make an invaluable contribution to achieving sustained organisational success.

This need is explained in light of the global financial crisis (including the sovereign debt crisis) where the failure of both public and private sector organisations had many adverse consequences, including loss of value (social, financial and environmental), reduced services and stakeholder returns, increasing unemployment and in some cases, civil unrest.

Accordingly, the paper acknowledges the importance of governance, risk management, and internal control to successful and sustainable organisations, and provides various recommendations in meeting these objectives.

In relation to reporting, the paper notes the following:

IFAC believes that organizations should be transparent in reporting on the structure and performance of their governance, risk management, and internal control arrangements in their various reports to internal and external stakeholders. This can be achieved through periodic accountability reports or a description on the organization’s website. Organizations should report not only on the existence of an integrated management system, but also on major risks the organization faces, the controls it has established, how internal control is monitored and evaluated, how the system works, and what has been done to remediate any control failures or weaknesses. A better understanding of how an organization manages its risks creates trust and provides reassurance to its stakeholders.

As such, the paper shares much with calls for sustainability and integrated reporting.

Click for IFAC press release (link to IFAC website).

IFAC updates member body obligations

05 Dec 2012

The International Federation of Accountants (IFAC) has released seven revised Statements of Membership Obligations (SMOs) that form the basis of the IFAC Member Body Compliance Program.

The SMOs cover IFAC member bodies’ obligations to support:

  • the adoption and implementation of international standards and other pronouncements issued by the International Auditing and Assurance Standards Board (IAASB) (SMO 3), International Accounting Education Standards Board (IAESB) (SMO 2), International Ethics Standards Board for Accountants (IESBA) (SMO 4), International Public Sector Accounting Standards Board (IPSASB) (SMO 5), and International Accounting Standards Board (IASB) (SMO 7)
  • the establishment of quality assurance (SMO 1) and investigation and disciplinary systems (SMO 6).

In relation to the member body obligations in relation International Financial Reporting Standards (IFRS) contained in SMO 7, the revised SMO clarifies the obligations depending on the degree of responsibility the member body has for standard setting.  The SMO requires the implementation of IFRS where the member body has direct responsibility, and may only be departed from where it is "in the public interest".

The revised SMOs have an effective date of 1 January 2013, except for SMO 1, which has an effective date of 1 January 2014.

Click for IFAC press release (link to IFAC website).

IFAC PAIB exposes revised good practice guide

30 Nov 2012

The International Federation of Accountants (IFAC) Professional Accountants in Business Committee (PAIB) has released for comment an exposure draft of an updated International Good Practice Guide 'Project and Investment Appraisal for Sustainable Value Creation'.

The proposals would update the existing guidance which was issued in 2008 by reinforcing the importance of rigorous project and investment appraisal, and include a specific emphasis on facilitating long-term decision making and incorporating sustainability related impacts.

The introduction to the proposed guide notes:

Organizations with explicit sustainable value-creating strategies typically emphasize techniques such as DCF and real options and downplay the role of other short-term measurement criteria, such as payback and earnings per share (EPS) growth.  Research shows that a significant number of organizations do not prioritize such techniques when perhaps they should, especially in assessing strategic investment decisions and taking a long-term view.

The paper sets out seven key principles in project and investment appraisal and provides guidance on how the principles should be implemented, including special considerations for the public and not-for-profit sectors.

The key principles include such things as considering the time value of money, the opportunity cost of capital, systematic risks related to the project being assessed, and decision making of in the context of understanding the organisation's business and strategy, and its economic, social, and competitive position.  As such the requirements have much in common with topics such as the determination of 'value in use' under IAS 36 Impairment of Assets, and more broadly in terms of integrated reporting.

The exposure draft is open for comment until 28 February 2013.  Click for press release (link to IFAC website).

IFAC update

22 Nov 2012

The International Federation of Accountants (IFAC) has made a number of recent announcements, including the appointment of new president and vice-president, the election of new IFAC Board members, admission of new members, and the approval of a new strategic plan for the organisation. In addition, an updated series of 'Statements of Member Obligations' has been released and IFAC has announced that the initial phase of the process of nominations for its various boards and committees has been delayed, whilst the IFAC Professional Accountants in Business Committee has also released its strategy and plan.

In brief (links to further information on the IFAC website):

  • Warren Allen, of New Zealand, has been appointed as IFAC president for a two-year term ending November 2014 and Olivia Kirtley, of the United States, has been appointed deputy president (a role previously held by Mr. Allen)
  • The six new members of the IFAC Board are: Carol Bellringer (Canada), Norunn Byrkjeland (Norway), Dr. Yugui Chen (China), Pamela Monroe Ellis (Jamaica), Dr. In-Ki Joo (South Korea), and Russell Loubser (South Africa). The IFAC Council also re-elected Jacques Potdevin (France) and Marta Rejman (UK)
  • The new IFAC associates are: the Albanian Institute of Certified Accountants, the Association of National Accountants of Nigeria, the Institute of Professional Auditors (Russia), the Ordre National des Experts Comptables et des Comptablies Agréés du Togo, the Institute of Certified Public Accountants of Rwanda, and the Ordem Dos Tecnicos Oficiais dos Contas (Portugal).  A number of organisations have changed status and the Pan African Federation of Accountants has been granted 'Recognized Regional Organization' status
  • IFAC’s strategic plan for 2013-16 will continue a focus on the development, adoption, and implementation of high-quality international standards, improved public sector financial reporting and integrated reporting, and enhance focus on regulation and public policy
  • IFAC has recently completed its revision of the Statements of Membership Obligations (SMOs), which assist member organisations support the adoption and implementation of international standards and maintain quality assurance review systems and investigation and discipline mechanisms.  Most of the revised SMOs commence operation from 1 January 2013
  • Notification of the 'Call for Nominations for Boards and Committees in 2014' has been postponed until 26 November 2012 due to the recent storms, with the final call be issued on 15 January 2013, and nominations submitted from 15 January to 15 March 2013
  • The proposed Professional Accountants in Business Strategy and Work Plan for 2013-2016 has been published for comment, with comments due by 31 January 2013.

Revised standard on the assessment of professional competence

19 Nov 2012

The International Accounting Education Standards Board (IAESB) has released a revised International Education Standard (IES) on the how professional competence of an aspiring professional accountant should be assessed.

The new standard, IES 6 Initial Professional Development—Assessment of Professional Competence (link to IFAC website), prescribes:

  • A principles-based approach, specifying the requirements for the assessment of professional competence by the end of Initial Professional Development (IPD)
  • Principles for individual assessment activities used by member bodies to assess professional competence
  • A requirement that IFAC member bodies formally assess the achievement of competence of aspiring professional accountants prior to their admission to the profession.

A key change from the exposure draft issued in April 2011 is that IES 6 reflects that assessment principles should only apply in initial professional development to ensure the attainment of professional competence, so distinguishing it from continuing professional development.

The revised IES 6 is designed to assist IFAC member bodies and other professional accountancy organisations understand the learning and development requirements for assessing professional competence, and their obligations in upholding the standards.

IES 6 is a result of the IAESB's project to revise all eight IES based on new clarity drafting principles, and is effective from 1 July 2015.

Click for press release (link to IFAC website).

IAASB proposes substantial revisions to auditor responsibilities for 'other information'

15 Nov 2012

The International Auditing and Assurance Standards Board (IAASB) has released an exposure draft of a revised International Standard on Auditing (ISA) on the auditor's responsibilities in relation to 'other information' included in documents containing or accompanying the entity’s audited financial statements.

Some of the proposals in the exposure draft, ISA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information in Documents Containing or Accompanying Audited Financial Statements and the Auditor’s Report Thereon, include:

  • Clarification and expansion of scope of the documents considered "other information", reflecting changes in financial reporting over recent years
  • Extending the auditor’s responsibilities (i.e. the work effort) to include not only reading the other information for consistency with the audited financial statements but also reading and considering the other information for consistency with the auditor’s understanding of the entity and the environment acquired during the course of the audit
  • New suggested auditor reporting responsibilities with respect to other information, including an explicit statement in the audit report providing a description of the auditor’s responsibilities with respect to that information, identification of the specific documents in which it is contained, and whether the auditor has identified material inconsistencies in the other information.

The IAASB acknowledges the proposals in the exposure draft represent a substantive revision and is proposing a 12-15 month transition period after making the standard available before it would be mandatorily applied.

Comments on the exposure draft close on 14 March 2013.  Click for press release (link to IFAC website).

IFAC committee publication on governance and sustainability

26 Oct 2012

The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC) has issued a publication which uses case studies to analyse how professional accountants in business support the performance of their organisations by integrating governance into the key drivers of sustainable organisational success.

The report, entitled Integrating Governance for Sustainable Success, seeks to address how professional accountants can assist to build good governance into the entire cycle of strategic planning, resource utilisation, value creation, accountability, and assurance.

The report posits that an effectively integrated, enterprise-wide governance, risk management, and internal control system:

  • integrates and aligns activities and processes related to planning, risk management, policies/procedures, culture, competency, internal audit, financial management, monitoring, and reporting; and
  • supports executives/managers in moving an organisation forward in a cohesive integrated and aligned manner to improve performance, while operating effectively, efficiently, ethically, legally, and within the established limits for risk.

In the report's discussion on effective and transparent communication, it is noted that the enlarged economic, environmental, and social footprint of many organisations causes a greater demand from various stakeholder groups for accountability or environmental, social and governance (ESG) information.  These factors, combined with complexity in reporting and regulation hve led to increasingly voluminous, complex, and compliance-focused business reports.

Accordingly, the report suggests that current reports should be expanded into more connected and holistic business reports that integrate the various economic, environmental, and social aspects of an organisation into one cohesive explanation of the business.  The report notes the International Integrated Reporting Framework, under development by the International Integrated Reporting Council, will play a role in helping organisations in this respect.

Click for (links to IFAC website):

New standard on review engagements issued

02 Oct 2012

The International Auditing and Assurance Standards Board (IAASB) has released revised International Standard on Review Engagements (ISRE) 2400 'Engagements to Review Historical Financial Statements'.

The revised ISRE is the result of a project commenced in March 2009 to explore standards for a range of services that are capable of meeting the unique needs of small- and medium-sized entities (SMEs) and the users of their financial information, particularly in response to legislative changes in some jurisdictions removing the requirement to prepare audited financial statements.  An exposure draft was issued in January 2011.

Accordingly, review engagements are of particular relevance for entities that are not required, or do not elect, to have an audit, but wish to enhance the credibility of, and confidence in, their unaudited financial statements among their users through practitioner involvement.

The practitioner’s report when a review engagement has been conducted in accordance with ISRE 2400 describes whether anything has come to the practitioner's attention that causes the practitioner to believe the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.

A review is a limited assurance engagement, however, and the procedures performed are substantially less than those performed in an audit conducted in accordance with International Standards on Auditing. Accordingly, the practitioner's review engagement report does not express an audit opinion on the financial statements.

The revised standard is effective for reviews of financial statements for periods ending on or after 31 December 2013.  Click for press release (link to IFAC website).

New guidance proposed on how professional accountants should respond to suspected illegal acts

23 Aug 2012

New proposals from the International Ethics Standards Board for Accountants (IESBA) would introduce new requirements for professional accountants on responding to suspected illegal acts by a client or employer.

The proposals would introduce into the Code of Ethics for Professional Accountants a description of the circumstances in which a professional accountant is required or expected to breach confidentiality and disclose the act to an appropriate authority.

The proposal would require a professional accountant when encountering a suspected illegal act to take reasonable steps to confirm or dispel the suspicion and to discuss the matter with the appropriate level of management. If the response of those with whom the matter has been discussed is not appropriate, the professional accountant shall escalate the matter to higher levels of management and those charged with governance, as appropriate.

If the response is not appropriate and, in the judgement of the professional accountant, the suspected illegal act is of such consequence that disclosure would be in the public interest:

  • a professional accountant providing professional services to an audit client would be required to disclose certain illegal acts to an appropriate authority
  • a professional accountant providing non-audit services to a client that is not an audit client and a professional accountant in business would be required to disclose the matter to the entity’s external auditor, if any, and, in certain circumstances, would have a right to disclose certain illegal acts to an appropriate authority and would be expected to exercise that right.

The proposals require a professional accountant to consider and comply with any applicable legal or regulatory requirements and to consider whether it is appropriate to terminate the professional relationship with the client or resign from the employing organisation.

Comments on the IESBA exposure draft close on 15 December 2012.  Click for IESBA press release (link to IFAC website).

Correction list for hyphenation

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