| During the 1990's there was much debate surrounding the desirability of public statements by directors of listed companies concerning the effectiveness of internal control, and the extent to which auditors should express assurance on such statements. Publication of the report of the Turnbull Committee Internal Control: Guidance for Directors on the Combined Code 1 (Turnbull report) and associated APB Bulletins' has brought that debate to a conclusion. |
| The Turnbull report provides guidance for directors on the implementation of the internal control provisions of the Combined Code 2 Its guidance is intended to reflect sound business practice whereby internal controls are embedded in the business processes by which an entity pursues its objectives. |
| Under the Listing Rules and the associated APB Bulletins the auditors review whether the company's published summary of the process it has adopted in reviewing the effectiveness of its system of internal control is both supported by the documentation prepared by, or for, the directors and appropriately reflects that process. The auditors are not required to provide assurance on internal control. |
| The procedures to support the review required by the Listing Rules are considerably narrower in scope than those that would be required for an engagement to provide assurance on internal control. This paper does not deal with the narrow requirements of auditors under the Listing Rules but with the much broader concepts of providing assurance on the effectiveness of internal control. |
| Interest in the effectiveness of internal control has not been restricted to the capital markets. Regulators in the financial services sector have shown considerable interest in the internal control of the entities they regulate. In the public sector there are specific requirements for auditors to consider aspects of the internal control of many bodies. |
| The APB has issued two discussion papers on the subject of providing assurance on internal control 3. These papers explained the issues associated with providing assurance on internal control, especially in reports that are made public, and explored different approaches. Responses to these discussion papers indicate that there is still some way to go before a consensus is reached on how engagements to provide assurance on internal control should be performed and how conclusions should be reported. |
| If a demand for either external or internal auditors to provide assurance on internal control develops, then the conceptual and practical difficulties that have been identified will need to be overcome. |
| The APB hopes this Briefing Paper will contribute to developing a model of how practitioners might be able to express assurance on the reliability of systems of internal control. This paper will also assist directors, regulators and others, better appreciate the challenges associated with reporting on the effectiveness of internal control and, in particular, the advantages of providing assurance through a narrative, rather than a standardised, report. |
| Following the concepts described in this Briefing Paper will, almost invariably, give rise to a lengthy narrative report. A lengthy narrative report is necessary in order to communicate the various judgments made by the practitioners, the reasoning underpinning those judgments, and the context in which the opinion is given. Owing to the tack of generally accepted suitable criteria available to practitioners in carrying out such engagements, and the difficulties of communicating conclusions relating to internal control, a standardised short-form report is likely to lead to misunderstandings and unfulfilled expectations. |
| The illustrative narrative report set out in Section 3 of the paper is nine pages long and relates to only the revenue of the subject entity. Furthermore, it does not include a full description of the design of the system of internal control for revenue. It is not difficult to imagine, therefore, that a narrative report dealing with all aspects of an entity's system of internal control, and including a full description of the system, could be a substantial document. |
| It is likely to be impractical to circulate widely reports of such length and, therefore, it seems most likely that reports providing assurance on the effectiveness of internal control will usually be provided by practitioners to those who have instructed them, and not be published. |
| 1 Guidance for auditors in meeting the requirements of the Listing Rules are dealt with in APB Bulletins 1999/5 (United Kingdom) and 2000/1 (Republic of Ireland). See Appendix 2 of this paper. |
| 2 See Appendix 2 of this paper. |
| 3 'Internal financial control effectiveness' in April 1995, and 'Providing assurance on internal control' in March 1998. |
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