The Auditing Practices Board Independent Regulation of the Accountancy Profession 117 Houndsditch London EC3A 7BT Telephone Facsimile +44 (0)20 7293 7931 +44 (0)20 7293 7940 www.auditingpracticesboard.com The Technical Director, International Federation of Accountants, 535 Fifth Avenue, 26th Floor, New York, NY 10017, USA. 28 February 2003 Dear Sir, IAASB Exposure Draft on Proposed Terms of Reference and Operations Policy No.1 The Auditing Practices Board (APB), which is the body that establishes auditing standards in the United Kingdom and the Republic of Ireland, welcomes the opportunity to comment on the Exposure Draft entitled 'Proposed Terms of Reference, Preface to the International Standards on Quality Control, Auditing, Assurance and Related Services and Operations Policy No I - Bold Type Lettering'. Our more significant comments are set out below. Appendix I contains responses to the specific questions posed in the Exposure Draft and Appendix 2 contains detailed and/or drafting comments. Terms of Reference Status of Practice Statements The Terms of Reference state that Practice Statements "provide practical assistances (Sic) in implementing its standards and to promote good practice". The wording in the Preface is much stronger- paragraph 19 requires professional accountants 'to be aware of and consider practice statements applicable to the engagement'. We believe that the references to the status of Practice Statements in the two documents should be conformed, and prefer the wording in the Terms of Reference. Preface to International Standards Exposure of draft Practice Statements Following on from the comment above on the status of Practice Statements, the APB is concerned by the last sentence of paragraph 21 of the Preface, to the effect that drafts of Practice Statements may not in all cases be exposed for comment before they are issued in The Auditing Practice,; Board Limited is a company limited by guarante. Registered in England number 4106326 Registered Office 117 Houndsditch London EC3A 7BT
2 final form. If professional accountants are to be required to be aware of and consider these statements then it is very important that they are only issued after due process, and a proper consideration of the appropriateness and practicality of the proposed guidance before it becomes effective. Departures from ISAs Paragraph 14 of the Preface states that professional accountants need to justify any departures from requirements of Engagement Standards, but does not require this justification to be documented. APB believes that, in the interests of transparency, auditors should document the reasons for any departures from ISAs and, furthermore, they may need to disclose this in their report. APB recommends that the ISA 700 task force should be requested to consider the implications of a failure to comply with all ISAs on the auditor's report. Status Qf ISAs when differences are imoosed bv local laws or ref!ulations Although there is an overriding IF AC requirement for member bodies to use their best endeavours to incorporate ISAs within their national standards we do not believe it is helpful to state this in the final sentence of paragraph 3 and in the footnote and suggest that both are deleted. We believe that the actions required of member bodies should be set out in the IFAC Constitution and in Statements of Membership Obligations and that they have no place in IAASB Statements. We believe that the guidance in the second and third sentences of paragraph 3 of the Preface correctly describes the position when there are differences between national and international standards. We are concerned that the reference to the IFAC requirements in the Exposure Draft detracts from the clarity of this. Effective dates for Practice Statements The APB considers that all Practice Statements issued by the IAASB should have effective dates, contrary to what is stated in paragraph 22 of the Preface. The notion that they be effective as soon as they are issued is unrealistic and does not assist their considered implementation by auditors and appropriate training being provided. Structure of laasb 's Technical Pronouncements The APB is concerned by the potential for conflict between the requirements set out in the IFAC Code of Ethics for Professional Accountants (The IFAC Code) and those in national or European ethical codes. As countries improve national ethical requirements, a requirement within ISAs to comply with the IF AC Code may inhibit the adoption of international auditing standards. In Europe, for example, the EC has issued a Recommendation which extends, and in some respects differs, from the IF AC Code. The APB believes it will be very confusing for auditors to have to comply with differing ethical standards, and considers that the linkage between ISAs and the IF AC Code should be reviewed. The APB notes that the IF AC Code states that it is intended to serve as a model on which to base national ethical guidance. For ISAs to require direct application of the IF AC Code goes beyond that intent and is inappropriate. The Auditing Practices Board Umited is a company limited by guarani Registered in England numher 4106326 Registered Office 117 Houndsditch London EC3A 7BT
3 The Appendix to the Preface indicates that Standards for reviews of historical financial infomlation will be dealt with in the same series of Standards as audits. The APB considers that this is acceptable provided that it is made entirely clear that a different level of assurance is provided by a review and that different operational standards apply. The APB would not support the proposed classification if ( a) there are cross references between an ISA dealing with reviews to ISAs dealing with audits, and (b) the opinion on a review engagement refers to the corpus of 'international auditing standards'. On balance the APB believes that it might be preferable to include reviews within Other assurance engagements. While the APB supports the segregation of ISAs and ISAEs it observes that the proposed structure is likely to result in a degree of duplication in relation to 'topics that apply to all subject matters'. Examples might be use of experts, planning, using the work of another auditor. The APB would favour subject specific standards being as self -contained as possible. Until it is clear that 'topics that apply to all subject matters' are necessary the APB suggests that the IAASB should not commit to them in any published structure. Operations Policy No.1 Bold-type letterin$! The APB strongly supports the use of bold type lettering to highlight basic principles and essential procedures. This is primarily because the APB believes that it is essential for the IAASB to continue to demonstrate its commitment to principle-based standards. Standards based on principles reflect the fact that auditing is a highly judgmental process and high quality auditing results from experienced auditors, knowledgable about their clients, making well informed judgments, rather than from the application of detailed procedural rules which can detract from a thoughtful approach. If you wish to discuss any of the comments set out in this letter please contact Jon Grant, the APB Executive Director, in the first instance. Yours faithfully, ( ilraal<! ~ RJH Fleck Chainnan The Auditing Practices Board Limited is a company limited by guarantee Registered in England number 4106326 Repistered Office 117 Houndsditch London EC3A 7BT
4-1 2 3 APPENDIX 1 Responses to specific Questions posed in the Exposure Draft Do the Terms of Reference appropriately reflect the IAASB's role as the international audit and assurance standard setter? The APB considers that essentially they do. Consideration might be given to recommending to IF AC that the cooperation with national standard-setters should be one ofiaasb's formal objectives. Do the Terms of Reference and Preface, when taken together, address all relevant matters? Yes Is there general support for retaining the distinction between bold and ordinary lettering? The APB strongly supports the retention of a distinction between bold and ordinary lettering. It believes that bold lettering helps with the development and understanding of auditing standards. 4 Is the restructuring of the Handbook understandable and effective~? Generally the APB supports the proposed structure. However, as described in the covering letter, we have reseivations about whether there should be a commitment to developing standards on 'topics that apply to all subject matters' for assurance engagements and believe that great care should be taken not to give the impression that the corpus of international standards on auditing apply to reviews of historical financial information. -- 5 Are there any terms, phrases or concepts in the Preface that would be particularly difficult to translate into other languages or that might be ambiguous when translated? The APB fears that the word 'assurance' may give rise to difficulties in other languages, but this is primarily a matter for respondents of other nationalities to comment on. The Auditing Practices Board Limited is a company limited by guarantee Registered in England number 4106326 R"owt"r,,'! om"" 117 Hft"n'!,'!;trh I ftn,!ftn J;r~A 7RT
5 APPEND IX 2 Detailed and/or draftin2: comments Terms of Reference Para 1. The APB notes a difference in the emphasis given to the quality of the various standards to be developed by IAASB in the first paragraph. ISAs are described as - 'such high quality that...'; 'ISAEs as high quality'; and ISRSs as simply 'standards for related services'. Para 2. We are not sure that auditors report on the credibility of historic financial infonnation. Rather auditors' reports 'enhance the credibility of historic financial infonnation'. We suggest that the word 'historical' be used rather than 'historic'. Para 3. There should not be an's' on assistance. Paras 2 and 3. Overall these paragraphs appeared to be statements of what laasb does in response to its objectives, and might therefore be better as part of the Preface, or Operating Procedures. Para 4. The IAASB can only encourage the national standard setters to 'link their work with IAASB's own'. Adding the word 'encourage' would help but this whole sentence is rather limited. We commend to you the much more expansive reference to cooperation with national standard setters in your 2002 Annual Report - "with an aim to share resources, minimize duplication and reach consensus and convergence in standards at an early stage in their development". Preface to International Standards Para 3. The APB believes that the first line should refer to.....audit, assurance and related ServIces.. - Para 7. The APB believes that minutes of all IAASB meetings should also be published on the web site a short time after each meeting so as to enhance the transparency of the IAASB's work. Para 9. It is suggested that 'as appropriate' is inserted after 'applied'. As noted in the covering letter the APB is concerned that ISAs relating to audits should be thought to apply to reviews. Para 13. The APB considers that the final sentence commencing "This includes the explanatory...." is un-necessary, as it repeats the substance of the rest of the paragraph, and should be deleted. The Auditing Practices Board Limited is a company limited by guarantee Registered in England number 4106326 Registered Office 117 Houndsditch London EC3A 7ST
6 Para 24. The APB believes that the minutes of meetings should always contain details of dissenting opinions not just if dissenting members request this. We suggest the last 9 words of the sentence be deleted. Operations Policy No.1 Para I. The APB considers that the use of bold type lettering is a 'policy' or a 'practice', not a 'process'. Paras 3 and 4. These paragraphs appear to set out a short history of a 'codification' project carried out ten years ago. The APB does not consider that this section adds anything to the guidance on bold type lettering and recommends that it be removed. Para 6. The APB recommends that the phrase " 1. d. " expame m...is clear from." Is replaced by Para 7. The APB considers that paragraph 7 appears somewhat trivial, and its substance is already covered in paragraph 6. The Auditing Practices Board Limited i,; a company limited by guarantee Registered in England number 4] 06326 Registercd Office 117 Houndsditch London EC3A 7BT