The horizon for Auditors – January 2022

The horizon for auditors is driven by the desire to improve audit quality, resulting in the introduction and implementation of:

A challenging horizon ahead for auditors

The audit profession has come under significant pressure in recent years, having to audit new and complex accounting standards against a background of increasing criticism from regulators globally and an increasingly litigious environment.

The IAASB have released a series of revised auditing standards (ASA 540, ASA 500 and ASA 315) to improve audit quality, emphasizing the need for auditors to apply professional scepticism. Concurrently, the IAASB introduced a new standard in respect of quality management for audit firms (ISQM1).

The fundamental requirements of an audit, being to obtain sufficient appropriate audit evidence to opine whether the financial report is free of material misstatement, has not been changed or been enhanced. Nor has the requirement to understand the entity and the environment it operates in, so as to identify the risk of material misstatement through error or fraud. The revised auditing standards will however make it clearer for reviewers, regulators, and litigators to identify when the auditor has failed to properly identify risk and failed to obtain sufficient audit evidence.

Key amendments to auditing and ethical standards applicable to Australian auditors

The key amendments to auditing and ethical standards applicable to Australian auditors are:

2022 2023 2024
ISQM1 to be in place system by 15 December 2022 First year of implementing and quality under ISQM1 Review of ISQM1 application
Readiness for ASA 315 (revised) Identifying and Assessing the Risks of Material Misstatement First year of ISQM2 Review of ISQM2 application
First year of ASA 315 (revised) applying to the planning of 31 December 2022 year ends First year of ASA 315 (revised) applying to the planning of 30 June 2023 year
Amended APES 110 Code of Ethics for Professional Accountants to Promote the Role and Mindset Expected of Professional Accountants in place from 1 January 2022 First year of ASA 220 (revised) applying to half year reviews for 30 June 2023 and full year audits 31 December 2023 First year of ASA 220 (revised) applying to half year reviews for 31 December 2023 and full year audits 30 June 2024
Application of ASRS 4400 (revised), Agreed-Upon Procedures Engagements, applicable from 1 January 2022
Review of: ASA540(revised) application ASA 500(revised) application Review of: ASA540(revised) application ASA 500(revised) application Review of: ASA 220(revised) application ASA 315(revised) application ASA540(revised) application ASA 500(revised) application

2022 Another challenging year for auditors

2022 is the year in which an audit firm implements ISQM1, (this needs to be completed by 15 December 2022) and prepares to implement ASA 315 (revised). 2022 also sees the application of revisions to APES 110, which will implement both assurance and non-assurance arrangements, and the introduction of ASRS 4400 (revised) Agreed-Upon Procedures Engagements.

2022 will involve an audit firm implementing and applying:

2022 will involve an audit firm preparing to implement:

ISQM1 represents a fundamental change as to how Australian audit firms address quality management, Australian audit firms are required to implement an ISQM1 Quality Management process by 15 December 2022.

Practical implications

Audit firms need to determine as soon as possible, their plan and timeline for implementing ISQM1.

This plan must include:

The individual and team who are responsible for implementation.

A realistic time frame for implementation, considering peak audit workloads, staff turnover, training requirements and the need to rectify deficiencies.

The firm’s quality management plan will form the basis for future inspections by regulators and professional bodies. Therefore, a robust and well considered plan is crucial.

Amendments to APES 110 Code of Ethics for Professional Accountants to Promote the Role and Mindset Expected of Professional Accountants

The amendments to APES 110 are effective 1 January 2022.

The revisions to APES 110 promote the role and mindset expected of accountants and include a new requirement for accountants to have an inquiring mind when applying the conceptual framework of the Code of Ethics.

The amendments include:

  • Definition of professional judgement

  • Further explanation of the requirement to act in the public interest

  • Revisions to the five fundamental principles of ethics for accountants

  • Definition of what integrity involves

  • Guidance on compliance with the principle of objectivity

  • Requires an accountant to have an inquiring mind

  • Requirements to consider the source, relevance and sufficiency of information obtained

  • Definition and examples of bias

Key Requirements of APES 110 amendments

The revisions to APES 110 clarify that the mindset of Professional Accountants and auditors in Australia is to be impartial when performing:

  • An audit

  • Agreed upon procedures

  • Providing technical advice

  • Preparing financial statements

  • Providing taxation advice

  • Providing valuations

The key theme being that a Professional Accountant, when performing accounting services cannot simply provide their client with the advice or outcome their client desires, ignoring the interest of others or potential contradictory evidence.

The amendments to APES 110 set out that all Professional Accountants and auditors are required to:

  • consider not only the preferences or requirements of an individual client or employing organisation, but also the interests of other stakeholders when performing Professional Activities

  • to be straightforward and honest in all professional and business relationships

  • to exercise professional or business judgements without being compromised by undue influence of, or undue reliance on, individuals, organisations, technology or other factors

  • attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent Professional Activities, based on current technical and professional standards and relevant legislation

  • behave in a manner consistent with the profession’s responsibility to act in the public interest in all Professional Activities and business relationships

  • avoid any conduct that the Professional Accountant knows or should know might discredit the profession

  • have the strength of character to act appropriately, even when facing pressure to do otherwise or when doing so might create potential adverse personal or organisational consequences

  • have an enquiring mind

  • consider the source, relevance and sufficiency of information obtained, taking into account the nature, scope and outputs of the Professional Activity being undertaken

  • be open and alert to the need for further investigation or other action

  • consider whether the information or its source might be influenced by bias or self-interest

  • consider whether there is reason to be concerned that potentially relevant information might be missing from the facts and circumstances

  • consider whether there is an inconsistency between the known facts and circumstances and the Professional Accountant’s expectations

  • consider whether the information provides a reasonable basis on which to reach a conclusion

  • consider whether there might be other reasonable conclusions that could be reached from the information obtained

APES 110 amendments – Bias

APES 110 defines bias as:

Conscious or unconscious bias affects the exercise of professional judgement when identifying, evaluating and addressing threats to compliance with the fundamental principles.

APES 110 sets out the following examples of potential bias that Professional Accountants are required to be aware of when exercising professional judgement:

  • Anchoring bias, which is a tendency to use an initial piece of information as an anchor against which subsequent information is inadequately assessed.

  • Automation bias, which is a tendency to favour output generated from automated systems, even when human reasoning or contradictory information raises questions as to whether such output is reliable or fit for purpose.

  • Availability bias, which is a tendency to place more weight on events or experiences that immediately come to mind or are readily available than on those that are not.

  • Confirmation bias, which is a tendency to place more weight on information that corroborates an existing belief than information that contradicts or casts doubt on that belief.

  • Groupthink, which is a tendency for a group of individuals to discourage individual creativity and responsibility and as a result reach a decision without critical reasoning or consideration of alternatives.

  • Overconfidence bias, which is a tendency to overestimate one’s own ability to make accurate assessments of risk or other judgements or decisions.

  • Representation bias, which is a tendency to base an understanding on a pattern of experiences, events or beliefs that is assumed to be representative.

  • Selective perception, which is a tendency for a person’s expectations to influence how the person views a particular matter or person.

Practical Implications

The revisions to APES 110, potentially expose Professional Accountants and auditors to greater scrutiny and litigation than they have been subject to historically.

The amendments make it very difficult for Professional Accountants to produce reports or advice framed around assumptions they have been provided which are clearly incorrect, misleading or otherwise deficient.

ASRS 4400 (revised) Agreed-Upon Procedures Engagements

ASRS 4400 (revised) Agreed-Upon Procedures Engagements, has been revised to respond to the growing demand for these engagements, particularly in relation to the need for increased accountability around funding and grants.

The revised requirements and application material promote consistency in the performance of agreed-upon procedures engagements, and include enhancement relating to, among other matters:

  • the exercise of professional judgement

  • compliance with independence requirements

  • engagement acceptance and continuance considerations

  • using the work of a practitioner’s expert

  • greater clarity and transparency in the agreed-upon procedures report.

ISRS 4400 (revised) will be effective for agreed upon procedure (AUP) engagements for which the terms of engagement are agreed on or after 1 January 2022.

In addressing public interest issues relevant to AUP engagements, the revised standard intends to:

  • Respond to the needs of stakeholders―the scope of the revised standard has been broadened to meet the demand for AUP engagements on both financial and non-financial subject matters

  • Provide clarity in the AUP report

  • Enhance consistency in the performance of AUP engagements.

Key amendments to agreed upon procedures engagements

Key amendments include:

  • The scope now covers AUP engagements on both financial and non-financial subject matters

  • The term ‘factual findings’ has been replaced by the term ‘findings,’ which is defined as the factual results of agreed-upon procedures performed

  • Setting out that ‘findings’ exclude opinions or conclusions in any form as well as any recommendations

  • Setting out that findings are capable of being objectively verified

  • Requirement for the AUP report to include a statement on independence

  • Requirement for the practitioner to exercise professional judgment throughout the engagement, including in accepting, conducting and reporting on the AUP engagement, taking into account the circumstances of the engagement.

New requirements in relation to engagement acceptance and continuance considerations

The revised standard introduces new requirements in relation to engagement acceptance and continuance considerations, including:

  • The requirement to understand the purpose of the engagement, and the requirement to decline the engagement if the practitioner becomes aware of any facts or circumstances indicating that the procedures are inappropriate for the purpose of the engagement

  • Only accepting or continuing the engagement when certain conditions are met

  • Communicating with the firm if information is obtained that would have caused the firm to decline the engagement had that information been available earlier, so that necessary action can be taken.

Indications that the procedures the practitioner is asked to perform are inappropriate for the purpose of the agreed-upon procedures engagement

ASRS 4400 sets out the circumstances where it is inappropriate to accept or perform of the agreed-upon procedures engagement, these being:

  • The procedures are selected in a manner intended to bias the intended users’ decision-making

  • The subject matter on which the agreed-upon procedures are performed is unreliable

  • An assurance engagement or advisory service may better serve the needs of the engaging party or other intended users.

Considering the needs of the intended user

ASRS 4400 sets out that in certain circumstances it may only be appropriate to accept or continue the agreed upon procedure engagement if the practitioner requests the engaging party to:

  • Distribute a copy of the anticipated procedures and the form and content of the agreed-upon procedures report as set out in the terms of engagement to the intended user

  • Obtain acknowledgement from the intended user of the procedures to be performed

  • Discuss the procedures to be performed with appropriate representatives of the intended user.

In some circumstances it may only be appropriate to accept or continue the agreed upon procedure engagement if the practitioner reads correspondence between the engaging party and other intended user if the engaging party is not the only intended user.

Practical implications of ASRS 440 (revised)

The nature of an agreed upon procedure has historically meant this type of engagement as being viewed as the least risky type of engagement performed by an auditor, largely because as by definition the auditor provides no assurance and is not governed by the auditing standards.

ASRS 4400 (revised) together with the amendments to APES 110 will mean that auditors now need to consider the needs of users and ensure that their reported findings are not influenced by bias or self-interest.

2023 Another challenging year for auditor

2023 will see the audit firm:

  • test its quality management system for compliance with ISQM1

  • implement the revised ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information and the new standard ISQM2 Engagement Quality Reviews

  • Apply ASA315 to the audit of 30 June 2023 year ends

2024 Adjusting to the new norm

At present no new or revised auditing standards are applicable for 2024, this year will represent a period of audit firms being inspected against the new and revised suit of auditing standards and the revised quality standards.

New quality management standards

As part of the IAASB’s drive to improve audit quality, the IAASB introduced two revised quality management standards.

The challenge of implementing these new standards should not be underestimated, with the full impact being felt in 2023.

2023 will be the first full year audit firms apply ISQM1, which require audit firms to:

  • Continually monitor the appropriateness of the firm’s quality risk management for changing risks and conditions

  • Evaluate the performance of the audit firm’s leadership

  • Evaluate and conclude whether the system of quality management is achieving its objectives (to be performed annually)

  • Take further action if the conclusion on whether the system of quality management is achieving its objectives is unsatisfactory.

Practical implications

The ongoing compliance with ISQM1 should not be underestimated, audit firms are required to test their quality management system at least annually.

The audit firm will have clearly failed to comply with the requirements of ISQM1 if:

  • An annual review of the effectiveness of the audit firm’s quality management system is not performed

  • Appropriate actions are not taken for weaknesses identified in the annual review.

ISQM2 Engagement Quality Reviews

ISQM2 is effective for audit and review engagements of financial statements for periods beginning on or after 15 December 2022, applying to half year reviews for 30 June 2023 and full year audits 31 December 2023.

ISQM 2 Engagement Quality Reviews, addresses:

  • The appointment and eligibility of the engagement quality (EQ) reviewer

  • The EQ reviewer’s responsibilities relating to the performance and documentation of an EQ review.

The changes introduced in ISQM 2 are intended to:

  • Extend the scope of engagements subject to an EQ review (in addition to audits of financial statements of listed entities)

  • Strengthen the eligibility criteria for an individual to be appointed as an EQ reviewer

  • Enhance the EQ reviewer’s responsibilities relating to the performance (including the nature, timing and extent of procedures) and documentation of the EQ review.

ISQM2 requires an EQ review for:

  • Audits of financial statements of listed entities

  • Audits or other engagements for which an EQ review is required by law or regulation

  • Audits or other engagements for which the firm determines that an EQ review is an appropriate response to address one or more quality risk(s).

The EQ reviewer must have:

  • An understanding of professional standards, applicable legal and regulatory requirements and of the firm’s policies or procedures relevant to the engagement;

  • Knowledge of the entity’s industry

  • An understanding of, and experience relevant to, engagements of a similar nature and complexity

  • An understanding of the responsibilities of the engagement quality reviewer in performing and documenting the engagement quality review

  • Sufficient time

  • Appropriate authority

  • Comply with relevant ethical requirements, including threats to objectivity and independence

  • Comply with provisions of relevant laws and regulations.

Practical implications

The introduction goes hand in hand with application of ISQM1 and ASA220 revised. Audit firms will need to carefully determine whether their EQ reviewers:

  • Have the appropriate skills and experience for each engagement to which they are assigned

  • Have the appropriate authority

  • Are given sufficient time.

An interesting inclusion is that ISQM2 permits the use of suitably qualified external EQ reviewers and the use of assistants.

Revised Auditing Standards

The period 2022 to 2024 sees the introduction of two revised auditing standards, namely:

These revised auditing standards are part of the IAASB’s and AuASB’s continued drive to improve audit quality.

ASA 220 (revised) Quality Management for an Audit of Financial Statements

ASA 220 (revised) is effective for audit and review engagements of financial statements for periods beginning on or after 15 December 2022, applying to half year reviews for 30 June 2023 and full year audits 31 December 2023.

The revisions to ASA 220 continue the drive for quality set out in ASA 540 (revised) and ASA 315 (revised), emphasizing the importance of professional scepticism, and requiring enhanced documentation of the auditor’s judgments. It also is fully in line with ISQM1 and ISQM2.

ASA 220 (revised) makes it clear that it is the engagement partner’s overall responsibility to manage and achieve quality on the engagement and this is achieved through the engagement partner having sufficient and appropriate involvement throughout the audit engagement.

ASA 220 (revised)) sets out that the Engagement partner is responsible for:

  • managing and achieving quality at the engagement level

  • determining the nature, timing and extent of direction, supervision, and review.

The engagement partner is required to be satisfied that their involvement has been sufficient and appropriate to provide the basis for taking overall responsibility.

Practical implications

The revisions to ASA 220, require the audit partner to be appropriately involved in all phases of the audit and for there to be evidence of this. For those audit partner that typically have a “hands off” approach or are simply too stretched, delegating significant work to their senior managers, this revised standard together with ISQM1 requires a change to their business model.

ASA 315 (revised) Identifying and Assessing the Risks of Material Misstatement

2023 is the year to apply ASA 315 (revised)

ASA 315 (revised) is operative for financial reporting periods commencing on or after 15 December 2021, applicable to audits of 31 December 2022 and 30 June 2023 year ends.

The standard has been revised to respond to challenges and issues with the current ASA 315. The revised requirements focus on ‘what’ needs to be done, and the application material enhanced, modernized, and reorganized to describe ‘why’ and ‘how’ procedures are to be undertaken.

ASA 315 (revised) is very much aligned to the changes contained within ASA 540 (revised) and includes similar new concepts and definitions. ASA 315 (revised) sets out:

  • There is a spectrum of inherent risk

  • Inherent risk factors that must be considered by auditors

  • The requirement to perform separate assessments of inherent risk and control risk

  • Consideration of ‘significant classes of transactions, account balances and disclosures’ and ‘relevant assertions’

  • Introduces a new definition of ‘significant risk’ being those risks close to the upper end of the spectrum of risk

  • Requires the auditor to ‘stand-back’ to evaluate the completeness of significant classes of transactions, account balances and disclosures at the end of the risk assessment process

  • Where the auditor does not contemplate testing the operating effectiveness of controls, the risk of material misstatement is the same as the assessment of inherent risk.

Practical implications

Revisions to ASA 315 are in response to dissatisfaction by audit regulators as to how auditors identify and respond to risk. Whilst the basic objective of the audit has not changed, ASA 315 (revised) is very prescriptive as to how risk identification should take place, emphasizing the requirement to link risk to assertions and the need to apply an appropriate level of professional scepticism.

ASA 315 (revised) is very much in line with ASA 540 (revised) that came into force in 2021, so the key changes in respects of the risk of material misstatements arising from management’s accounting estimates should not come as a surprise to auditors in 2023.

IAASB work plan

Auditing standards applicable in Australia are driven by the activities of the IAASB. The activity of the IAASB has been impacted by the ongoing effects of the pandemic. In November 2021 the IAASB released its detailed Quarterly Work Plan Table for 2022‒2023.

As can be seen below this work plan does not envisage any new standards being issued till 2023.

Planned date for an exposure draft Planned date for final approval of a new or revised auditing standard
Audit Evidence September 2022 March 2024
Fraud June 2023 Not stipulated
Going Concern December 2022 December 2023
Audits of Less Complex Entities – Development of a Separate Standard July 2021 March 2023

Some good news for auditors

For auditors, although 2022 continues the new era of complexity and a drive for quality, the good news is that the accounting changes in 2022 are minimal which we will discuss in our article “2022 the horizon for Accountants”.