Audit and Assurance news

The Financial Reporting Council has issued revised International Standard for Review Engagement (UK) 2410 (ISRE (UK) 2410) Review of Interim Financial Information Performed by the Independent Auditor of the Entity. The revised standard provides additional clarity on auditor responsibilities, strengthens the review procedures required on management’s going concern assessment and strengthens reporting requirements in relation to going concern.  This ISRE (UK) is effective for reviews of interim financial information for periods commencing on or after 15th December 2021. Early adoption is permitted.

The Financial Reporting Council (FRC) has published a Thematic Briefing: The audit of cash flow statements. The briefing document highlights the results of the FRC's Constructive Engagement key findings and the steps taken by audit firms to strengthen the audit of cash flow statements. The cash flow statement provides users of the financial statements with an understanding of the generation, availability, and use of cash, and in supporting analysis of future expectations. The cash flow statement is a primary statement, but it does not always get the necessary amount of audit input as other primary statements.  As the cash flow statement movements are linked to other audited primary financial statements, this can manifest itself in the amount of audit work performed not being sufficient to reach an appropriate audit opinion or to identify matters that should be corrected/reported to those charged with governance. A common root cause is: • Internal consistency checks by the audit team across the financial statements are not picking up basic errors in the cash flow statement. This may also result in classification errors between sections of the cash flow statement. Other root causes include: • The audit team did not always adequately challenge management on the accounting policies applied and disclosures made affecting the cash flow statement. • Guidance available to the audit team to deal with technical and complex judgements was not always sufficient or embedded through staff awareness methods and training. • The review process did not always identify and adequately respond to matters identified in the audit. • The use of spreadsheets and the manual nature of cash flow workings by companies increases the complexity of auditing the consolidated cash flow statement. 

Technical Release 01/2021 Reporting to Third Parties, Guidance for Accountants, was issued in April 2021. Accountants are often asked by their clients to sign reports that have been requested by parties with whom the client has a relationship (Third Parties). Often these reports (or standard forms) are not suitable for the accountant to sign and contain language and assurances that are not appropriate. The accountant may be able to carry out an assurance engagement (reasonable assurance or limited assurance) or an agreed-upon-procedures engagement and provide the client with a report which will meet the needs of the third party. This Technical Release TR 01/2021 aims to provide a “roadmap” to relevant international standards and supporting materials that are available to accountants when delivering assurance, agreed-upon procedures or advisory engagements.  Miscellaneous Technical Statement M39 Reporting to Third Parties has been withdrawn. All our Technical Releases can be accessed on our website.

Since the outbreak of Covid-19, there have been huge challenges for many businesses, with accountants playing a critical role in helping them navigate the uncertainties. Amongst this disruption, one significant change which may have slipped off some businesses’ radar is the discontinuation of LIBOR (the London Interbank Offered Rate), and deadlines are imminent. As you are probably aware, public authorities globally have announced that LIBOR, a series of benchmark reference rates used for calculating interest rates for financial products, is no longer sustainable and the market should move to robust alternative rates. In the UK, the Bank of England and the Financial Conduct Authority (FCA) have set out the need for this transition, and from April 2021 lenders will no longer be able to offer new sterling loans linked to LIBOR, and any existing LIBOR based loans will need to be switched by 31 December 2021. This will affect a significant proportion of British businesses in some way. LIBOR is found in commercial loans, leasing and servicing contracts, discount rates used in valuations and company pension schemes. The transition will have implications ranging from the way businesses finance themselves, to potential impacts on accounting systems and tax. Many businesses may now need support in understanding how the transition could affect the payment or receipt of interest after the end of 2021, the legal position of a new contract, and the nature and impact of the new alternative rates. Replacements for LIBOR will be quite differently constructed. For example, the main alternative rate that may be used to replace LIBOR, particularly for medium to large businesses, is SONIA (Sterling Overnight Index Average). Whilst LIBOR is available as a forward-looking term rate for different tenors, for example one month, or three months, SONIA is a backward-looking overnight rate. For smaller businesses, other rates such as Bank of England Base Rate may be offered, but this too is constructed differently to LIBOR. For example, unlike LIBOR, it does not include any term bank credit risk or liquidity premium. The practical challenges when taking out new lending on alternative rates to LIBOR or transitioning existing contracts, are not insignificant. Additionally, lenders are now starting to contact clients to discuss contracts and new rates, so businesses need to be prepared. To help with this preparation, ICAEW and UK Finance, working alongside the CBI, ACT and LMA, have developed a new simple introductory guide which can be given to clients and also used by any accountants or advisers of businesses who are not yet familiar with the transition. The guide sets out what is happening, helps businesses understand if it affects them, what they need to do and where they can go for further information. Accountants and advisers have a very important role at the centre of this transition and can help secure the best outcomes for businesses and clients. Now is the time for both accountants and businesses to put LIBOR on their list of priorities for 2021. For more information, please visit the Institute of Chartered Accountants in England and Wales’ webpage on LIBOR transition or in addition to its introductory guide, please also see UK Finance's detailed guide on the discontinuation of LIBOR.   

 The International Auditing and Assurance Standards Board (IAASB) has issued a Staff Audit Practice Alert, The Consideration of Climate-Related Risks in an Audit of Financial Statement.Climate change is growing in relevance to investors and other stakeholders of the IAASB.  There is growing demand by investors for climate-related information for their economic decision-making. The effects of climate change are increasingly visible, global and local policy actions are evolving to take account of it, and it has the potential to impact most - if not all entities - directly or indirectly. The phrase 'climate change' does not feature in the International Standards on Auditing (ISA). This Staff Audit Practice Alert is to assist auditors in understanding what already exists in ISA and how it relates to auditors’ considerations of climate-related risks in an audit of financial statements. According to IAASB Technical Director Willie Botha "the auditor’s responsibilities under the ISAs encapsulate the consideration of events or conditions relevant to the susceptibility to misstatement of amounts and disclosures in an entity’s financial statements, which would include climate-change risk."About the IAASBThe IAASB develops auditing and assurance standards and guidance for use by all professional accountants under a shared standard-setting process involving the Public Interest Oversight Board, which oversees the activities of the IAASB, and the IAASB Consultative Advisory Group, which provides public interest input into the development of the standards and guidance. The structures and processes that support the operations of the IAASB are facilitated by the International Federation of Accountants (IFAC). 

(up-to-date to 10 June 2020) Introduction  Over recent weeks, much has been issued in terms of advice from regulators, and commentary, regarding various auditing considerations related to the spread of coronavirus.  We have assembled below some information that we have come across that may be of assistance to members. Commentary should not be taken as advice or as a comprehensive analysis of all aspects. This is a rapidly evolving situation. When reading information at the links below, due care should be taken of the date of issue and any developments in the interim that may not be reflected in the material published, such as updated statements from regulators etc. There is a need to be cognisant of the relevant Auditing Standards (IAASA and FRC) as well as the accounting framework being applied by an entity (e.g. FRS 102, IFRS etc.), and the jurisdiction, in considering the relevance of any of the information below. This webpage will be periodically amended as further clarification is provided and additional queries are received. Guidance from regulators A number of regulatory bodies have issued guidance. Auditors and their clients should monitor the relevant websites for up to date information. IAASA IAASA has created a Covid hub on its website. The hub includes statements and publications from various regulatory bodies in the context of Covid-19. It also includes a statement from IAASA on the challenges for audit arising from Covid-19.  The IAASA Covid hub can be accessed here. UK - Financial reporting Council (FRC) The UK oversight body and standard setter the FRC has issued a Bulletin Guidance for Auditors and Matters to consider where engagements are affected by Coronavirus (Covid 19).  The issues covered include Acceptance of new engagements Materiality Audit evidence Compliance with laws and regulations Going Concern Group audits Reporting Previously the FRC issued guidance (16 March 2020) and this covered: risk assessments;  how the auditor gathers sufficient, appropriate audit evidence; matters relevant to Group audits; going concern, disclosures and the need to reassess key aspects of the audit planning.  The FRC have also issued advice for companies and auditors on disclosure of risks and other reporting consequences arising from the emergence and spread of COVID-19 (18 February 2020) and guidance for companies on Corporate Governance and Reporting  Further guidance on modified auditors’ opinions and reports during Covid 19 crisis. Issued 21 April The FRC has issued guidance (14 May) on corporate governance and reporting including interim reports.  Read the full guidance here: Company Guidance (Updated May 2020) (COVID-19) Podcasts from the FRC  Mark Babington, the FRC's Acting Executive Director of Regulatory Standards discusses new guidance issued by the FRC to assist auditors during the coronavirus pandemic. You can download or listen to the podcast here.  Jen Sisson, the FRC's Deputy Director of Investor and Stakeholder Engagement, speaks with Will Boyack to discuss how the FRC's engagement is influencing its guidance for companies, investors and auditors during the Covid-19 pandemic.  AGMs and audit reports are among the auditing issues discussed on this short podcast which you can download or listen to the podcast here. Guidance on best practice for AGMs has now been added to the Q&As published previously by BEIS , These details have been published to give companies and other bodies a basis on which to plan over the coming months. Any legislation is subject to the approval of Parliament A link to the Q&As can be found here UK - The Financial Conduct Authority (FCA) The Financial Conduct Authority (FCA), Financial Reporting Council (FRC) and Prudential Regulation Authority (PRA) have announced a series of actions to ensure that information continues to flow to investors and to support the continued functioning of the UK’s capital markets including permission for a delay in the publication of audited annual financial reports for listed companies from 4 to 6 months from the end of the financial year. The FCA has now (22 April) extended the submission deadlines for certain regulatory returns. The extension applies for submissions that are due up to and including 30 June 2020. They had previously requested that all listed companies observe a moratorium on the publication of preliminary financial statements for at least two weeks. EU- The Committee of European Auditing Oversight Bodies In a recent paper CEAOB emphasises the areas of high importance on audits of financial statements with particular emphasis on the following areas that are of high importance for the performance of ongoing audits:   Obtaining Sufficient appropriate audit evidence Going concern Subsequent events Reporting and Communication  Relevant Auditing Standards The auditing standards listed below are of particular relevance in the current situation.  Ireland ISA (Ireland) 570 Going Concern (Revised October 2019) ISA (Ireland) 501 Audit Evidence – Specific Considerations for Selected Items ISA (Ireland) 560 Subsequent Events ISA (Ireland) 600 Special Considerations – Audits of Group Financial Statements (including the Work of Component Auditors) All Irish auditing standards are available on the IAASA website    UK  ISA (UK) 570 (Revised September 2019) Going Concern ISA (UK) 501 Audit Evidence – Specific Considerations for Selected Items ISA (UK) 560 Subsequent Events ISA (UK) 600 Special Considerations – Audits of Group Financial Statements (including the Work of Component Auditors) All UK auditing standards are available on CHARIOT and on the FRC website COVID-19 - Regulated Firms Updates - The Central Bank of Ireland (Last updated on 21 April 2020) The Central Bank of Ireland has intensified its engagement across the financial services system to ensure that firms are taking the necessary actions to be able to continue to serve their customers through the unprecedented challenges COVID-19 is causing and will continue to review its approach to regulatory flexibility throughout the duration of the COVID-19 pandemic and may provide further updates as required. Additional Guidance material   Accountancy Europe  unites 51 professional organisations from 35 countries that represent 1 million qualified accountants, auditors and advisors.  Analysis of guidance for European auditors This publication focuses on how COVID 19 impacts businesses and the people that audit them. It aims to support European auditors in adapting their work to new circumstances in ongoing audits with 2019 year-ends and beyond. It highlights the following main matters for auditors to consider: obtaining audit evidence auditor’s assessment of going concern auditor’s reporting Most of the matters in this publication apply also to audits with closing dates after 2019 an additional overview with main matters for consideration specifically for audits with 2020 closing dates is being developed. European Securities and Markets Authority (ESMA) ESMA, the EU’s securities markets regulator, has issued a Public Statement on some accounting implications of the economic support and relief measures adopted by EU Member States in response to the COVID-19 outbreak ESMA statement ESMA Guidelines on APM   Alternative Performance Measures ESMA issued Guidelines on Alternative Performance Measures (Guidelines on APMs) aimed at promoting the usefulness and transparency of APMs included in prospectuses and/or regulated information. ESMA have now (17 April) published some Q&A to help users in the context of COVID-19.   The Q&A:  highlights the main principles of the ESMA Guidelines on Alternative Performance Measures;  encourages issuers to use caution when adjusting APMs and when including new APMs to address the impact of COVID-19; and  recommends issuers provide narrative information regarding the modifications made, the assumptions used and the impact of COVID-19 in APMs used.  The Q&A document may be accessed here. On 20 May the FRC updated this guidance for companies on corporate reporting to explain how they should report exceptional items and alternative performance measures (APMs) in their reports and accounts, in the context of the Covid-19 crisis. Investors expect to see balanced, transparent and clearly explained disclosures of material items arising from the crisis. A link to the guidance can be viewed here.  European Banking Authority Statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of COVID19 measures EBA statement UK Company Filings, AGMs and other general meetings.  BEIS have published some Q&A to provide companies and their advisers with additional information upon which to plan activities over the coming months.  International  International Auditing and Assurance Standards Board (IAASB ) - Guidance for auditors during the coronavirus pandemic  IAASB has issued a guidance for auditors highlighting areas of focus in an evolving audit environment due to the impact of covid-19.  The guidance lists the relevant International Standards for Auditing (ISAs) and specific matters for each of these which auditors have to consider in the context of the pandemic.  On 22 May the IAASB released -Staff Audit Practice Alert with COVID-19 Pandemic related guidance for auditors to consider when issuing an auditor’s report on the completion of the audit of financial statements. This highlights the potential implications for auditor and interim review reports arising from the current environments including: Auditor’s opinion Material uncertainty KAM and EOM paragraphs Interim reviews The document can be found HERE. Guidance on auditor considerations relating to GOING CONCERN in light of changing environment due to the COVID-19 pandemic On April 29, IAASB issued their official guidance on auditor considerations relating to going concern in light of changing environment due to the COVID-19 pandemic. Click HERE to read more. The International Ethics Standards Board for Accountant (IESBA) A Questions and Answers (Q&A) publication was developed by the staff of the IESBA to highlight aspects of the International Code of Ethics for Professional Accountants (including International Independence Standards) that might be relevant in navigating ethics and independence challenges and risks as a result of the COVID-19 pandemic. The Q&A can be read here Guidance from professional bodies:   Chartered Accountants Ireland Practice Consulting have published guidance for auditors on attendance at stocktakes by auditors of small and medium sized entities.  We have also published a series of auditing FAQs which provide examples to prompt evaluation and challenge.    The Institute Advocacy and Voice Team’s article ‘Going Concern considerations published COVID19 2020’ (23 April 2020), may assist members that are preparing and auditing financial statements and serve as a reminder of some of the requirements around going concern from an accounting and auditing perspective. ICAEW The ICAEW have a dedicated audit webpage for the current crisis.   The ICAEW have produced a guide dealing with the particular issues facing group audits, it is designed for UK group auditors with component auditors based in jurisdictions impacted by Coronavirus (COVID-19). It offers practical considerations in relation to the work of component auditors to address the requirements in ISAs (UK). It may also be relevant for group auditors in other jurisdictions with similar requirements. The ICAEW Audit and Assurance Faculty have produced a two part guide for auditors, covering COVID-19 considerations for auditing going concern, and how to report when a material uncertainty relating to going concern exists. The potential impact of coronavirus on going concern and the auditor’s report is discussed here on the ICAEW webpage. ICAS The institute in Scotland have a website providing guidance for members and have also published guidance on stocktakes UK Pensions For UK pensions: ICAS and ICAEW have prepared an article ‘Relevant accounts for section 179 valuations due by 31 March 2020’ (30 March 2020) to assist both pension trustees and auditors to meet their responsibilities. Updated 10 June 2020