Chairman's Statement from the Review of Activities 2007-08
When the Auditing Practices Board was formed in 1991 difficulties identified in UK accounting, aud
iting and corporate governance were addressed on a national basis by the Accounting Standards Board, the APB and the Cadbury Committee and its successors. This work has served us well domestically and has enabled the UK to play a major role internationally in the development of standards for financial reporting, auditing and governance.
Now, however, international accounting and auditing standards are becoming a reality and, in Europe at least, are being underpinned by legislation. Despite, or rather because, the focus on setting auditing and ethical standards has moved to international fora, the APB has been very busy during the last year. In particular we have responded to a consultation on proposed changes to the IFAC Code of Ethics and to the numerous ISA exposure drafts issued by the International Auditing and Assurance Standards Board (IAASB) after having obtained views from our public sector and SME audit subcommittees. This work is especially important as the EC Statutory Audit Directive provides the basis for the adoption of international auditing standards into law throughout the European Union.
Not all work can however be carried out at an international level and domestically we have:
- updated the APB's Ethical Standards on auditor integrity, objectivity and independence;
- updated ISA (UK and Ireland) 600 and several APB Bulletins for changes in law and regulations, principally that arising from the Companies Act 2006; and
- issued a discussion paper on the form and content of auditor's reports.
Auditing standards
The finalisation of the EC's Statutory Audit Directive in June 2006 provides a platform for the adoption of International Standards on Auditing (ISAs) issued by IAASB throughout Europe. Although no date has yet been specified for the adoption of ISAs by the EU this will become feasible once IAASB's Clarity Project has been completed at the end of 2008. The APB anticipated this development and, rather than issue its own new standards (except where necessitated by changes in UK law or regulation), has directed its efforts at being actively involved in the work of the IAASB - participating directly in some IAASB projects and contributing indirectly to others. During the fifteen months covered by this report the APB has responded to some 21 ISA exposure drafts.
The APB has also, through its press releases and other material published on its website, sought to raise the awareness of UK and Irish auditors, investors and preparers of financial statements to the changes that were being proposed to the ISAs and to facilitate their input to the process.
The APB is conscious that auditing standards must apply to all audits including the audits of smaller entities. Despite recent increases in the audit exemption threshold, many small companies are still audited and there remain statutory requirements for other small entities including charities and pension funds. During the year the APB's SME audit sub-committee has reviewed the ISA exposure drafts and, through the APB's responses to IAASB, has helped change those proposed requirements which were not appropriate on smaller audits and add additional guidance material on how other requirements can best be applied in the context of smaller audits.
A particular concern of the SME audit sub-committee has been the cost effective implementation of the requirements in the ISAs. This relates, in part, to the issue of training which is not within the APB's remit. We have however discussed with the accountancy bodies the important question of who provides training support to audit firms, especially smaller audit firms, on the application of auditing standards. This will be an important issue when the revised 'clarity' ISAs are implemented. To assist auditors understand what audit documentation is required on a smaller audit, the APB has also issued guidance which includes illustrative examples of audit documentation that are relevant to the requirements of the current ISA (UK and Ireland) audit risk and fraud standards.
Ethical standards
The APB issued Ethical Standards for Auditors (ESs) in 2004. During 2007 it conducted a review of the ESs by gathering views of interested parties, undertaking its own research and drawing on available third party research. As a result of this work, the APB concluded that the existing ESs are:
- proportionate to their purpose;
- comparable with the highest standards internationally; and
- working in practice.
Furthermore, the APB believes that there have been a number of helpful developments over the past three years which have served to decrease the threats to auditor independence, including a reduction in non-audit services provided by auditors to the listed companies they audit and the increasingly active involvement of audit committees in the consideration of auditor independence. On the basis of this review, and from responses obtained to the consultation paper it issued in October 2007, the APB believes that there is currently no need to make major changes to the ESs. Accordingly the revised ESs that were approved by APB in March 2008, only reflect amendments that:
- are required by UK and Irish legislation arising from the implementation of the EC Statutory Audit Directive;
- are necessary in order that the ESs will continue to adhere to the principles of the IFAC Code; and
- add to the clarity of the existing standards and assist their implementation in practice.
There remain a small number of issues that APB needs to give consideration to in 2008. One of these relates to the appropriate period for rotation of the audit engagement partner on listed company audits. Responses to the October 2007 consultation paper demonstrate that differences of view persist between stakeholders as to whether extending the period of rotation for audit engagement partners on the audit of listed companies from five years (the period established by CCAB in 2003 and perpetuated by the APB) to seven years (the period in the IFAC Code of Ethics and the EC Statutory Audit Directive) would have a positive or negative effect on audit quality.
Work is also underway, through the International Ethics Standards Board for Accountants ('IESBA'), on a fundamental revision of international ethical standards. During 2007, the APB reviewed, and commented on, proposed changes to section 290 of the IFAC Code of Ethics on auditor independence. The APB is delighted that the APB's Ethical Standards are being used as a benchmark internationally for quality standards on auditor independence and that the changes that the IESBA is making are largely consistent with them.
As with auditing standards, the challenge will remain how to balance the need for ethical standards that are sufficiently robust to meet the public interest test, especially for the audits of listed companies, with maintaining a workable approach to smaller audits.
Drivers of audit quality
APB collaborated with other parts of the FRC in developing the Consultation Paper 'Promoting Audit Quality' and in finalising the Audit Quality Framework which the FRC hopes will assist stakeholders with communicating about, and assessing, audit quality.
Responses to 'Promoting Audit Quality' confirmed the need to avoid auditing standards becoming too prescriptive, highlighted the critical importance of the skills and personal qualities of partners and staff and demonstrated that some investors believe that more needs to be done to increase the usefulness of the auditor's report. In response to this in December 2007, APB issued a discussion paper 'The Auditor's Report: A Time for Change?' exploring how this might be achieved. An important objective for APB in the current year is to respond to the comments it has received and to influence the international debate in this important area, especially within Europe.
Guidance
During the period the APB has also issued a large volume of guidance for auditors. This included 6 revised Practice Notes, 2 consultation drafts of Practice Notes and 8 Bulletins. Further details of this work can be found on pages 8 to 10 of this report.
Personal thanks
I would like to take this opportunity to thank all members of APB and our staff for their tireless efforts in the last year. Much has been achieved; we have combined well as a team and been flexible in how we approach our changing role. In particular I would like to thank Will Rainey who, in December 2007, completed his three year term as a member of IAASB and to congratulate Jon Grant on his appointment to IAASB.
Richard Fleck
April 2008
Review of Activities 2007-08 (2mb)
Review of Activities 2006 (1824kb)
Review of Activities 2003-04 (1708kb) - 2004-05-04
Review of Activities 2002 (1673kb) - 2003-02-26
Review of Activities 2001 (3545kb) - 2003-02-25
