The Auditing Practices Board ('APB') has issued a Consultation Draft of an update of Practice Note (PN) 23 providing guidance for auditors on 'Auditing Complex Financial Instruments.'
The current PN 23 was issued in April 2002 to provide guidance on auditing derivative financial instruments and is based on an International Auditing Practice Statement (IAPS) issued by the International Auditing and Assurance Standards Board (IAASB). The APB considers that it is helpful to widen the scope of PN 23 to cover other complex financial instruments, as well as derivatives, as many of the audit considerations are the same. Also, there have been a number of recent developments that make this an opportune time to update PN 23, in particular:
The current difficult financial market conditions give rise to particular considerations in relation to valuations and to financial statement disclosures about risks and uncertainties pertaining to complex financial instruments. The consultation draft includes guidance that draws on the IAASB Staff Audit Practice Alert on 'Challenges in Auditing Fair Value Accounting Estimates in the Current Market Environment' issued in October 2008. This guidance supplements that given in Bulletin 2008/1, 'Audit Issues when Financial Market Conditions are Difficult and Credit Facilities may be Restricted.'
There have been changes to the financial reporting frameworks used by entities in the UK and Ireland to account for complex financial instruments, including the recent amendments to accounting standards to permit the reclassification of certain financial assets.
The opportunity has also been taken to align the guidance in PN 23 with the APB's International Standards on Auditing (ISAs) (UK and Ireland).
The comment period ends on 27 March 2009.